-----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, Rv/CgXkJWsviOnMeoGnk7jigE/KUcjKRU1Blf5JHXLC39DCL/8/8TyIrYu8FiRjJ x7tjPu7K8BiwpimFdL9gFA== /in/edgar/work/20000814/0000737955-00-000068/0000737955-00-000068.txt : 20000921 0000737955-00-000068.hdr.sgml : 20000921 ACCESSION NUMBER: 0000737955-00-000068 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SGI INTERNATIONAL CENTRAL INDEX KEY: 0000737955 STANDARD INDUSTRIAL CLASSIFICATION: [8711 ] IRS NUMBER: 330119035 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-16675 FILM NUMBER: 697215 BUSINESS ADDRESS: STREET 1: 1200 PROSPECT ST STE 325 CITY: LA JOLLA STATE: CA ZIP: 92037 BUSINESS PHONE: 6195511090 MAIL ADDRESS: STREET 1: 1200 PROSPECT STREET STE 325 CITY: LA JOLLA STATE: CA ZIP: 92037 FORMER COMPANY: FORMER CONFORMED NAME: VISION DEVELOPMENT INC DATE OF NAME CHANGE: 19850807 10QSB 1 0001.txt FORM 10-QSB FOR PERIOD ENDING 06/30/00 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ________ Commission File Number 2-93124 SGI International (Exact name of small business issuer as specified in its charter) Utah 33-0119035 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1200 Prospect Street, Suite 325, La Jolla, California 92037 (Address of principal executive offices) (858) 551-1090 (Issuer's telephone number) (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No The number of shares of common stock, no par value, outstanding as of August 11, 2000, was 67,646,849. Transitional Small Business Disclosure Format (Check one): [ ] Yes [X] No TABLE OF CONTENTS FORM 10-QSB PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statement of Stockholders' Deficiency 5 Condensed Consolidated Statements of Cash Flows 6 Notes to Condensed Unaudited Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introductory Note 11 Results of Operations 12 Liquidity and Capital Resources 13 Accounting Pronouncements 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 15 ITEM 2. CHANGES IN SECURITIES 15 ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 ITEM 5. OTHER INFORMATION 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17 PART III. SIGNATURES 18 SGI INTERNATIONAL 2 SGI INTERNATIONAL AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 2000 1999 (Unaudited) ==================================================================================================================== ASSETS Current assets: Cash $ 308,737 $ 278,391 Restricted time deposit - 402,500 Trade accounts receivable, less allowance for doubtful accounts of $71,587 and $80,320 864,485 661,880 Costs and estimated earnings in excess of billings on contracts 117,746 99,580 Inventories 412,672 413,716 Prepaid expenses and other current assets 158,423 102,624 Total current assets 1,862,063 1,958,691 - -------------------------------------------------------------------------------------------------------------------- LFC royalty rights, net 785,625 942,750 LFC cogeneration project, net 157,926 210,568 Investment in LFC Investees 244,733 266,813 LFC related notes receivable, net 150,000 150,000 LFC process equipment, net 525,618 355,886 Other LFC assets, net 25,641 26,757 Property, plant and equipment, net of accumulated depreciation of $1,486,372 and $1,340,622 2,397,081 2,514,595 Goodwill, net of accumulated amortization of $216,619 and $192,653 263,625 287,591 Interest receivable on notes from stockholders 18,788 - - -------------------------------------------------------------------------------------------------------------------- $ 6,431,100 $ 6,713,651 ==================================================================================================================== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable $ 925,609 $ 849,140 Notes payable 996,408 881,408 Accrued salaries, benefits and related taxes 958,419 770,167 Billings in excess of costs and estimated earnings on contracts 627,844 500,407 Borrowings on line-of-credit - 400,000 Interest payable 210,823 182,492 Current maturities of long-term notes payable 27,375 7,125 Other accrued expenses 161,276 188,530 - -------------------------------------------------------------------------------------------------------------------- Total current liabilities 3,907,754 3,779,269 Long-term debt, less current maturities 6,319,449 6,250,386 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 10,227,203 10,029,655 - -------------------------------------------------------------------------------------------------------------------- Commitments and contingencies Minority interest 461,762 471,000 - -------------------------------------------------------------------------------------------------------------------- Stockholders' deficiency: Convertible preferred stock 605 605 Common stock 52,471,503 49,890,623 Paid-in capital 6,994,978 7,021,879 Accumulated deficit (63,253,951) (60,229,111) Less notes receivable from stockholders (471,000) (471,000) - -------------------------------------------------------------------------------------------------------------------- Total stockholders' deficiency (4,257,865) (3,787,004) - -------------------------------------------------------------------------------------------------------------------- $ 6,431,100 $ 6,713,651 ====================================================================================================================
See notes to condensed consolidated financial statements. SGI INTERNATIONAL 3 SGI INTERNATIONAL AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three months Six months ended June 30, ended June 30, 2000 1999 2000 1999 ================================================================================================================================ REVENUES: Contract revenues $ 1,325,691 $ 767,976 $ 2,381,402 $ 1,451,484 - -------------------------------------------------------------------------------------------------------------------------------- EXPENSES: Cost of sales 1,002,463 438,619 1,812,178 914,837 Engineering, research and development 385,157 525,962 753,887 808,687 Selling, general and administrative 992,122 867,843 1,827,706 1,616,467 Loss on LFC Investees 3,226 - 22,079 - Legal and accounting 85,482 167,474 182,957 326,145 Depreciation and amortization 218,320 231,028 444,429 542,506 - ------------------------------------------------------------------------------------------------------------------------------- Total expenses 2,686,770 2,230,926 5,043,236 4,208,642 - ------------------------------------------------------------------------------------------------------------------------------- Loss from operations (1,361,079) (1,462,950) (2,661,834) (2,757,158) NON-OPERATING INCOME (EXPENSES): Interest expense (203,489) (161,566) (413,716) (312,348) Other income 22,449 13,157 41,472 30,889 - -------------------------------------------------------------------------------------------------------------------------------- Loss before minority interest in consolidated subsidiary (1,542,119) (1,611,359) (3,034,078) (3,038,617) Minority interest in loss of consolidated subsidiary 4,074 - 9,238 - - -------------------------------------------------------------------------------------------------------------------------------- Net loss $ (1,538,045) $ (1,611,359) $ (3,024,840) $ (3,038,617) ================================================================================================================================ PREFERRED STOCK DIVIDENDS: Imputed preferred stock dividends and accretion on convertible and mandatorily redeemable preferred stock $ - $ 36,382 $ - $ 36,382 - -------------------------------------------------------------------------------------------------------------------------------- Net loss applicable to common stock $ (1,538,045) $ (1,647,741) $ (3,024,840) $ (3,074,999) - -------------------------------------------------------------------------------------------------------------------------------- Net loss per common share - basic $ (0.02) $ (0.05) $ (0.05) $ (0.10) ================================================================================================================================ Weighted average common shares outstanding 63,494,131 35,193,496 60,069,264 29,891,480 ================================================================================================================================
See notes to condensed consolidated financial statements. SGI INTERNATIONAL 4 SGI INTERNATIONAL AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY (Unaudited) Convertible Preferred Stock Common Stock Total ----------------- ----------------------- Paid-In Accumulated Notes Stockholders' Shares Amount Shares Amount Capital Deficit Receivable Deficiency ==================================================================================================================================== Balances at December 31, 1999 60,541 $ 605 54,053,293 $49,890,623 $7,021,879 $(60,229,111) $(471,000) $(3,787,004) Issuance of common stock for cash, net 9,794,655 2,043,195 2,043,195 Exercise of warrants to purchase common stock for cash 20,000 2,500 2,500 Issuance of common stock for notes payable and interest 1,620,809 401,172 401,172 Issuance of common stock for services 459,717 95,700 95,700 Conversion of preferred stock (23) - 312,386 38,313 (38,313) - Issuance of warrants to purchase common stock to non-employees 11,412 11,412 Net loss (3,024,840) (3,024,840) - ------------------------------------------------------------------------------------------------------------------------------------ Balances at June 30, 2000 60,518 $ 605 66,260,860 $52,471,503 $6,994,978 $(63,253,951) $(471,000) $(4,257,865) ====================================================================================================================================
See notes to condensed consolidated financial statements. SGI INTERNATIONAL 5 SGI INTERNATIONAL AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six months ended June 30, 2000 1999 ========================================================================================================== Operating activities: Net loss $ (3,024,840) $ (3,038,617) Adjustments to reconcile net loss to net cash used in operating activities: Equity in net loss of LFC Investees 22,080 - Depreciation and amortization 444,429 542,506 Common stock issued for services 95,700 39,075 Non-employee compensation expense on issuance of warrants 11,412 18,765 Imputed and accrued interest on warrants issued to note holders - 21,107 Accrued long-term interest expense 94,063 - Accrued interest income (18,788) - Minority interest in loss of consolidated subsidiary (9,238) - Changes in operating assets and liabilities: Restricted time deposit 402,500 - Trade accounts receivable (220,771) (49,786) Inventories 1,044 1,250 Prepaid expenses and other current assets (55,799) 15,264 Accounts payable 76,469 519,327 Billings in excess of costs and estimated earnings on contracts 127,437 298,427 Accrued salaries, benefits and related taxes 188,252 282,500 Interest payable 43,798 12,760 Other accrued expenses (27,254) 89,652 - ---------------------------------------------------------------------------------------------------------- Net cash used in operating activities (1,849,506) (1,247,770) - ---------------------------------------------------------------------------------------------------------- Investing activities: Additions to LFC Process equipment (233,562) (85,419) Investment in LFC Investees - (990) Purchase of property and equipment (28,236) (18,400) Other assets - (9,247) - ---------------------------------------------------------------------------------------------------------- Net cash used in investing activities (261,798) (114,056) - ---------------------------------------------------------------------------------------------------------- Financing activities: Payments of notes payable (4,750) (4,750) Payments on line-of-credit (400,000) - Proceeds from issuance of debt 500,705 825,000 Proceeds from issuance of common stock 2,045,695 645,500 - ---------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 2,141,650 1,465,750 - ---------------------------------------------------------------------------------------------------------- Net increase in cash 30,346 103,924 Cash at beginning of period 278,391 239,885 - ---------------------------------------------------------------------------------------------------------- Cash at end of period $ 308,737 $ 343,809 ========================================================================================================== Supplemental disclosure of cash flow information: Interest paid 261,873 $ 264,715 Supplemental disclosure of non-cash activities: Conversion of preferred stock 38,313 1,029,205 Common stock issued for convertible debentures - 68,107 Common stock issued for debt and interest 401,172 - Common stock issued for mandatorily redeemable preferred stock - 1,072,833 ==========================================================================================================
See notes to condensed consolidated financial statements. SGI INTERNATIONAL 6 SGI INTERNATIONAL AND SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (1) BUSINESS SGI International, a Utah corporation, (together with its subsidiaries, hereinafter referred to as the "Company"), has its corporate office in La Jolla, California. The Company is primarily in the business of developing and marketing energy-related technologies, which at the present include the Liquids From Coal ("LFC") Process and the Opti-Crude Enhancement Technology ("OCET") Process. The LFC Process is designed to convert and upgrade low-rank coal to create a higher Btu more efficient and less environmentally polluting fuel to produce power and simultaneously produce low temperature coal tars, which contain valuable specialty chemicals. The OCET Process is designed to increase the efficiency of oil refineries by deasphalting crude oil as well as residual oil bottoms ("resid"), which is produced in oil refining. Through Assembly & Manufacturing Systems, Inc. ("AMS"), a wholly-owned subsidiary, the Company is also in the business of supplying custom precision automated assembly equipment. (2) BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of SGI International and subsidiaries (the "Company") for the three and six month periods ended June 30, 2000, and 1999, are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-QSB. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements reflect all adjustments, consisting of only normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the consolidated financial position as of June 30, 2000, and the consolidated results of operations for the three and six month periods ended June 30, 2000, and 1999, and cash flows for the six month periods ended June 30, 2000, and 1999. The results of operations for the six months ended June 30, 2000, are not necessarily indicative of the results to be expected for the year ending December 31, 2000. For more complete financial information, these financial statements, and the notes thereto, should be read in conjunction with the consolidated audited financial statements for the year ended December 31, 1999, included in the Company's Form 10-KSB filed with the Securities and Exchange Commission. The accompanying consolidated financial statements are prepared on a going concern basis and in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern and realization of assets and settlement of liabilities and commitments in the normal course of business. The recovery of amounts invested in the Company's principal assets, the LFC Process and OCET Process assets, is dependent upon the Company's ability to adequately fund its on-going development operations and eventual commercialization of these technologies. Furthermore, the ability to successfully bring both the LFC Process and OCET Process technologies to commercialization will ultimately depend on the Company's ability to attract sufficient additional equity, debt or other third-party financing. Success in commercialization of the LFC Process and OCET Process is dependent in large part upon the ability to enter into satisfactory arrangements with other partners, financiers or customers and upon the ability of these third parties to perform their responsibilities. The resources required to profitably develop, construct and operate an LFC plant are likely to include hundreds of millions of dollars, and expertise in major plant development and operations. There can be no assurance any licenses, joint venture agreements or other arrangements will be available on acceptable terms, if at all; that any revenue will be derived from such arrangements; or that, if revenue is generated, any of said arrangements will be profitable to the Company. If the Company is unsuccessful in its attempts to license the LFC Process or SGI INTERNATIONAL 7 OCET Process, or if such third parties are unsuccessful in profitably developing and operating LFC plants, the planned business and operations of the Company will likely not succeed and the Company would not be able to recover the carrying value of the long-lived assets related to either the LFC Process or OCET Process. The Company had negative working capital of approximately $2.0 million and an accumulated deficit of $63.3 million at June 30, 2000. These factors and the Company's recurring losses from continuing operations, among others, raise substantial doubt about the Company's ability to continue as a going concern. The Company is currently seeking additional financing through public or private sales of its securities to fund working capital requirements. The Company will also seek funding through additional strategic partnerships, joint ventures or similar arrangements to commercialize the technologies. There can be no assurance that any collaborative financing arrangements through a joint venture, and/or with strategic partners, will be available when needed, or on terms acceptable to the Company. If adequate funds are not available, the Company may be required to curtail or terminate one or more of its operating activities. The Company is engaged in continuing negotiation to secure additional capital and financing, and while management believes funds can be raised, there is no assurance that their efforts will be successful. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. (3) FINANCING TRANSACTIONS On June 8, 2000, the Company as provided in a related consulting agreement, granted one warrant to purchase an aggregate of 48,000 common shares, to one consultant for services rendered. The warrants were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D and investment representations were obtained and legends were placed on the certificate. In connection therewith, the Company recorded compensation expense of approximately $7,000. The exercise price was not lower than the closing bid price on the grant date. The warrant is exercisable one year from the grant date at $0.225 per share and expires on December 31, 2005. During the three month period ended June 30, 2000, the Company raised approximately $834,000 through the issuance of approximately 4,457,000 restricted common shares to accredited investors. These securities were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained and legends placed on the certificates. During the three month period ended June 30, 2000, the Company in conjunction with its private placements, paid cash of approximately $16,000, issued 182,271 shares of restricted common stock valued at $46,000 and accrued a liability of approximately $27,000 to be paid through the issuance of approximately 144,000 shares of restricted common stock, as compensation for placement agent services. On June 30, 2000, the Company exchanged one unsecured 9% note payable with a face value of $31,000 due on demand but no sooner than June 15, 2000, for a new note payable of equal value. The new note is payable upon 30 days written demand but no sooner than January 25, 2001. Both the principal and accrued interest thereon may be paid in cash or at the option of the Company on January 25, 2001, by issuing 366,482 shares of restricted common stock. The security was issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained from the accredited investor. On June 30, 2000, the Company exchanged one unsecured 9% note payable with a face value of $9,000 due on demand but no sooner than June 15, 2000, for a new note payable of equal value. The new note is payable upon 30 days written demand but no sooner than November 30, 2000. Both the principal and accrued interest thereon may be paid in cash or at the option of the Company on November 30, 2000, by SGI INTERNATIONAL 8 issuing 94,737 shares of restricted common stock. The security was issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained from the accredited investor. On June 30, 2000, the Company issued for cash a $75,000 unsecured 9% note payable to one accredited investor. The note is payable upon 30 days written demand but no sooner than December 15, 2000. Both the principal and accrued interest thereon may be paid in cash or at the option of the Company, on December 15, 2000, by issuing 882,331 shares of restricted common stock. The security was issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained from the accredited investor. During the three month period ended June 30, 2000, the Company as provided in their related consulting agreements issued approximately 50,000 restricted common shares to two consultants for services rendered, valued by the parties at approximately $10,000. These securities were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained and legends were placed on the certificates. (4) NET LOSS PER SHARE Basic net loss per share is computed based on the weighted average number of common shares outstanding and includes preferred stock dividends. Diluted net loss per share is not presented since the effect of shares issuable upon the assumed conversion of preferred stock and convertible debentures and the assumed exercise of outstanding stock options and warrants would be anti-dilutive. For purposes of computing net loss per share, preferred stock dividends include "imputed dividends" for preferred stock issued with a non-detachable beneficial conversion feature near the date of issuance. Imputed dividends represent the aggregate difference between conversion price and the fair market value of the common stock as of the date of issuance of the preferred stock. (5) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS Inventories Inventories are stated at the lower of cost or market, using the first-in, first-out cost method. Substantially, all inventories represent finished goods held for use in operations. Property and Equipment June 30, December 31, 2000 1999 ==================================================================== ENCOAL LFC Plant $ 2,121,000 $ 2,121,000 Laboratory equipment 1,030,000 1,020,000 Machinery and equipment 137,000 136,000 Computer equipment 416,000 400,000 Office furniture and fixtures 125,000 125,000 Leasehold improvements 54,000 54,000 - -------------------------------------------------------------------- 3,883,000 3,856,000 Less accumulated depreciation (1,486,000) (1,341,000) - -------------------------------------------------------------------- Net property and equipment $ 2,397,000 $ 2,515,000 ====================================================================
(6) SEGMENT REPORTING The Company manages its segments based on strategic business units that are in turn based along technological lines. These strategic business units offer products and services to different markets in SGI INTERNATIONAL 9 accordance with their underlying technology. Accordingly, the Company's three business segments are centered on the operations associated with the LFC Process, the OCET Process and automated assembly and manufacturing systems. The Company's operations are primarily centered in the United States, however, through its joint venture with MLFC, a subsidiary of Mitsubishi Corp., the Company's LFC Process technology will continue to be marketed on an international basis. The Company evaluates performance of each segment based on profit or loss from operations before income taxes. The Company has no significant intersegment sales. Reclassification of certain items has been made to the 1999 schedule to conform to the 2000 presentation. Three months ended Automated LFC OCET June 30 Assembly Process Process Corporate Total ================================================================================================================ 2000 Revenues $ 1,322,000 $ - $ 4,000 $ - $ 1,326,000 Net income (loss) 122,000 (676,000) (136,000) (848,000) (1,538,000) Equity in operations of investee - (3,000) - - (3,000) Depreciation & Amortization 32,000 137,000 46,000 3,000 218,000 Engineering, research and consulting expenditures - 242,000 103,000 40,000 385,000 Interest expense - - - 203,000 203,000 - ---------------------------------------------------------------------------------------------------------------- 1999 Revenues $ 374,000 $ 375,000 $ 19,000 $ - $ 768,000 Net loss (322,000) (4,000) (330,000) (955,000) (1,611,000) Equity in operations of investee - - - - - Depreciation & Amortization 29,000 112,000 87,000 3,000 231,000 Engineering, research and consulting expenditures - 268,000 258,000 - 526,000 Interest expense - - - 162,000 162,000 ================================================================================================================
Six months ended Automated LFC OCET June 30 Assembly Process Process Corporate Total ================================================================================================================ 2000 Revenues $ 2,376,000 $ - $ 5,000 $ - $ 2,381,000 Net income (loss) 157,000 (1,355,000) (308,000) (1,519,000) (3,025,000) Equity in operations of investee - (22,000) - - (22,000) Depreciation & Amortization 63,000 275,000 99,000 7,000 444,000 Engineering, research and consulting expenditures - 477,000 237,000 40,000 754,000 Interest expense 1,000 - - 413,000 414,000 - ---------------------------------------------------------------------------------------------------------------- 1999 Revenues $ 933,000 $ 500,000 $ 18,000 $ - $ 1,451,000 Net loss (489,000) (94,000) (677,000) (1,779,000) (3,039,000) Equity in operations of investee - - - - - Depreciation & Amortization 58,000 303,000 174,000 8,000 543,000 Engineering, research and consulting expenditures - 291,000 518,000 - 809,000 Interest expense 1,000 - - 311,000 312,000 ================================================================================================================
SGI INTERNATIONAL 10 June 30, December 31, Total Assets by Segment 2000 1999 ============================================================ Identifiable assets, net Automated Assembly $ 1,684,000 $ 1,414,000 LFC Process 4,373,000 4,425,000 OCET Process 192,000 281,000 Corporate 182,000 594,000 - ------------------------------------------------------------ Total $ 6,431,000 $ 6,714,000 ============================================================
(7) LINE-OF-CREDIT In May 2000 the Company, upon maturity of a $402,500 certificate of deposit securing its borrowings under a $400,000 line-of-credit, used the proceeds to pay-off the borrowing and closed the line. (8) LEASES During the period ended June 30, 2000, the Company renewed its operating leases for its corporate offices and its OCET facilities. The Company leases its corporate offices under an operating lease agreement which provides for annual escalation of rental payments which now expires in December 2005. The Company's OCET subsidiary leases its laboratory facilities under an operating lease agreement which expires in May 2003. AMS leases its manufacturing facility under an operating lease agreement which expired in October 1998 and is currently on a monthly basis. Under the terms of these lease agreements, the lessee pays taxes, maintenance and insurance. As of June 30, 2000, the Company had no other significant commitments under capital or operating leases. Future minimum annual operating lease commitments, by fiscal year and in the aggregate, under noncancelable operating leases with initial or remaining terms of one year or more, consisted of the following as of June 30, 2000. Fiscal Year End Amount =============================== 2000 $ 254,000 2001 307,000 2002 314,000 2003 252,000 2004 189,000 Thereafter 192,000 - ------------------------------- $ 1,508,000 ===============================
(9) RECLASSIFICATION Certain prior period amounts have been reclassified to conform to the current period presentation. These changes had no impact on previously reported results of operations, cash flows or stockholders' deficiency. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTORY NOTE This Quarterly Report on Form 10-QSB contains statements relative to (i) projections, (ii) estimates, (iii) future research plans and expenditures, (iv) potential collaborative arrangements, (v) opinions of management and (vi) the need for and availability of additional financing which may be considered "forward looking statements." SGI INTERNATIONAL 11 The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on assumptions regarding the Company's business and technology, which involve judgments with respect to, among other things, future scientific, economic and competitive conditions, and future business decisions, as well as risk factors detailed from time to time in the Company's Securities and Exchange Commission reports (including this Form 10-QSB) and are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated will be realized and actual results may differ materially. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. Therefore, historical results and percentage relationships will not necessarily be indicative of the operating results of any future period. RESULTS OF OPERATIONS Net Loss per Common Share. Basic net loss per common share for the three and six month periods ended June 30, 2000, decreased approximately $0.03 per share and $0.05 per share, respectively, over the same prior year periods. The decrease in basic net loss per share for both the three and six month periods is primarily attributable to an increase in the weighted average number of common shares outstanding. The net loss for the three and six month periods ended June 30, 2000 declined approximately 5% and remained essentially unchanged, respectively, over the same prior year periods. Revenues and Gross Margin. Revenues and cost of sales are primarily attributable to Assembly and Manufacturing Systems, Inc. (AMS) and are recorded using the percentage of completion method. Revenues at AMS for the three and six month periods ended June 30, 2000, increased 253% and 155% respectively over the same prior year periods. Gross margin as a percentage of sales for both the three and six month periods ended June 30, 2000 returned to normal operating levels and are anticipated to remain at these levels throughout the remainder of the fiscal year. Gross margin as a percentage of sales for the three month period ended June 30, 2000 was 24%, compared to a negative 16% over the same prior year period. Gross margins for the six month period ended June 30, 2000, was 24% compared to 3% over the same prior year period. Gross margins may vary in any given period as a result of the variations in profitability of contracts for large orders of automated production systems or specialty machines, as well as efficiencies related to the overall utilization of AMS' manufacturing resources. The Company attributes the increase in revenues and improved gross margins primarily to strong sales to the medical industry which continues from the prior year and renewed sales to the automotive industry. The Company anticipates sales to both these industries to exceed prior year levels based on current order activity. The Company is continuing to experience weak sales to the high-tech industry (electronics and communications) which negatively impacted overall revenues in the prior year. The Company anticipates that sales to this sector will continue to be slow throughout 2000. The projected length and severity of the slowdown to this sector is unknown at this time. For the three and six month periods ended June 30, 1999, the Company received net revenues of $375,000 and $500,000, respectively, from its services agreement with LFC Tech, it's joint venture with MLFC. No additional revenues are anticipated from the services agreement in 2000 offsetting the increase in revenues from AMS. Engineering, Research and Development Expenses. Engineering, research and development expenses for the three and six month periods ended June 30, 2000, decreased 27% and 7%, respectively, over the SGI INTERNATIONAL 12 same prior year periods. The decrease for both the three and six month periods is primarily attributable to a 60% decrease in expenses on the OCET Process as the Company has shifted its laboratory resources towards increasing the value of CDL produced from the LFC Process. Work on increasing the value of CDL is expected to continue throughout most of the year. Selling, General and Administrative Expenses. Selling, general and administrative expense for the three and six month periods ended June 30, 2000, increased 14% and 13%, respectively, over the same prior year periods. The increase is primarily attributable to the carrying costs associated with the ENCOAL LFC plant which the Company acquired in late 1999. Selling, general and administrative expenses for AMS remained relatively unchanged over the same prior year periods. Loss on Investment in LFC Investee. The Company's share of the losses for its LFC joint venture (LFC Tech) for the three and six months ended June 30, 2000, increased 100% over the same prior year period. The increase is primarily attributable to the amortization of assets which LFC Tech acquired in late 1999. Legal and Accounting Expenses. Legal and accounting expenses for the three and six month periods ended June 30, 2000, decreased 49% and 44%, respectively, over the same prior year periods. The decrease is related primarily to a reduction in legal and accounting salaries and the settlement of various lawsuits to which the Company and AMS were parties. Depreciation and Amortization Expenses. Depreciation and amortization expense for the three and six month periods ended June 30, 2000, decreased 6% and 18%, respectively over the same prior year periods due primarily to a non-recurring charge of approximately $80,000 related primarily to the write-off of the Company's Australian LFC project costs in 1999 which occurred in the first quarter of the year. Partially offsetting this decrease is the Company's acquisition of various LFC related assets late in 1999. Interest Expense. Interest expense for the three and six month periods ended June 30, 2000, increased 26% and 32%, respectively, over the same prior year periods. The increase is primarily due to the addition of approximately $2.0 million in long-term debt associated with the purchase of the ENCOAL LFC plant and various LFC assets in late 1999. Other Income. Other income for the three and six month periods ended June 30, 2000, remained substantially unchanged over the same prior year periods. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2000, the Company had assets totaling $6.4 and a working capital deficiency of $2.0 million. This is compared to assets of $4.6 million and a $6.1 million working capital deficiency as of June 30, 1999. Current notes payable, accounts payable and accrued salaries primarily contribute to the working capital deficiency at June 30, 2000. The Company anticipates continued operating losses over the next twelve months and has both short-term and long-term liquidity deficiencies as of June 30, 2000. Other short-term liquidity requirements are expected to be satisfied from existing cash balances, proceeds from the sale of future equity securities or other collaborative arrangements. Negotiations are on-going for the public and private placement of equity securities, the proceeds of which are intended to be used to satisfy the short-term liquidity deficiency. In the event that the Company is unable to finance operations at the current level, various administrative activities would be curtailed and certain research and development efforts would be reduced. The Company will not be able to sustain operations if it is unsuccessful in securing sufficient financing and/or generating revenues from operations. The Company had long-term liquidity deficiencies at June 30, 2000. Over the long-term, the Company will require substantial additional funds to maintain and expand its research and development activities SGI INTERNATIONAL 13 and ultimately to commercialize, with or without the assistance of corporate partners, any of its proposed technologies. Although there are no commitments, the Company believes the long-term liquidity deficiency will be satisfied through a combination of future equity sales, increased positive cash flows from operations, and research or other collaborative agreements, until such time, if ever, as the commercialization of the LFC and OCET Processes result in positive cash flows. The Company is seeking additional funds through the financing, sale and operations of the ENCOAL LFC plant and through collaborative or other arrangements with larger well capitalized companies, under which such companies may provide additional capital to the Company in exchange for exclusive or non-exclusive licenses or other rights to certain commercial projects, technologies and products the Company is developing. Although the Company is presently engaged in discussions with a number of suitable candidate companies, there can be no assurance that an agreement or agreements will arise from these discussions in a timely manner, or at all, or that revenues that may be generated thereby will offset operating expenses sufficiently to reduce the Company's short-term or long-term funding requirements. Cash used in operating activities for the six month period ended June 30, 2000, increased 48% over the same prior year period. This increase is primarily attributable to an increase in accounts receivable and decrease in billings in excess of costs and estimated earnings at AMS, due to a significant increase in sales. The use of funds from operating activities is essentially attributable to the Company's net loss of approximately $3.0 million for both the six month periods ended June 30, 2000, and 1999, respectively. These losses were incurred primarily as a result of the Company's administrative and technology development activities. In the fourth quarter of 1999 the Company acquired various LFC related assets, including the ENCOAL Demonstration Plant. As a result of this acquisition, the Company originally anticipated operating expenses associated with maintaining the ENCOAL LFC plant in idle condition at approximately $350,000 in 2000. As of June 30, 2000, the Company had incurred approximately $360,000 and anticipates incurring an additional $100,000 each month until an investor for the facility is obtained. The Company's investing activities amounted to a use of funds of approximately $262,000 a 130% increase over the same prior year period. This use of funds is primarily related to the acquisition of LFC Process related equipment. In January of 1999 the Company and MLFC a wholly-owned subsidiary of Mitsubishi Corporation formed LFC Technologies, LLC ("LFC Tech"). Accordingly, the Company may be required from time to time to make capital contributions to LFC Tech. The Company is required to contribute one-half of any such required capital contributions. In the prior year, in accordance with the Amended Services Agreement between the Company and LFC Tech, the Company received approximately $500,000 of net revenues under this agreement through the six month period ended June 30. This agreement was amended subsequent to October 1999, and the Company will not be receiving any additional funds pursuant thereto through the year 2000. In 2000 the Company is projecting capital expenditures for equipment at OCET to remain consistent with the prior year and an increase in capital expenditures at AMS of approximately $300,000 to improve manufacturing capabilities and efficiencies. Further, the Company intends to obtain project financing for the ENCOAL LFC plant estimated at $10.1 million. The financing is for improvements which are necessary to set the plant on more of a commercial footing and to position it as a reference plant for potential future commercial LFC facilities. Other than the improvements to the ENCOAL LFC plant, the Company as of June 30, 2000, does not have any material requirements or commitments for capital expenditures. The amount of funds used for investing activities in a given period are directly related to development requirements of the Company's technologies and funds availability. SGI INTERNATIONAL 14 The Company's net financing activities raised approximately $2.1 million and $1.5 million for the six month period ended June 30, 2000, and 1999, respectively. These funds were raised primarily through the private placement of debt and equity securities. Offsetting the $2.5 million of funds raised during the six month period was the pay-off and termination of the Company's $400,000 line-of-credit which was secured by a $402,500 certificate of deposit which matured in May 2000. The Company is actively seeking a new line-of-credit to provide working capital to AMS and support its current and anticipated growth in business activity. As stated earlier the Company intends to obtain project financing related to the ENCOAL LFC plant estimated at $10.1 million. The Company believes, due to the plant's special nature, that financing for these improvements will not likely be obtained through conventional methods and that a strategic partner or financier capable of utilizing Internal Revenue Code section 29 tax credits will be required. There is no assurance that the Company will be able to obtain this financing, or if available, the terms will be acceptable. The amount of money raised during a given period is dependent upon financial market conditions, technological progress and the Company's projected funding requirements. The Company anticipates that future financing activities will be influenced by the aforementioned factors. Significant future financing activities will be required to fund future operating and investing activities and to maintain debt service. While the Company is engaged in continuing negotiations to secure additional capital and financing, there is no assurance such funding will be available or if received will be adequate. ACCOUNTING PRONOUNCEMENTS In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44 ("FIN 44"), Accounting For Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25. FIN 44 clarifies the application of Opinion 25 for (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. Management believes that the impact of FIN 44 will not have a material effect on the financial position or results of operations of the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK [NONE] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company and its subsidiaries are from time to time involved in litigation arising in the ordinary course of their respective businesses. As of June 30, 2000, the Company is not party to any pending legal proceeding. ITEM 2. CHANGES IN SECURITIES On June 8, 2000, the Company as provided in a related consulting agreement, granted one warrant to purchase an aggregate of 48,000 common shares, to one consultant for services rendered. The warrants were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D and investment representations were obtained and legends were placed on the certificate. In connection SGI INTERNATIONAL 15 therewith, the Company recorded compensation expense of approximately $7,000. The exercise price was not lower than the closing bid price on the grant date. The warrant is exercisable one year from the grant date at $0.225 per share and expires on December 31, 2005. During the three month period ended June 30, 2000, the Company raised approximately $834,000 through the issuance of approximately 4,457,000 restricted common shares to accredited investors. These securities were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained and legends placed on the certificates. During the three month period ended June 30, 2000, the Company in conjunction with its private placements, paid cash of approximately $16,000, issued 182,271 shares of restricted common stock valued at $46,000 and accrued a liability of approximately $27,000 to be paid through the issuance of approximately 144,000 shares of restricted common stock, as compensation for placement agent services. On June 30, 2000, the Company exchanged one unsecured 9% note payable with a face value of $31,000 due on demand but no sooner than June 15, 2000, for a new note payable of equal value. The new note is payable upon 30 days written demand but no sooner than January 25, 2001. Both the principal and accrued interest thereon may be paid in cash or at the option of the Company on January 25, 2001, by issuing 366,482 shares of restricted common stock. The security was issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained from the accredited investor. On June 30, 2000, the Company exchanged one unsecured 9% note payable with a face value of $9,000 due on demand but no sooner than June 15, 2000, for a new note payable of equal value. The new note is payable upon 30 days written demand but no sooner than November 30, 2000. Both the principal and accrued interest thereon may be paid in cash or at the option of the Company on November 30, 2000, by issuing 94,737 shares of restricted common stock. The security was issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained from the accredited investor. On June 30, 2000, the Company issued for cash a $75,000 unsecured 9% note payable to one accredited investor. The note is payable upon 30 days written demand but no sooner than December 15, 2000. Both the principal and accrued interest thereon may be paid in cash or at the option of the Company, on December 15, 2000, by issuing 882,331 shares of restricted common stock. The security was issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained from the accredited investor. During the three month period ended June 30, 2000, the Company as provided in their related consulting agreements issued approximately 50,000 restricted common shares to two consultants for services rendered, valued by the parties at approximately $10,000. These securities were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. Investment representations were obtained and legends were placed on the certificates. ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES [NONE] ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Annual Meeting of Stockholders was held on June 2, 2000. At that meeting the following matters were submitted to a vote of the stockholders of SGI International: 2000 SGI International Annual Meeting Final Voting Results SGI INTERNATIONAL 16 Proposal Item No. 1 Election of Directors The following nominees for director received the number of votes set opposite their respective names: Voting Results - ---------------------------------------------------------- Votes Percent ========================================================== Richard B. Bein For 42,220,275 99% Withhold 282,209 1% Edward D. Doherty For 42,220,285 99% Withhold 282,199 1% William A. Kerr For 42,219,037 99% Withhold 283,447 1% Ben W. Reppond For 42,219,428 99% Withhold 283,056 1% ==========================================================
Directors: Michael L. Rose, James W. Mahler, Dr. Ernest P. Esztergar, Jeffrey L. Smith and John R. Taylor whose terms of office had not expired, continued in their respective capacities as directors. Item No. 2 Ratification of Selection of J.H. Cohn LLP, as Independent Public Accountants Voting Results - ---------------------------------- Votes Percent ================================== For 42,100,694 98% Against 230,343 1% Abstain 171,448 1% ==================================
ITEM 5. OTHER INFORMATION NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 4.1 Form of Restricted Stock Subscription Agreement (1) 4.2 Form of Promissory Note (2) 10.1 Lease agreement between OCET Corporation and Sorrento Square dated May 10, 2000 (2) 10.2 Second Amendment to Lease between Registrant and La Jolla Financial dated June 19, 2000 (2) 27.1 Financial Data Schedule (2) - ------------ (1) Incorporated by reference to report on Form 10-Q (File No. 2-93124) ending June 30, 1999. (2) Filed herewith. (b) Reports on 8-K On July 14, 2000, the Company reported on its Current Report on form 8-K, filed with the Securities and Exchange Commission, that it had amended effective June 30, 2000 (the "Second Amendment"), certain terms and conditions of the Amended and Restated Acquisition Agreement (the "Acquisition Agreement") between itself and certain subsidiaries of AEI Resources, dated December 9, 1999. The Second Amendment essentially provides SGI with an extension of the June 30, 2000, date to September 30, 2000, in which to satisfy various terms and conditions more fully described in the Acquisition Agreement. SGI INTERNATIONAL 17 PART III. SIGNATURES 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 and in the capacities and on the dates indicated. SGI INTERNATIONAL /s/ MICHAEL L. ROSE August 11, 2000 - ------------------------------------ Michael L. Rose, President and Chief Executive Officer /s/ GEORGE E. DONLOU August 11, 2000 - ------------------------------------ George E. Donlou Vice President Finance and Controller SGI INTERNATIONAL 18 EX-4.2 2 0002.txt FORM OF NOTE PAYABLE PROMISSORY NOTE $________ Dated: ___________ SECTION ONE TERMS OF NOTE FOR VALUE RECEIVED, SGI INTERNATIONAL, OTC Bulletin Board symbol "SGII" ("the "Debtor"), of 1200 Prospect Street, Suite 325, La Jolla, CA 92037 promises to pay to the order of ________________ (hereinafter "Holder"), the principal sum of __________________ ($______) Dollars with interest thereon at the rate of nine percent (9%) per annum, payable upon 30 days written demand but no sooner than on July 19, 2001, in cash or at the option of Debtor, all principal and interest can be paid by issuing Holder _______ shares of restricted stock of Debtor. Debtor shall be in default hereunder only after Holder gives five (5) days advance written notice to Debtor that it is in default, and Debtor does not cure such default within this prescribed period. SECTION TWO PREPAYMENT OF NOTE Prepayment of the full principal balance, along with all unpaid interest, or any portion of the principal balance, along with any portion thereof of unpaid interest, is permitted at any time without penalty. SECTION THREE EFFECT OF WAIVER OF RIGHTS BY Holder Holder is not under any obligation to exercise any of his rights under this note, and failure to exercise his rights under this note or to delay in exercising any of his rights shall not be deemed a waiver of or in any manner impair any of the rights of Holder. SECTION FOUR CUMULATIVE RIGHTS AND REMEDIES The rights and remedies of Holder specified in this note are cumulative and do not exclude any other rights or remedies he may otherwise have. SECTION FIVE ACCELERATION ON INSOLVENCY OF DEBTOR If Debtor shall be adjudged bankrupt, or file a petition in bankruptcy, or have a petition in bankruptcy filed against it, this note shall become due and payable immediately without demand or notice. SECTION SIX WAIVER OF PRESENTMENT, PROTEST, AND NOTICE OF DISHONOR Except as otherwise required herein, Debtor hereby waives all acts on the part of Holder required in fixing the liability of the party, including among other things presentment, notice of dishonor, protest, notice of protest, notice of nonpayment, and any other notice. SECTION SEVEN CHOICE OF LAWS This note shall be governed by and construed in accordance with the laws of California in all respects, including matters of construction, validity and performance. SECTION EIGHT COSTS OF COLLECTION Debtor shall pay on demand all costs of collection, including legal expenses and attorney fees, incurred by Holder in enforcing this note on default. SECTION NINE INTEREST CHARGES If a law, which applies to this note and which sets the maximum interest amount, is finally interpreted so that the interest in connection with this note exceed the permitted limits, then: (1) any such interest shall be reduced by the amount necessary to reduce the interest to the permitted limit; and (2) any sums already collected (if any) from the Debtor which exceed the permitted limits will be refunded to the Debtor. Holder may choose to make this refund by reducing the principal Debtor owes under this note or by making a direct payment to the Debtor. If a refund reduces the principal, the reduction will be treated as a partial payment. Dated: SGI INTERNATIONAL By Authorized Signatory EX-10.1 3 0003.txt STANDARD INDUSTRIAL LEASE AGREEMENT FOR OCET STANDARD INDUSTRIAL NET LEASE CENTER NAME: Sorrento Square LANDLORD: Sorrento Square TENANT: OCET Corporation, a Delaware Corporation STANDARD INDUSTRIAL NET LEASE TABLE OF CONTENTS BASIC LEASE TERMS ......................1 1.1 Address for Notice ....................1 1.2 Description of Premises ............1 1.3 Commencement Date ..............1 1.4 Lease Term .....................1 1.5 Minimum Monthly Rent .............1 1.6 Security Deposit ......................1 1.7 Tenant's Pro Rata Share of Operating Costs ...................1 1.8 Permitted Use ...........................1 1.9 Tenant's Guarantor ...............................1 1.10 Tenant's Parking Spaces ...........................1 1.11 Landlord's Broker/Tenant's Broker .................1 1.12 Additional Provisions .............................1 1.13 Exhibits ................................ 2. LEASE OF PREMISES . . 1 3. LEASE TERM .........1 3.1 Commencement........1................ 3.2 Delay In Commencement .................2 3.3 Early Occupancy ............................2 4. RENT.....................................2 4.1 Minimum Monthly Rent .......2............ 4.2 Lease Year ...........................2 4.3 Additional Rent .....................2.... 4.4 Impounds.............................2 5. SECURITY DEPOSIT .........2 6. OPERATING COSTS ............2........ 6.1 Payment of Operating Costs by Tenant 2 6.2 Pro Rata Share of Operating Costs ............2. 6.3 Operating Costs .........................................2 6.4 Common Facilities.............2 7. MAINTENANCE AND REPAIRS 3 7.1 Tenant's Obligations 3 7.2 Landlord's Obligations 3 7.3 Performance By Landlord 3 8. REAL PROPERTY TAXES 3 8.1 Payment of Real Property Taxes by Tenant 3 8.2 Real Properly Taxes Defined 3 8.3 Personal Properly Taxes 3 9. INSURANCE 3 9.1 All Risk Coverage .........................3 9.2 Tenant's Personal Property and Fixtures .....3 9.3 Tenant's Liability Insurance ...............3 9.4 Payment of Insurance Costs ..............4 9.5 Waiver of Subrogation ...................4 9.6 Tenant's Use Not to Increase Premium ......4 9.7 Boiler and Machinery Coverage ............4 10. UTII ITIES...4 11. USE...4 11.1 Permitted Use...4 11.2 Compliance with Law and Other Requirements 4 11.3 Waste, Quiet Conduct 4 11.4 Rules and Regulations 4 11.5 Signs 4 11.6 Parking 5 11.7 Entry by Landlord 5 12. ACCEPTANCE OF PREMISES; NON-LIABILITY OF LANDLORD; DISCLAIMER .....................................5 12.1 Acceptance of Premises .................................5 12.2 Landlord's Exemption From Liability ....................5 12.3 No Warranties or Representations .......................5 12.4 Keys ...................................................5 13. INDEMNIFICATION .....5 14. HAZARDOUS MATERIALS...6 14.1 Definitions ......6 14.2 Use of Hazardous Materials 6 14.3 Compliance With Laws; Handling Hazardous Materials .....6 14.4 Notice; Reporting .................6 14.5 Indemnity.......................6 14.6 Entry and Inspection, Cure ............6 14.7 Termination/Expiration ...............6 14.8 Exit Assessment ....................6 14.9 Event of Default ....................7 15. ALTERATIONS; LIENS .......................7 15.1 Alterations by Tenant ...................7 15.2 Permits and Govemmental Requirements ....7 15.3 Liens ...............................7 16. DAMAGE AND DESTRUCTION 7 16.1 Partial Insured Damage 7 16.2 Insurance Deductible ...................7 16.3 Uninsured Damage 7 16.4 Total Destruction ......................7 16.5 Partial Destruction of Center ..............7 16.6 Tenant's Obligations ...................7 16.7 RentAbatement.......................7 16.8 Waiver of Inconsistent Statutes .........8 17. CONDEMNATION 8 17.1 Condemnation of Premises 8 17.2 Condemnation of Parking Area 8 17.3 Condemnation Award 8 18. ASSIGNMENT AND SUBLETTING 8 18.1 Landlord's Consent Required 8 18.2 Landlord's Election 8 18.3 Costs; Transfer Fee 8 18.4 Assumption;No Release of Tenant .8 18.5 No Merger 8 18.6 Reasonable Restriction 8 19. SUBORDINATION; ATTORNMENT; ESTOPPEL CERTIFICATE ........................................8 19.1 Subordination ...........................................8 19.2 Attornment ..............................................9 19.3 Estoppel Certificates ...................................9 20. SURRENDER OF PREMISES ...................................9 20.1 Condition of Premises ...................................9 20.2 Removal of Certain Alterations, Fixtures and Equipment Prohibited ............................9 20.3 Holding Over ............................................9 21. DEFAULT BY TENANT ........................................9 22. REMEDIES 9 22.1 Termination of Lease . .9 22.2 Continuation of Lease . .10 22.3 Performance By Landlord 10 22.4 Late Charge; Interest on Overdue Payments 10 22.5 Landlord's Right to Require Advance Payment of Rent; Cashier's Checks . .10 23. DEFAULT BY LANDLORD 10 23.1 Notice to Landlord 10 23.2 Notice to Mortgagees 10 23.3 Limitations on Remedies Against Landlord 10 24. GENERAL PROVISIONS 10 24.1 Action or Defense by Tenant 10 24.2 Arbitration and Mediation Waiver of Jury Trial 11 24.3 Attorneys' Fees 11 .......... 24.4 Authority of Tenant 11 24.5 Binding Effect 11 24.6 Brokers 11 24.7 Construction 11 24.8 Counterparts 11 24.9 Covenants and Conditions 11 24.10 Entire Agreement 11 24.11 Exhibits 11 24.12 Financial Statements 11 24.13 Force Majeure 11 24.14 Governing Law 11 24.15 Joint and Several Liability 11 24.16 Modification 11 24.17 Modification for Lender 11 24.18 Nondiscrimination 11 24.19 Notice 11 24.20 Partial Invalidity 11 24.21 Quiet Enjoyment 11 24.22 Recording 11 24.23 Relationship of the Parties 12 24.24 Relocation of Tenant 12 24.25 Rights of Redemption Waived 12 24.26 Time of Essence 12 24.27 Transfer of Landlord's Interest . . .12 24.28 Waiver 12 Exhibit"A" - Descrioption of Premises Exhibit "B" RulesandRegulations Exhibit"C" - Sign Criter STANDARD INDUSTRIAL NET LEASE This STANDARD INDUSTRIAL NET LEASE ('Lease" ), dated for reference purposes only May 10, 2000, is entered into by Sorrento Square' a Limited Partnership ('Landlord"), and OCET Corporation, a Delaware Corporation, a wholly owned (Tenant") subsidiary of S.G.I. International, a Utah Corporation. 1. BASIC LEASE TERMS. The basic terms of the Lease set forth in this Article 1 shall be read in conjunction with the other Articles of this Lease, which define and explain the basic terms. 1.1 Address for Notice (see Section 24.19): Landlord: 11750 Sorrento Valley Road, Suite 209 San Diego, California 92121 Attention: [Center Name] Property Management Tenant At the Premises, or Address for Tenant other than at the Premises (required): 1200 Prospect Stree, Suite 325 La Jolla, CA 92037 1.2 Description of Premises: Center Name: Sorrento Square Address: 115 88 Sorrento Valley Road San Diego, CA 92121 Suite/Unit 20 & 21 Approximate Rentable Square Footage (see Exhibit "A"): 5,060 1.3 Commencement Date: June 1, 2000 1.4 Lease Term (see Article e 3): Approximately three years and -0- months, beginning on the Commencement Date and ending on the last day of the last day of the calendar month May, 2003 (the "Expiration Date"). 1.5 Minimum Monthly Rent $10,120 per month for the first Lease Year, as provided in Article 4. The Minimum Monthly Rent shall be increased on the first day of the second (2nd) Lease Year and each first day of each succeeding Lease Year by five percent (5%) of the Minimum Monthly Rent in effect emmediately prior to the date of such adjustment. 6/1/2001 - 5/31/2002 - $10,525 per month, 6/2/2002 - 5/31/2003 - per month - $10,946 1.6 Security Deposit $3,800.00* (see Article 5). *already on deposit 1.7 Tenant's Pro Rata Share of Operating Costs (see Articie 6): 5.8% 1.8 Permitted Use (see Article 11): Laboratory office and storage space associated with a scientific research firm 1.9 Tenants Guarantor (lf none, so state): S.G.I. International, a Utah-Corporation 1.10 Tenant's Parking Spaces (Unassigned) (see Section 11.6): fifteen (15) 1.11 Landlord's Broker (lf none, so state): Asset Management Group Tenant's Broker (If none, so state): none 1.12 Additional Provisions: The following additional provisions are attached to and made a part of this Lease (if none, so state): First Addendum - Tenant Improvements 1.13 Exhibits: The following Exhibits are attached to and made a part of this lease Exhibit"A" - Description of Premises Exhibit "B" - Rules and Regulations Exhibit"C" - Sign Criteria 2. LEASE OF PREMISES. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the premises (the "Premises") described in Section 1.2 which are indicated on the site/floor plan attached as Exhibit "A". The Premises are part of the office or industrial center identified in Section 1.2 (the "Center"). The approximate Rentable Square Footage identified in Section 1.2 is a measurement of the net leasable floor area of the Premises, as determine by landlord and applied on a consistent basis throughout the Center. 3. LEASE TERM. 3.1 Commencement. The term of this Lease (the "Lease term shall commence on the Commencement Date stated in Section 1.3 and shall continue for the period stated in Section 1.4, unless sooner terminated pursuant to any provision of this Lease. 3.2 Delay In Commencement. If Landlord cannot deliver possession of the Premises to Tenant on the Commencement Date specified in Section 1.3 for any reason, Landlord shall not be subject to any liability therefor. Such non-delivery shall not affect the validity of this Lease nor the obligations of Tenant hereunder. However (a) Tenant shall not be obligated to pay rent until possession of the Premises is delivered to Tenant, (b) if possession of the Premises is not delivered to Tenant within thirty (30) days of the Commencement Date, the last day of the Lease Term shall be extended by the total number of days that possession is so delayed, plus the minimum number of additional days necessary to make the Expiration Date the last day of a calendar month, and (c) if Landlord has not delivered possession of the Premises thin ninety (90) days after the Commencement Date, Tenant may elect to terminate this Lease by delivering written notice to Landlord within ten (10) days thereafter, in which event the parties shall be discharged from all further obligations hereunder. 3.3 Early Occupancy. If Tenant occupies the Premises prior to the Commencement Date, such occupancy shalt be subject to all provisions of this Lease. Such occupancy shall not advance the Expiration Date. Tenant shall pay Minimum Monthly Rent at the rate in effect for the first Lease Year, Additional Rent and all other charges required hereunder for such early occupancy period. 4. RENT. 4.1 Minimum Monthly Rent. Tenant shall pay minimum monthly rent ('Minimum Monthly Rent') in the initial amount stated in Section 1.5. The Minimum Monthly Rent shall be increased as set forth in Section 1.5 and/or elsewhere in this Lease. Tenant shall pay the Minimum Monthly Rent on or before the first day of each calendar month, in advance, at the office of Landlord or at such other place designated by Landlord, without deduction, offset or prior demand. If the Commencement Date is not the first day of a calendar month, the rent for the partial month at the beginning of the Lease Term shall be prorated on a per diem basis and shall be due on the first day of such partial month. Upon execution of this Lease, Tenant shall pay the first month's Minimum Monthly Rent to Landlord. 4.2 Lease Year. As used in this Lease, the term "Lease Year" means (i) the first period of twelve (12) full calendar months following the Commencement Date (including, if the Commencement Date is not the first day of a calendar month, the period between the Commencement Date and the next first day of the month), (ii) each period of twelve (12) full calendar months thereafter, and (iii) any remaining period at the end of the Lease Term of less than twelve (12) full calendar months. 4.3 Additional Rent. All charges payable by Tenant in addition to Minimum Monthly Rent shall constitute Additional Rent to Landlord. All remedies available to Landlord for nonpayment of rent shall be available for nonpayment of any such Additional Rent. Unless this Lease provides otherwise, all Additional Rent shall be paid by Tenant, without limitation or offset, within fifteen (15) days after Tenant's receipt of a statement from Landlord. Additional Rent includes, without limitation, Operating Costs (see Article 6), Maintenance and Repairs (see Article 7), Real Property Taxes (see Article 8), insurance costs (see Article 9), Utilities (see Article 10), and attomeys' fees and costs (see Section 24.3). If any Minimum Monthly Rent is abated or waived pursuant to another specific term of this Lease or in any separate agreement, it is understood that such abatement or waiver shall apply only to the Minimum Monthly Rent, and Tenant shall be obligated to pay all components of Additional Rent (including the applicable impounds thereof) during the periods of abatement or waiver of Minimum Monthly Rent and throughout the Lease Term. Minimum Monthly Rent, Additional Rent, and all other charges and monetary amounts due Landlord from Tenant hereunder shall constitute "rent." 4.4 Impounds. Landlord shall have the right, but not the obligation, to collect and impound, in advance, any or all components of Operating Costs, Real Property Taxes and insurance costs based upon Landlord's reasonable estimate of Tenant's future liability for such amounts under this Lease. Landlord shall initially establish the monthly amount of such impound ("Monthly Impound Payments"), based upon its estimate of one-twelfth of Tenant's annual liability therefor, Landlord shall have the right, at any time during the Lease term to adjust the amount of the Monthly Impound Payment upon notice to Tenant. The Monthly Impound Payment shall be due and payable on the first day of each month throughout the Lease Term Any failure to pay the Monthly Impound Payment when due shall be an Event of Default under this Lease and shall entitle Landlord to exercise any or all of its remedies available in the same manner as for the failure to pay rent, including the imposition of late charges and interest, and the right of Landlord to require that future payment of the Monthly Impound Payments be made by cashier's check. Upon the occurrence of any Event of Default by Tenant hereunder, Landlord shall have the right to apply all unapplied amounts of Monthly Impound Payments to Tenant's default. Within ninety (90) days after the end of each calendar year, Landlord shall deliver to Tenant an accounting of Tenant's actual Pro Rata Share of Operating Costs and the estimated amounts paid by Tenant. Any overpayment by Tenant shall be credited against next Monthly Impound Payments due hereunder, or, at Landlord's option, shall be remitted to Tenant. Tenant shall pay the amount of any underpayment within fifteen (15) days after receipt of the accounting. Tenant acknowledges that the Monthly Impound Payments are estimates only and not a representation of the amount of Tenant's ultimate liability for Operating Costs, Real Property Taxes and insurance costs. 5. SECURITY DEPOSIT. Upon execution of this Lease, Tenant shall deposit with Landlord the amount specified in Section 1.6 (the "Security Deposit") to be held by Landlord, without liability for interest, as security for tenant's performance of its obligations under this Lease. Landlord shall not be required to keep the Security Deposit separate from its other accounts. Landlord may apply all or a part of the Security Deposit to any unpaid rent (including unpaid Additional Rent or Monthly Impound Payments) or other monetary payments due from Tenant or to cure any other default of Tenant hereunder and to compensate Landlord for all damage and expense sustained as a result of such default. If all or any portion of the Security Deposit is so applied, Tenant shall deposit cash sufficient to restore the Security Deposit to its original amount within fifteen (15) days after receipt of Landlord's written demand. If Tenant fully and faithfully performs each of its obligations under this Lease, the Security Deposit or any balance thereof shall be resumed to Tenant within thirty (30) days of the later of the expiration or earlier termination of this Lease or the vacation of the Premises by Tenant. At Landlord's request, Tenant shall accompany Landlord or Landlord's representative on a "walk-through" of the Premises prior to Landlord's return of the Security Deposit. 6. OPERATING COSTS. 6.1 Payment of Operating Costs by Tenant. Tenant shall pay its pro rata share of Operating Costs for the Center, as defined herein. Tenant's pro rata share shall be computed by Landlord on a monthly or other periodic basis selected by Landlord. Tenant shall pay the amount of such pro rata share to Landlond, to the extent such obligation exceeds any amount thereof impounded under Section 4.4, within fifteen (15) days after receipt of a statement from Landlord. 6.2 Pro Rata Share of Operating Costs. Tenant's pro rata share of Operating Costs is stated in Section 1.7 and represents the ratio of the Rentable Square Footage of the Premises (identified in Section 1.2) to the total Rentable Square Footage of the Center, as determined by Landlord from time to time Changes in Rentable Square Footage shall be effective on the first day of the first calendar month following the change. Tenant's share of Real Property Taxes! insurance costs and other components of Additional Rent shall be computed on the same basis as Tenant's Pro Rata Share of Operating Costs, unless Landlord determines that some other basis would be equitable. 6.3 Operating Costs. "Operating Costs" includes all costs of operating, managing, repairing and maintaining the Common Facilities, including without limitation: gardening and landscaping; the cost of public liability and property damage insurance; Real Property Taxes, as defined in Section 8.2 but applicable to the Common Facilities; utilities; line painting and parking lot repairs; roof repairs; lighting; trash and refuse removal; supplies; equipment; exterior painting; capital improvements (including without limitation the costs of roof, parking lot and underground utilities replacements); reasonable reserves for repairs and replacements; the costs of altering, improving, renovating, upgrading or retrofitting any portion of the Common Facilities to comply with all laws, regulations and governmental requirements applicable to the Center (including without limitation those related to disabled persons, hazardous materials, lighting upgrades, sprinkler and energy-saving retrofits); security service; property management costs and administrative fees; bookkeeping services; labor; and the cost of personnel to implement such services and to direct parking. In lieu of including the entire amount of any such expense in Operating Costs in any one period, Landlord, at its election, may spread the inclusion of, or may amortize, any such expenses, or a reasonable reserve for anticipated expenses, in Operating Costs over such multiple periods as Landlord shall determine. 6.4 Common Facilities. "Common Facilities" all areas, facilities, utilities, equipment and services provided by Landlord for the common use or benefit of the occupants of the Center and their employees, agents, customers and other invitees, including without limitation: building lobbies, common corridors and hallways, restrooms, pedestrian walkways, driveways and access roads, access facilities for disabled persons (including elevators), truck serviceways, loading docks, garages, driveways, parking lots, landscaped areas, stairways, elevators, retaining walls, all areas required to be maintained under the conditions of governmental approvals for the Center, and other generally understood public or common areas. Landlord reserves the right to relocate, alter, improve, or adjust the size and location of any, Common Facilities from time to time without liability to Tenant. 7. MAINTENANCE AND REPAIRS. 7.1 Tenant's Obligations. Except as provided in Section 7.2, Tenant shall keep the Premises in good order, condition and repair during the Lease Term including without limitation: all nonstructural, interior, exterior, and landscaped areas; all heating, ventilation and air conditioning systems and equipment; all glass, glazing, windows, window moldings, partitions, doors and door hardware; all interior painting; all f ixtures and appurtenances in the Premises or exclusively serving the Premises including electrical, lighting and plumbing fixtures; and all other portions of the Premises seen or unseen. Tenant shall promptly replace at its sole cost and expense any of the systems, equipment and other portions of the Premises for which it is responsible hereunder during the Lease Term if and when necessary, regardless of whether the benefit of such replacement extends beyond the Lease Term. It is the intention of Landlord and Tenant that Tenant shall maintain the Premises, at all times during the Lease Term, in an attractive, first class and fully operative condition, at Tenant's expense. If any heating and air conditioning system or equipment exclusively serves the Premises, Tenant shall additionally obtain and keep in force a preventive maintenance contract providing for the regular (at least quarterly) inspection and maintenance of the heating and air conditioning system (including leaks around ducts, pipes, vents, and other parts of the air conditioning) by a reputable licensed heating and air conditioning contractor acceptable to Landlord. Prior to April 1 of each calendar year, Tenant shall deliver Landlord written confirmation from such contractor verifying that such a contract has been entered into and that the required service will be provided. Notwithstanding the foregoing, Landlord shall have the right, upon written notice to Tenant, to undertake the responsibility for preventive maintenance and repair of the heating and air conditioning system, at Tenant's sole cost and expense. 7.2 Landlord's Obligations. Landlord shall repair and maintain the Common Facilities, subject to Tenant's obligation to pay its Pro Rata Share of Operating Costs, as provided in Article 6. Landlord shall maintain the roof, the foundations and structural portions of the Premises and any building of which the Premises are a part, but Tenant shall pay (a) the full costs of such maintenance, or an equitable share determined by Landlord if the Premises are part of a multi-tenant building, (b) the full amount of any maintenance and repairs necessitated by any act, omission, conduct or activity of, or breach of finis lease by, Tenant or any of Ten ant's officers, agents, customers or invitees (plus fifteen percent (15%) of the cost thereof for Landlord's overhead); and (c) any maintenance and repairs necessitated by breaking and entering of the Premises. Tenant shall pay its share of such maintenance and repair costs incurred by Landlord, to the extent such obligation exceeds any amount thereof impounded under Section 4.4, within fifteen (15) days after receipt of a statement from Landlord. There shall be no abatement of rent, and no liability of Landlord, by reason of any injury to or interference with Ten ant's business arising from the making of any repairs alterations, or improvements to any portion of the Premises or the Center. Except as provided in Article 16 Damage and Destruction) and Article 17 (Condemnation), Landlord shall have absolutely no other responsibility to repair, maintain or replace any portion of the Premises at any time. Tenant waives the right to make repairs at Landlord's expense under California Civil Code Section 1942, or under any other law, statute or ordinance now or hereafter in effect. Landlord's obligations under this Section are not intended to alter or modify in any way the provisions of Article 12. 7.3 Performance By Landlord. If Tenant refuses or neglects to perform its maintenance obligations hereunder to the reasonable satisfaction of Landlord, Landlord shall have the right (but not the obligation), upon three (3) days' prior notice to Tenant, to enter the Premises and perform such repairs and maintenance on behalf of Tenant. Landlord shall also have the right (but not the obligation), without prior notice to Tenant, to correct or remove any dangerous or hazardous condition, to repair the heating, ventilation, air conditioning or plumbing systems, to correct repair or bring into legal compliance any fire or other life safety systems of the Premises, and to repair or replace any broken glass or glazing, if Tenant fails to correct or repair the same within twenty-four (24) hours after the need arises. Landlord shall not be liable to Tenant for any loss or damage to Tenant's merchandise, fixtures, or other properly or to Tenant's business in connection with Landlord's performance hereunder, and Tenant shall pay Landlord's costs plus fifteen percent (15%) of such amount for overhead, upon presentation of a statement therefor, as Additional Rent. Tenant shall also pay interest at the rate provided in Section 22.4 from the date of completion of repairs by Landlord to the date paid by Tenant. 8. REAL PROPERTY TAXES. 8.1 Payment of Real Property Taxes by Tenant. Tenant shall pay all Real Property Taxes applicable to the Premises during the Lease Term, If the Premises are not separately assessed, a share of the tax bill that includes the Premises shall be allocated to the Premises. Such share shall be equitably determined by Landlord based upon the Rentable Square Footage of the Premises compared to the total Rentable Square Footage covered by the tax bill, the respective valuations assigned in the assessor's worksheet, or other reasonably available information Tenant shall pay its share of Real Property Taxes to Landlord, to the extent such obligation exceeds any amount thereof impounded under Section 4.4, within fifteen (15) days after receipt of a statement from Landlord. 8.2 Real Property Taxes Defined. "Real Property Taxes" means all taxes, assessments, levies, fees and other governmental charges levied on or attributable to the Premises or any part thereof, including without limitation: (a) real properly taxes and assessments levied with respect to all or a portion of the Premises, (b) assessments, charges and fees charged by governmental agencies or districts for services or facilities provided to the Premises, (c) transfer, transaction, rental, gross receipts, license or similar taxes or charges measured by rent received by Landlord, excluding any federal or state income, franchise, estate or inheritance taxes of Landlord, (d) taxes based upon a reassessment of the Premises due to a transfer or change of ownership, and (e) any assessment, charge or fee that is a substitute in whole or in part for any tax now or previously included within the definition of Real Properly Taxes. If Landlord elects to contest an assessment of any Real Properly Taxes, Landlord shall have the right to recover its actual costs of such contest including attorneys' fees and costs) as part of Real Property Taxes, but only to the extent such contest has resulted in a reduction of Real Properly Taxes. Tenant shall not be entitled to the benefit of any reduction, refund, rebate or credit accruing or payable to Landlord prior to the commencement of or after the expiration or other termination of the Lease Term. 8.3 Personal Property Taxes. Tenant shall pay prior to delinquency all taxes charged against trade fixtures, fumishings, equipment or any other personal properly belonging to Tenant. Tenant shall attempt to have such personal property taxed separately from the Premises. If any such taxes on Tenant's personal property are levied against Landlord or the Premises, or if the assessed value of the Premises is increased by inclusion of a value placed upon such personal properly of Tenant, then: (a) Landlord, after written notice to Tenant, shall have the right to pay the taxes levied against Landlord, or the taxes based upon such increased valuation, but under protest if so requested by Tenant in writing and (b) Tenant shall pay to Landlord the taxes levied against Landlord, or the taxes resulting from such increased valuation, within fifteen (15) days after Tenant's receipt of a written statement from Landlord. 9. INSURANCE. 9.1 All Risk Coverage. During the Lease Term, Landlord shall maintain, at Tenant's expense, insurance covering loss or damage to the Premises (excluding Tenant's Alterations, fixtures, equipment and personal property), insuring against any or all risks of physical loss (and including at Landlord's option, flood and earthquake coverage), with the scope and amounts of such coverage as determined by Landlord. Said insurance shall provide for payment of loss thereunder to Landlond or to the holder of a first mortgage or deed of trust on the Premises. Landlord may also maintain during the Lease Term, at Tenant's expense, a policy of rental income insurance covering a period of one (1) year, with loss payable to Landlord. 9.2 Tenant's Personal Property and Fixtures. Tenant shall at all times, at Tenant's sole cost and expense, maintain insurance l | against any or all risks of physical loss in an amount adequate to cover the cost of replacement of all of Tenant's Alterations, trade fixtures, \ equipment and personal property. Such policy shall be issued by an insurance company approved by Landlord, shall name Landlord and \ Landlord's lender as additional insureds, and shall provide that no cancellation or reduction in coverage shall be effective until thirty (30) days after written notice to Landlord and Landlord's lender. Tenant shall deliver a certificate evidencing such insurance to Landlord and a renewal or binder at least twenty (20) days prior to expiration. Tenant acknowledges that Landlord's insurance is not intended to cover Tenant's Alterations, trade fixtures, equipment, and personal property. Provided, however, that at Landlord's sole election, Landlord may obtain at Tenant's expense any or all of the insurance described in this Section. 9.3 Tenant's Liability Insurance. Tenant shall, at Tenant's sole cost and expense, provide comprehensive general liability insurance, fully covering and indemnifying Landlord and Landlord's officers, directors, shareholders, partners, principals, employees, agents, representatives, and other related entities and individuals (together with, at Landlord's election, Landlord's lender), as additional insureds, against any and all claims arising from personal injury, death, and/or property damage occuring in or about the Premises or the Center during the period of Tenant's possession (actual and/or constructive) at the Premises. The initial limits of such insurance shall be at least $2,000,000 combined single liability limit if the Rentable Square Footage of the Premises (as indicated in Section 1.2) exceeds 3 000 square feet, or $1,000,000 combined single liability limit if such Rentable Square Footage is 3,000 square feet or less. Such liability insurance limits shall be subject to periodic increase, at Landlord's elect/on, based upon inflation, increased liability awards, lender requirements, the recommendations of Landlord's professional insurance advisors, and other relevant factors. Tenant shall also, at its sole cost and expense, obtain workers' compensation insurance for the protection of its employees such as will relieve Landlord of all liability to such employees for any and all accidents that may arise on or about the Premises or the Center. All insurance required to be carried by Tenant shall be primary and noncontributory to any insurance carried by Landlord, regardless of the absence of negligence or other fault of Tenant for alleged injury, death and/or property damage. Each policy of insurance required to be canted by Tenant hereunder shall: (a) contain cross-liability and contractual liability endorsements, (b) provide that no cancellation or reduction in coverage shall be effective until thirty (30) days after written notice to Landlord and Landlord's lender, (c) be issued by an insurer licensed in California and reasonably approved by Landlord, and (d) shall insure Tenant's performance of the indemnity provisions of Article 13, but the amount of such insurance shall not limit Tenant's liability nor relieve Tenant of any obligation hereunder. Prior to the Commencement Date, Tenant shall deliver a certificate evidencing all such insurance to Landlord. Tenant shall deliver a renewal or binder of such policy at least thirty (30) days prior to expiration thereof. Tenant shall, at Tenant's expense, maintain such other liability insurance as Tenant deems necessary to protect Tenant. Tenant shall be in material breach of this Lease if Tenant fails to obtain the insurance required under this Section, or if Tenant obtains insurance with terms, conditions and/or exclusions that are inconsistent with the requirements and terms of this Lease. 9.4 Payment of Insurance Costs. Tenant shall pay directly all premiums for its liability insurance required under Section 9.3, for its personal property insurance to be carried by Tenant as required under this Article, and for all other insurance Tenant elects to carry. Tenant shall pay the insurance premiums, or, where applicable, its share thereof as equitably determined by Landlord, for the insurance policies carried or obtained by Landlord as described in this Article. If the Lease Term expires before the expiration of any such insurance policy, Tenant's liability for premiums shall be prorated on an annual basis. Tenant shall pay such insurance costs to Landlord, to the extent such obligation exceeds any amount thereof impounded under Section 4.4, within fifteen (15) days after receipt of a statement from Landlord. If any insurance policy maintained by Landlord covers improvements or real properly other than the Premises, Landlord shall reasonably determine the portion of the premiums applicable to the Premises, and Tenant shall pay its share thereof as so determined In addition, Tenant shall pay the full amount of any deductible amount under Landlord's insurance policies, or where applicable its share thereof as equitably determined by Landlord, within fifteen (15) days after receipt of a statement from Landlord. 9.5 Waiver of Subrogation. Each party waives all rights of recovery against the other party and its officers, employees, agents and representatives for any claims for loss or damage to person or property caused by or resulting from fire or any other risks insured against under any insurance policy in force at the time of such loss or damage. Each party shall use each insurance policy obtained by it to provide that the insurer waives all rights of recovery by way of subrogation against the other party in connection with any damage covered by such policy. 9.6 Tenant's Use Not to Increase Premium. Tenant shall not keep, use, manufacture, assemble, sell or offer for sale in or upon the Premises any article that may be prohibited by, or that might invalidate, in whole or in part, the coverage afforded by, a standard form of fire or all risk insurance policy. Tenant shall pay the entire amount of any increase in premiums that may be charged during the Lease Term for the insurance that may be maintained by Landlord on the Premises or the Center resulting from the type of materials or products stored, manufactured, assembled or sold by Tenant in the Premises, whether or not Landlord has consented to the same. In determining whether increased premiums are the result of Tenant's use of the Premises, a schedule issued by the entity making the insurance rate on the Premises showing the various components of such rate shall be conclusive evidence of the items and charges that make up the fire insurance rate on the Premises. 10. UTILITIES. Tenant shall pay the cost of all water, gas, heat, light, power, sewer, telephone, refuse disposal, and all other utilities and services supplied to the Premises. Tenant shall make payments for all separately metered utilities, when due, directly to the appropriate supplier. Landlord shall have the right to require Tenant to install, at Tenant's sole expense, separate meters (or other submeter, device or monitor for the measurement of utility usage) for any utility for which a separate meter is not installed as of the Commencement Date. If any utilities or services are not separately metered or monitored with respect to the Premises, Landlord shall determine Tenant's equitable share thereof, based on rentable square footage, intensity of use of any Utility, hours of operation, and such other factors as Landlord deems relevant. Tenant shall pay its equitable share of such utilities to Landlord to the extent such obligation exceeds any amount thereof impounded under Section 4.5, within fifteen (15) days after receipt of a statement from Landlord. If at any time during the Lease Term electrical power or any other utility is available to the Premises from multiple sources, Landlord shall have the right at any time and from time to time to contract for service from any company or companies providing electrical, telecommunication, or other utility service to the Building. Tenant shall cooperate with Landlord and all providers of electrical, telecommunication, or other utility service and, as reasonably necessary, allow Landlord and such providers reasonable access to the Premises and to the electic lines, feeders, risers, wiring and any other machinery or equipment within the Premises. Landlord shall in no way be liable or responsible for any loss, damage or expense that Tenant may sustain or incur by reason of any change, failure, interruption interference or defect in the supply or character of the electricity or other utilities supplied to the Premises. Landlord makes no representation or warranty as the suitability of the utility service for Tenant's requirements, and no such change, failure, defect, unavailability or unsuitability shall constitute any actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant of any of its obligations under the Lease. Landlord shall not be liable in damages or otherwise for any failure or interrupt/on of any utility service, and no such failure or interruption shall entitle Tenant to terminate this Lease or abate the rent due hereunder. 11. USE. 11.1 Permitted Use. The Premises shall be used and occupied only for the permitted uses specified in Section 1.8. The Premises shall not be used or occupied for any other purposes without the prior written consent of Landlord. Tenant shall provide such information about such proposed use as may be reasonably requested by Landlord. Landlord shall not unreasonably withhold its consent to any requested change of use, and shall have the right to impose reasonable restrictions on such other use. Factors that Landlord may take into account in granting or withholding its consent shall include, without limitation: (a) whether the proposed use is compatible with the character and tenant mix of the Center, (b) whether the proposed use poses any increased risk to Landlord or any other occupant of the Center, (c) whether any proposed Alterations to accommodate such proposed use might decrease the rental or sale value of the Premises or the Center, and (d) whether Tenant has the requisite expertise and financial ability to successfully operate in the Premises with the proposed use. 11.2 Compliance with Law and Other Requirements. Tenant shall not do or permit anything to be done in or about the Premises in conflict with all laws, ordinances, rules, regulations, orders, requirements, and recorded covenants and restrictions applicable to the Premises, whether now in force or hereafter in effect, including any requirement to make alterations or to install additional facilities required by Tenant's occupancy or the conduct of Tenant's business, and Tenant shall promptly comply with the same at its sole expense, 11.3 Waste, Quiet Conduct Tenant shall not use or permit the use of the Premises in any manner that tends to create waste or a nuisance, that will cause objectionable noise or odors, or that may disturb the quiet enjoyment of any other tenant in the Center. 11.4 Rules and Regulations Tenant shall comply with the Rules and Regulations for the Center attached as Exhibit "B", as the same may be amended by Landlord from time to time, upon notice to Tenant. 11.5 Signs. Tenant agrees, at Tenant's sole cost, to install a sign in strict conformance with Landlord's sign criteria, attached hereto as Exhibit "C", within fifteen (15) days after first occupying the Premises. Tenant shall maintain all approved signs and other items described herein in good condition and repair at all times All signs must be fabricated by a contractor selected by Landlord. Prior to construction of any such sign, a detailed drawing of the proposed sign shall be prepared by the Landlord's contractor, at the sole expense of Tenant, and submitted to Landlord and Tenant for written approval. No sign, placard, pennant, flag, awning, canopy, or advertising matter of any kind shall be placed or maintained on any exterior door, wall or window of the Premises or in any area outside the Premises, and no decoration, lettering or advertising matter shall be placed or maintained on the glass of any window or door, or that can be seen through the glass, of the Premises without first obtaining Landlord's written approval. All signs and sign cases shall be considered fixtures and improvements and shall become the properly of Landlord upon expiration or termination of the Lease. If Tenant fails to comply with this Section and Landlord serves upon Tenant a Notice to Perform or Quit (or similar notice), any breach of the covenants of this Section occurring thereafter shall be deemed to be noncurable. Landlord shall have the right from time to time to revise the sign criteria, and within sixty (60) days after Tenant's receipt of written notice of any new sign criteria, Tenant shall, at Tenant's expense, remove all existing exterior signs and replace the same with' new signs conforming to the new sign criteria. 11.6 Parking. Tenant shall have the nonexclusive right, in common with others, to use the parking areas of the Center; provided, however, that Tenant shall not use more than the number of parking spaces designated in Section 1.10, or if no number of such spaces is so indicated, Tenant shall not use more than its reasonable share of parking spaces, as Landlord shall determine. Landlord reserves the right without liability to Tenant, to modify the parking areas, to designate the specific location of the parking for Tenant and Tenant's customers and employees, and to adopt reasonable rules and regulations for use of the parking areas. 11.7 Entry by Landlord. Tenant shall permit Landlord and Landlord's agents to enter the Premises at all reasonable times for any of the following purposes: (a) to inspect the Premises, (b) to supply any services or to perform any maintenance obligations of Landlord, including the erection and maintenance of such scaffolding, canopies, fences, and props as may be required, (c) to make such improvements, replacements or additions to the Premises or the Center as Landlord deems necessary or desirable, (d) to post notices of nonresponsibility, (e) to place any usual or ordinary "for sale" signs, or (f) within six (6) months prior to the expiration of this Lease, to place any usual or ordinary "for lease" signs. No such entry shall result in any rebate of rent or any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises. Landlord shall give reasonable notice to Tenant prior to any entry except in an emergency or unless Tenant consents at the time of entry. If Tenant is not personally present to open and permit an entry into the Premises, at any time when for any reason an entry therein shall be necessary or permissible Landlord or Landlord's agents may enter the same by a master key, or may forcibly enter the same without rendering Landlord or such agents liable therefor, and without in any manner affecting the obligations and covenants of this Lease. Nothing herein contained, however, shall be deemed or construed to impose upon Landlord any obligation, responsibility or liability whatsoever for the care, maintenance or repair of the Premises or any part thereof, except as otherwise specifically provided herein. 12. ACCEPTANCE OF PREMISES; NONLIABILITY OF LANDLORD; DISCLAIMER. 12.1 Acceptance of Premises. By taking possession hereunder, Tenant acknowledges that it has examined the Premises and accepts the condition thereof. Tenant acknowledges and agrees that Landlord has no obligation to improve the Premises other than as set forth specifically in this Lease, if at all. In particular, Tenant acknowledges that any additional improvements or Alterations needed to accommodate Tenant's intended use shall be made solely at Tenant's sole cost and expense, and strictly in accordance with the requirements of this Lease (including the requirement to obtain Landlord's consent thereto), unless such improvements and alterations are specifically required of Landlord. Landlord shall have no responsibility to do any work required under any building codes or other governmental requirements not in effect or applicable at the time the Premises were constructed, including without limitation any requirements related to sprinkler retrofitting, seismic structural requirements, accommodation of disabled persons, or hazardous materials. Landlord shall be under no obligation to provide utility, telephone or other service or access beyond that which exists at the Premises as of the date of this Lease, unless Landlord specifically agrees in writing to provide the same. If it is anticipated that Tenant will be doing any Alterations or installations prior to taking occupancy, any delays encountered by Tenant in accomplishing such work or obtaining any required permits therefor shall not delay the Commencement Date or the date that Tenant becomes liable to pay rent, or the date that Landlord may effectively deliver possession of the Premises to Tenant. By taking possession hereunder, Tenant acknowledges that it accepts the square footage of the Premises as delivered and as stated in this Lease. No discovery or alleged discovery after such acceptance of any variance in such square footage as set forth in this Lease (or in any proposal advertisement or other description thereof) shall be grounds for any adjustment in any element of the rent payable hereunder, unless such adjustment is initiated by and implemented by Landlord in writing. 12.2 Landlord's Exemption From Liability. Landlord shall not be liable for injury to Tenant's business or loss of income therefrom, or for personal injury or property damage that may be sustained by Tenant or any subtenant of Tenant, or their respective employees, invitees, customers, agents or contractors or any other person in or about the Premises, caused by or resulting from fire, flood, earthquake or other natural disaster, or from steam, electricity gas, water or rain, that may leak or flow from or into any part of the Premises, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air-conditioning, lighting fixtures or computer equipment or software, whether such damage or injury 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, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant. Landlord shall not be liable for any damages to properly or for personal injury or loss of life arising from any use, act or failure to act of any third parties (including other occupants of the Center) occurring in, or about the Premises or in or about the Center (including without limitation the criminal acts of any third parties). Landlord shall not be liable for any latent defect in the Premises or in the building of which the Premises are a part. All properly of Tenant kept or stored on the Premises shall be so kept or stored at the risk of Tenant only, and Tenant shall indemnify, defend and hold Landlord and Landlord's officers, directors, shareholders, partners, principals, employees and agents, and their respective successors and assigns, harmless from and against any claims arising out of damage to the same, including subrogation claims by Tenant's insurance carriers. Provided, however, that the indemnifications and waivers of Tenant set forth in this Section shall not apply to damage and liability caused (i) by the gross negligence or willful misconduct of Landlord, and (ii) through no fault of Tenant, its assignees or subtenants, or their respective agents, contractors, employees, customers, invitees or licensees. 12.3 No Warranties or Representations. (a) Neither Landlord nor Landlord's agents make any warranty or representation with respect to the suitability or fitness of the space for the conduct of Tenant's business, or for any other purpose. (b) Neither Landlord nor Landlord's agents make any warranty or representation with respect to any other tenants or users that may or may not construct improvements, occupy space or conduct business within the Center, and Tenant hereby acknowledges and agrees that it is not relying on any warranty or representation relating thereto in entering into this Lease. (c) Landlord specifically disavows any oral representations made by or on behalf of its employees, agents and independent contractors, and Tenant hereby acknowledges and agrees that it is not relying and has not relied on any oral representations in entering into this Lease. (d) Landlord has not made any promises or representations, expressed or implied, that it will renew, extend or modify this Lease in favor of Tenant or any permitted transferee of Tenant, except as may be specifically set forth herein or in a written instrument signed by both parties amending this Lease in the future. (e) Notwithstanding that the rent payable to Landlord hereunder may at times include the cost of guard service or other security measures, it is specifically understood that Landlord does not represent, guarantee or assume responsibility that Tenant will be secure from any damage, injury or loss of life because of such guard service. Landlord shall have no obligation to hire, maintain or provide such services, which may be withdrawn or changed at any time with or without notice to Tenant or any other person and without liability to Landlord. To induce Landlord to provide such service if Landlord elects in its sole discretion to do so, Tenant agrees that (i) Landlord shall not be liable for any damage, injury or loss of life related to the provision or nonprovision of such service, and (ii) Landlord shall have no responsibility to protect Tenant, or its employees or agents, from the acts of any third parties (including other occupants of the Center) occurring in or about the Premises or in or about the Center (including without limitation the criminal acts of any third parties), whether or not the same could have been prevented by any such guard service or other security measures. 13. 13. INDEMNIFICATION. Tenant shall indemnify, defend and hold Landlord and Landlord's officers, directors, shareholders, partners, principals, employees, agents, representatives, and other related entities and individuals (collectively, "Landlord's Related Entities"), harmless from and against any and all claims, actions, damages, liability, costs, and expenses, including attomeys' fees and costs, arising from personal injury, death, and/or property damage and arising from: (a) Tenant's use or occupation of the Premises or any work or activity done or permitted by Tenant in or about the Premises (including without limitation any storage or display of materials or merchandise, or other activity by Tenant in the Common Facilities), (b) any activity, condition or occurrence in the Premises or other area under the control of Tenant, (c) any breach or failure to perform any obligation imposed on Tenant under this Lease, or (d) any other act or omission of Tenant or its assignees or subtenants or their respective agents, contractors, employees, customers, invitees or licensees. Tenant's obligation to defend and indemnify shall include, but not be limited to, claims based on duties, obligations, or liabilities imposed on Landlord or Landlord's Related Entities by statute, ordinance, regulation, or other law, such as claims based on theories of peculiar risk and nondelegable duty, and to any and all other claims based on the negligent act or omission of Landlord or Landlord's Related Entities. The parties intend that this provision be interpreted as the broadest Type I indemnity provision as defined in McDonald & Kruse, Inc. v. San Jose Steel Co., 29 Cal. App. 3rd 413 (1972), and as allowed by law between a landlord and a tenant. Upon notice from Landlord, Tenant shall, at Tenant's sole expense and by counsel satisfactory to Landlord, defend any action or proceeding brought against Landlord or Landlord's Related Entities by reason of any such claim. If Landlord or any of Landlord's Related Entities is made a party to any litigation commenced by or against Tenant, then Tenant shall indemnify, defend and hold Landlord and Landlord's Related Entities harmless from, and shall pay all costs, expenses and attomeys' fees and costs incurred or paid in connection with, such litigation. Tenant, as a material part of the consideration to Landlord hereunder, assumes all risk of, and waives all claims against Landlord for, personal injury or property damage in, upon or about the Premises, from any cause whatsoever. Provided, however, that the indemnifications and waivers of Tenant set forth in this Section shall not apply to damage and liability caused (i) by the gross negligence or willful misconduct of Landlord, and (ii) through no fault of Tenant, its assignees or subtenants, or their respective agents, contractors, employees, customers, invitees or licensees. 14. HAZARDOUS MATERIALS. 14.1 Definitions. "Hazardous Materials Laws" means any and all federal, state or local laws, ordinances, rules, decrees, orders, regulations or court decisions relating to hazardous substances, hazardous materials, hazardous waste, toxic substances, environmental conditions on, under or about the Premises, or soil and ground water conditions, including, but not limited to, the Comprehensive Environmental Response, Compensation and liability Act of 1980, as amended, 42 U.S.C.ss.9601, et seq., the Resource Conservation and Recovery Act ,42 U.S.C.ss.6901, et seq., the Hazardous Materials Transportation Act, 49 U.S.C.ss.1801, et seq., the California Hazardous Waste Control Act, Cal. Health and Safety Codess.25100, et seq., the Carpenter-Presley-Tanner Hazardous Substances Account Act, Cal. Health and Safety Codess.25300, et seq., the Safe Drinking Water and Toxic Enforcement Act, Cal. Health and Safety Codess.25249.5, et seq., the Porter-Cologne Water Quality Control Act, Cal. Water Codess.13000, et seq., any amendments to the foregoing, and any similar federal, state or local laws, ordinances, rules, decrees, orders or regulations. "Hazardous Materials" means any chemical, compound, material, substance or other matter that: (a) is defined as a hazardous substance, hazardous material, hazardous waste or toxic substance under any Hazardous Materials Law, (b) is controlled or governed by any Hazardous Materials Law or gives rise to any reporting, notice or publication requirements hereunder, or gives rise to any liability, responsibility or duty on the part of Tenant or Landlord with respect to any third person hereunder; or (c) is flammable or explosive material, oil, asbestos, urea fommaldehyde, radioactive material, nuclear medicine material, drug, vaccine, bacteria, virus, hazardous waste, toxic substance, or related injurious or potentially injurious material (by itself or in combination with other materials). 14.2 Use of Hazardous Materials. Tenant shall not allow any Hazardous Material to be used, generated, manufactured, released, stored or disposed of on, under or about, or transported from the Premises, unless: (a) such use is specifically disclosed to and approved by Landlord in writing prior to such use, and (b) such use is conducted in compliance with the provisions of this Article. Landlord's consent may be withheld in Landlord's sole discretion and, if granted, may be revoked at any time. Landlord may approve such use subject to reasonable conditions to protect the Premises and Landlord's interests. Landlord may withhold approval if Landlord determines that such proposed use involves a material risk of a release or discharge of Hazardous Materials or a violation of any Hazardous Materials Laws or that Tenant has not provided reasonably sufficient assurances of its ability to remedy such a violation and fulfill its obligations under this Article. Notwithstanding the foregoing, Landlord hereby consents to Tenant's use, storage or disposal of products containing small quantities of Hazardous Materials that are of a type customarily found in offices and households (such as aerosol cans containing insecticides, toner for copies, paints, paint remover and the like) provided that Tenant shall handle, use, store and dispose of such Hazardous Materials in a safe and lawful manner and shall not allow such Hazardous Materials to contaminate the Premises. 14.3 Compliance With Laws; Handling Hazardous Materials. Tenant shall strictly comply with, and shall maintain the Premises in compliance with, all Hazardous Materials Laws. Tenant shall obtain, maintain in effect and comply with the conditions of all permits, licenses and other governmental approvals required for Tenant's operations on the Premises under any Hazardous Materials Laws, including, but not limited to, the discharge of appropriately treated Hazardous Materials into or through any sanitary sewer serving the Premises. At Landlord's request, Tenant shall deliver copies of, or allow Landlord to inspect, all such permits, licenses and approvals. All Hazardous Materials removed from the Premises shall be removed and transported by duly licensed haulers to duly licensed disposal facilities, in compliance with all Hazardous Materials Laws. Tenant shall perform any monitoring, testing, investigation, dean-up, removal, detoxification, preparation of closure or other required plans and any other remedial work required by any governmental agency or lender, or recommended by Landlord's environmental consultants, as a result of any release or discharge or potential release or discharge of Hazardous Materials affecting the Premises or the Center or any violation or potential violation of Hazardous Materials Laws by Tenant or any assignee or subtenant of Tenant or their respective agents, contractors, employees, licensees or invitees (collectively, "Remedial Work"). Landlord shall have the right to intervene in any governmental action or proceeding involving any Remedial Work, and to approve performance of the work, in order to protect Landlord's interests. Tenant shall not enter into any settlement agreement, consent decree or other compromise with respect to any claims relating to Hazardous Materials without notifying Landlord and providing ample opportunity for Landlord to intervene. Tenant shall additionally comply with the recommendations of Landlord's and Tenant's insurers based upon National Fire Protection Association standards or other applicable guidelines regarding the management and handling of Hazardous Materials. If any present or future law imposes any requirement of reporting, survey, investigation or other compliance upon Landlord, Tenant, or the Premises, and if such requirement is precipitated by a transaction involving the Lease (other than the natural expiration thereof at the end of the lease term), including without limitation the assignment or sublease, in whole or in part of Tenant's interest in the Lease, or the change in the ownership of Tenant, then Tenant shall fully comply with and pay all costs of compliance with such requirement, including Landlord's attomeys' fees and costs. 14.4 Notice; Reporting. Tenant shall notify Landlord, in writing, within three (3) days after any of the following: (a) Tenant has knowledge, or has reasonable cause to believe, that any Hazardous Material has been released, discharged or is located on, under or about the Premises, whether or not the release or discharge is in quantities that would otherwise be reportable to a public agency, (b) Tenant receives any order of a governmental agency requiring any Remedial Work pursuant to any Hazardous Materials Laws, (c) Tenant receives any warning, notice of inspection, notice of violation or alleged violation or Tenant receives notice or knowledge of any proceeding, investigation or enforcement action, pursuant to any Hazardous Materials Laws; or (d) Tenant receives notice or knowledge of any claims made or threatened by any third party against Tenant or the Premises relating to any loss or injury resulting from Hazardous Materials. If the potential risk of any of the foregoing events is material, Tenant shall deliver immediate verbal notice to Landlord, in addition to written notice as set forth above. Tenant shall deliver to Landlord copies of all test results, reports and business or management plans required In be filed with any governmental agency pursuant to any Hazardous Materials Laws. 14.5 Indemnity. Tenant shall indemnify, defend and hold Landlord (and its partners and their respective officers, directors, employees and agents) harmless from and against any and all liabilities, claims, suits, judgments, actions, investigations, proceedings, costs and expenses including attorneys' fees and costs) arising out of or in connection with any breach of any provisions of this Article or directly or indirectly arising out of the use, generation, storage, release, disposal or transportation of Hazardous Materials by Tenant, or any assignee or subtenant of Tenant, or their respective agents, contractors, employees, licensees, or invitees, on, under or about the Premises during the Lease Term or any other period of Tenant's actual or constructive occupancy of the Premises, including but not limited to, all foreseeable and unforeseeable consequential damages and the cost of any Remedial Work. Any defense of Tenant pursuant to this Section shall be by counsel acceptable to Landlord. Neither the consent by Landlord to the use, generation, storage, release, disposal or transportation of Hazardous Materials nor l the strict compliance with all Hazardous Materials Laws shall excuse Tenant from Tenant's indemnification obligations pursuant to this Article. The foregoing indemnity shall be in addition to and not a limitation of the indemnification provisions of Article 13 of this Lease. Tenant's obligations pursuant to this Article shall survive the termination or expiration of this Lease. 14.6 Entry and Inspection; Cure. Landlord and its agents, employees and contractors, shall have the right (but not the obligation) to enter the Premises at all reasonable Ames to inspect the Premises and Tenant's compliance with the terms and conditions of this Article or to conduct investigations and tests. No prior notice to Tenant shall be required in the event of an emergency, or if Landlord has reasonable cause to believe that violations of this Article have occurred, or if Tenant consents at the time of entry. In all other cases, Landlord shall give at least twenty-four (24) hours' prior notice to Tenant. Landlord shall have the right (but not the obligation) to remedy any violation by Tenant of the provisions of this Article pursuant to Section 22.3 of this Lease or to perform any Remedial Work. Tenant shall pay, upon demand, all costs incurred by Landlord in investigating any such violations or potential violations or performing Remedial Work, plus interest thereon at the rate specified in this Lease from the date of demand until Tenant. 14.7 Termination/Expiration. Upon termination or expiration of this Lease, Tenant shall, at Tenant's cost, remove any equipment, improvements or storage facilities utilized in connection with any Hazardous Materials and shall clean up, detoxify, repair and otherwies restore the Premises to a condition free of Hazardous Materials, to the extent such condition is caused by Tenant or any assignee or subtenant of Tenant or their respective agents, contractors, employees, licensees or invitees. 14.8 Exit Assessment. No later than ten (10) days after the expiration or earlier termination of this Lease, Tenant shall cause to be performed, at its sole expense, an environmental assessment (the "Exit Assessment') of the Premises. Landlord agrees to allow Tenant access to the Premises for such purpose. The Exit Assessment must be performed by a qualified environmental consultant acceptable to Landlord, and shall include without limitation the following, as applicable to the Premises and Tenant's activities: (a) inspection of all floors, walls, ceiling tiles, benches, cabinet interiors, sinks, the roof and other surfaces for signs of contamination and/or deterioration related to Hazardous Materials, (b) inspection of any and all ducts, hoods and exhaust systems for signs of contamination, deterioration and/or leakage related or potent/ally related to Hazardous Materials, (c) inspection of all readily accessible drain lines and other discharge piping for signs of deterioration, loss of integrity and leakage, (d) Tenant interviews and review of appropriate Tenant records to detemmine the uses to which Tenant has put the Premises that involve or may have involved Hazardous Materials, and to detemnine if any known discharges to the Premises or ground or soils from Tenant's activities have occurred, (e) documentation in detail of all observations, including dated photographs, (f) if applicable a certification that all areas inspected are dean and free of any Hazardous Materials and that the investigation conducted by the consultant does indicate that any release of any Hazardous Materials has occurred in the Premises or the Center as a result of Tenant's activities, (9) if applicable, a detailed description of Hazardous Materials remaining in the Premises and of any contamination, deterioration and/or leakage observed, together with detailed recommendations for the removal, repair or abatement of the same, and (h) if applicable, a detailed description of evidence of possible or past releases of Hazardous Materials, together with detailed recommendations for the prevention of the same in the future. Landlord shall have the right to require additional evaluations or work in connection with the Exit Assessment based upon Tenant's use of the Premises, any actual or suspected Hazardous Materials issues, or other reasonable factors. The original of the Exit Assessment shall be addressed to Landlord and shall be provided to the Landlord within twenty (20) days of the expiration or earlier termination of the Lease. In addition to Tenant's obligations under Section 14.7, Tenant agrees to fully implement and address all recommended actions contained in the Exit Assessment, at its sole cost, within thirty (30) days of the date thereof.*see below 14.9 Event of Default. The release or discharge of any Hazardous Material or the violation of any Hazardous Materials Law by Tenant or any assignee or subtenant of Tenant shall be a material Event of Default by Tenant under this Lease. In addition to or in lieu of the remedies available under this Lease as a result of such Event of Default, Landlord shall have the right, without terminating this Lease, to require Tenant to suspend its operations and activities on the Premises until Landlord is satisfied that appropriate Remedial Work has been or is being' adequately performed; Landlord's election of this remedy shall not constitute a waiver of Landlord's right thereafter to declare an Event of Default and pursue any other available remedy. 15. ALTERATIONS; LIENS. 15.1 Alterations by Tenant. Tenant shall not make any alterations, additions or improvements ('AIterations') to the Premises without Landlord's prior written consent, except for nonstructural Alterations that cost $5,000 or less and are not visible from the exterior of the Premises. All Alterations installed by Tenant shall be new or completely reconditioned. Landlord shall have the right to approve the contractor, the method of payment of the contractor, and the plans and specifications for all proposed Alterations. Tenant shall obtain Landlord's consent to all proposed Alterations requiring Landlord's consent prior to the commencement of any such Alterations. Tenant's request for consent shall be accompanied by information identifying the contractor and method of payment and two (2) copies of the proposed plans and specifications. All Alterations of whatever kind and nature shall become at once a part of the realty and shall be surrendered with the Premises upon expiration or earlier termination of the Lease Term, unless Landlord requires Tenant to remove the same as provided in Article 20. If Tenant demolishes or removes any then-existing tenant improvements or other portions of the Premises or the Building (including without limitation any previously installed Alterations), Tenant shall promptly commence and diligently pursue to completion the Alterations then underway or shall otherwise restore the Premises and the Building to its condition and state of improvement prior to such demolition or removal. During the Lease Term, Tenant agrees to provide, at Tenant's expense, a policy of insurance covering loss or damage to Alterations made by Tenant, in an amount adequate to repair or replace the same, naming Landlord as an additional insured. Provided, however, Tenant may install movable furniture trade fixtures, machinery or equipment in conformance with applicable governmental rules or ordinances and remove the same upon expiration or earlier termination of this Lease as provided in Article 20. 15.2 Permits and Govemmental Requirements. Tenant shall obtain, at Tenant's sole cost and expense, all building permits and other permits of every kind and nature required by any governmental agency having jurisdiction in connection with the Alterations. Tenant shall indemnify, defend and hold Landlord and Landlord's officers, directors, shareholders, partners, principals, employees and agents, and their respective successors and assigns, harmless from and against any and all claims, actions, damages, liability, costs, and expenses, including attorneys' fees and costs, arising out of any failure by Tenant or Tenant's contractor or agents to obtain all required permits, regardless of when such failure is discovered. Tenant shall do any and all additional construction, alterations improvements and retrofittings required to be made to the Premises and/or the Center, or any other properly of Landlord as a result of or as may be triggered by, Tenants alterations Landlord shall have the right to do such construction itself; but in all instances Tenant shall pay all costs directly or indirectly related to such work and shall indemnify, defend and hold Landlord and Landlord's.officers, directors, shareholders, partners, principals, employees and agents, and their respective successors and assigns, harmless from and against any and all claims, actions, damages, liability, costs, and expenses, including attorneys' tees and costs, arising out of any such additionally required work. All payment and indemnification obligations under this Section shall survive the expiration or earlier termination of the Lease Term. 15.3 Liens. Tenant shall pay when due a' claims for any work performed materials furnished or obligations incurred by or for Tenant, and Tenant shall keep the Premises free from any liens arising v with respect thereto. If Tenant fails to cause any such lien to be released within fifteen (153 days after imposition, by payment or posting of a proper bond, Landlord shall have the right (but not the obligation) to cause such release by such means as Landlord deems proper. Tenant shall pay Landlord upon demand for all costs incurred by Landlord in connection therewith (including attorneys' fees and costs), with interest at the rate specified in Section 22.4 from the date of payment by Landlord to the date of payment by Tenant. Tenant will notify Landlord in writing thirty (30) days prior to commencing any alterations, additions, improvements or repairs in order to allow Landlord time to file a notice of nonresponsibility. 16. DAMAGE AND DESTRUCTION. 16.1 Partial Insured Damage. If the Premises or any building in which the Premises are located are partially damaged or destroyed during the Lease Term, Landlord shall make the necessary repairs, provided such repairs can reasonably be completed within sixty (60) days after the date of the damage or destruction in accordance with applicable laws and regulations and provided that Landlord receives sufficient insurance proceeds to pay the cost of such repairs. In such event, this Lease shall continue in full force and effect. If such repairs cannot reasonably be completed within sixty (60) days after the date of the damage or destruction or if Landlord does not receive sufficient insurance proceeds, then Landlord may at its option elect within forty (45) days of the date of the damage or destruction to proceed with the necessary repairs, in which event this Lease in continue force full force and Landlord shall complete the same within a reasonably time. If Landlord does not so elect to make such repairs or if such repairs cannot be made under applicable laws and regulations, this Lease // may be temminated at the option of either parry within ninety (90) days of the or currence of such damage or destruction. 16.2 Insurance Deductible.. If Landlord elects to repair any damage caused by an insured casualty as provided in Section 16.1, Tenant shall, within fifteen (15) days after receipt of written notice from Landlord, pay the amount of any deductible (or its share thereof) under any insurance policy covering such damage or destruction, in accordance with Section 9.4 above. 16.3 Uninsured Damage. In the event of any damage or destruction of the Premises or any building in which the Premises are located by an uninsured casualty, Landlord shall have the right to elect either to repair such damage or to temminate this Lease. Such election shall be exercised by written notice to Tenant within forty-five (45) days of such damage or destruction. A 16.4 Total Destruction. A total destruction (including any destruction required by any authorized public authority) of either the Premises or any building in which the Premises are located shall terminate this Lease. 16.5 Partial Destruction of Center. If fifty percent (50%) or more of the rentable area of the Center is damaged or destroyed by fire or other cause, notwithstanding that the Premises may be unaffected, Landlord shall have the right, to be exercised by notice in writing delivered to Tenant within ninety (90) days after said occurrence, to elect to terminate this Lease. *Tenant will employ an environmental consultant to perform a "baseline" environmental assessment within thirty (30) days of signing Lease. Tenant will be responsible to Landlord in accordance with Section 14.8 only for matters that are not present and shown in the baseline assessment. 16.6 Tenant's Obligations. Landlord shall not be required to repair any injury or damage by fire or other cause, or to make any restoration or replacement of any Alterations, trade fixtures, equipment or personal properly placed or installed in the Premises by or on behalf of Tenant Unless this Lease is terminated Article, Tenant shall promptly repair, restore or replace the same in the event of damage. Nothing contained in this Article shall be construed as a limitation on Tenant's liability for any damage or destruction if such liability otherwise exists. 16.7 Rent Abatement. If Landlord repairs the Premises or the building after damage or destruction as described in this Article 16,, Minimum Monthly Rent payable by Tenant hereunder from the date of damage until the repairs are completed shall be equitably reduced, based upon the extent to which such repairs interfere with the business carried on by Tenant in the Premises, but only to the extent Landlord receives proceeds from rental income insurance paid for by Tenant. Landlord agrees to take reasonable steps to make a claim for and collect any rental income insurance proceeds that might be available. 16.8 Waiver of Inconsistent Statutes. The parties' rights and obligations in the event of damage or destruction shall be governed by the provisions of this Lease; accordingly, Tenant waives the provisions of California Civil Code Sections 1932(2) and 1933(4), and any other statute, code or judicial decisions that grants a tenant a right to terminate a lease in the event of damage or destruction of a leased premises. 17. CONDEMNATION. 17.1 Condemnation of Premises. If any portion of the Premises is taken or condemned for a public or quasi-public use ('Condemnation"), and a portion remains that is susceptible of occupation, then this Lease shall terminate as to the portion so taken as of the date title vests in the condemnor but shall remain in full force and effect as to the remaining Premises Landlord shall, within a reasonable period of time, restore the remaining Premises as nearly as practicable to the condition existing prior to the condemnation; provided, however, that if Landlord receives insufficient funds from the condenmno for such purpose, Landlord may elect to terminate this Lease. If this Lease continues in effect, the Minimum Monthly Rent shall be equitably adjusted, based upon the value of the Premises remaining after the Condemnation compared to the value of the Premises prior to Condemnation Provided, however, in the event of any such partial condemnation, Landlord shall have the option to terminate this Lease entirely as of the date title vests in the condemnor If all the Premises are condemned, or such portion so that there does not remain a portion that is susceptible of occupation, or if such a substantial portion of the Center is condemned that it is no longer economically appropriate to lease the Premises on the terms and conditions of this Lease, as reasonably determined by Landlord, then at the election of Landlord this Lease shall terminate as of the date title vests in the condemnor. 17.2 Condemnation of Parking Area. If all or any portion of the parking area in the Center is condemned such that the ratio of the total square footage of parking and other Common Facilities compared to the total rentable building square footage of the Center is reduced to a ratio below two to one, then at the election of Landlord this Lease shall terminate as of the date title vests in the condemnor. 17.3 Condemnation Award. All compensation awarded upon any such partial or total Condemnation shall be paid to Landlord and Tenant shall have no claim thereto, and Tenant hereby irrevocably assigns and transfers to Landlord any right to compensation or damages by reason of any such Condemnation. Provided, however, that Tenant shall have the right to claim and recover from the condemning authority, but not from Landlord, such compensation as may be separately awarded or recoverable by Tenant in Tenant's own right on account of any damage to Tenant's business by reason of the Condemnation and on account of any cost that Tenant may incur in removing Tenants's merchandise, furniture, fixtures, leasehold improvements and equipment. If this Lease is terminated in whole or in part, in accordance with this Article as a result of a Condemnation, Tenant shall have no claim for the value of any unexpired term of this Lease. 18 ASSIGNMENT AND SUBLETTING 18.1 Landlord's Consent Required. Tenant shall not voluntarily or involuntarily assign, sublease, mortgage, encumber, or otherwise transfer all or any portion of the Premises or its interest in this Lease (collectively, Transfer") without Landlord's prior written consent, which consent Landlord shall not unreasonably withhold. Landlord may withhold its consent until Tenant has complied with the provisions of Sections 18.2 and 18.3. Any attempted Transfer without Landlord's written consent shall be void and shall constitute a noncurable Event of Default under finis Lease. If Tenant is a corporation, any cumulative Transfer of more than twenty percent (20%) of the voting stock of such corporation shall constitute a Transfer requiring Landlord's consent hereunder; provided, however, that this sentence shall not apply to any corporation whose stock is publicly traded. If Tenant is a partnership, limited liability company, trust or other entity, any cumulative Transfer of more than twenty percent (20%) of the partnership membership, beneficial or other ownership interests therein shall constitute a Transfer requiring Landlord's consent hereunder. Tenant shall not have the right to consummate a Transfer or to request Landlord's consent to any Transfer if any Event of Default has occurred and is continuing or if Tenant or any affiliate of Tenant is in default under any lease of any other real property owned or managed (in whole or in part) by Landlord or any affiliate of Landlord. 18.2 Landlord's Election. Tenant's request for consent to any Transfer shall be accompanied by a written statement setting forth the details of the proposed Transfer, including the name, business and financial condition of the prospective Transferee, financial details of the proposed Transfer (e.g., the ter, and tje rent and security deposit payable), and any other related information that Landlord may reasonably require. Landlord shall have the right: (a) to withhold consent to the Transfer, if reasonable, (b) to grant consent, (c) to terminate this Lease as to the portion of the Premises affected by any proposed Transfer, in which event LandIord may enter into a lease directly with the proposed Transferee, or (d) to consent on the condition that Landlord be paid, as Additional Rent hereunder, fifty percent ( 50%) of all subrent or other consideration to be paid to Tenant under the terms of the Transfer in excess of the total rent due hereunder (including, if such Transfer is an assignment or if such Transfer is to occur directly or indirectly in connection with the sale of any assets of Tenant, fifty percent (50%) of the amount of the consideration attributable to the Transfer of the Lease, as reasonably determined by Landlord). The grounds on which Landlord may reasonably withhold its consent to any requested Transfer include, without limitation, that: (i) the proposed Transferee's contemplated use of the Premises following the proposed Transfer is not reasonably similar to the use of the Premises permitted hereunder, (ii) in Landlord's reasonable business judgment, the proposed Transferee lacks sufficient business reputation or experience to operate a successful business of the type and quality permitted under this Lease, (iii) in Landlord's reasonable business judgment, the proposed Transferee lacks sufficient net worth, working capital, anticipated cash flow and other indications of financial strength to meet all of its obligations under this Lease, (iv) the proposed Transfer would breach any covenant of Landlord respecting a radius restriction, location, use or exclusivity in any other lease, financing agreement, or of her agreement relating to the Center, and (v) in Landlord's reasonable business judgment, the possibility of a release of Hazardous Materials is materially increased as a result of the Transfer or if Landlord does not receive sufficient assurances that the proposed Transferee has the experience and financial ability to remedy a violation of Hazardous Materials and to fulfill its obligations under Articles 13 and 14. In connection with any such Transfer, Landlord shall have the right to require Tenant, at Tenant's sole cost, to cause environmental testing meeting the requirements of an Exit Assessment described in Section 14.8 to be performed. Landlord need only respond to any request by Tenant hereunder within a reasonable time of not less than ten (10) business days after receipt of all information and other submission required in connection with such request. 18.3 Costs; Transfer Fee. Tenant shall pay all costs and expenses in connection with any permitted Transfer, including any real estate brokerage commissions due with respect to the Transfer. Tenant shall pay all attorneys' tees and costs incurred by Landlord and a fee of $500 to reimburse Landlord for costs and expenses incurred in connection with any request by Tenant for Landlord's consent to a Transfer. Such fee shall be delivered to Landlord concurrently with Tenant's request for consent. 18.4 Assumption; Not Release of Tenant. Any permitted tranferee shall assume in writing all obligations of Tenant under this Lease, utilizing a form of assumption agreement provided or approved by Landlord, and an executed copy of such assumption agreement shall be delivered to Landlord within fifteen) days after the effective date of the Transfer. The taking of possession of all or any part of the Premises by any such permitted assignee or subtenant shall constitute an agreement by such person or entity to assume without limitation or qualification all of the obligations of Tenant under this Lease, notwithstanding any failure by such person to execute the assumption agreement required in the immediately preceding sentence. No permitted Transfer shall release or change Tenant's primary liability to pay the rent and to perform all other obligations of Tenant under this Lease. Landlord's acceptance of rent from any other person is not a waiver of any provision of this Article or a consent to Transfer. Consent to one Transfer shall not constitute a consent to any subsequent Transfer. If any transferee defaults under this Lease, Landlord may proceed directly against Tenant without pursuing remedies against the transferee. Landlord may consent to subsequent Transfers or modifications of this Lease by Tenants transferee, without notifying Tenant or obtaining its consent, and such action shall not relieve Tenant of Us liability under this Lease. 18.5 No Merger. No merger shall result from any Transfer pursuant to this Article, any surrender by Tenant of its interest under this Lease, or any termination hereof in any other manner. In any such event, Landlord may either terminate any or all subleases or succeed to the interest of Tenant thereunder. 18.6 Reasonable Restnction. Tenant acknowledges that the restrictions on Transfer contained herein are reasonable restrictions for purposes of Section 22.2 of this Lease and California Civil Code Section 1951.4. 19. SUBORDINATION; ATTORNMENT; ESTOPEL 19.1 Subordination. This Lease is junior and subordinate to all ground leases, mortgages, deeds of trust, and other security instruments now or hereafter affecting the real property of which the Premises are a part, and to all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. If any mortgagee, beneficiary under deed of trust or ground lessor shall elect to have this Lease prior to the lien of its mortgage, deed of tnust or ground lease, and gives written notice thereof to Tenant, this Lease shall be deemed prior thereto. Tenant agrees to execute any documents required to effectuate such subordination or to make this Lease prior to the lien of any such mortgage, deed of trust or ground lease, as the case may be, and if Tenant fails to do so within fifteen (15) days after written demand, Tenant does hereby make, constitute and irrevocably appoint Landlord as Tenant's attomey-in-fact and in Tenant's name, place and stead, to do so. 19.2 Attornment. If Landlord sells, transfers, or conveys its interest in the Premises or this Lease, or if the same is foreclosed judicially or nonjudicially, or is otherwise acquired, by a mortgagee, beneficiary under deed of trust or ground lessor, upon the request and at the sole election of Landlord's lawful successor, Tenant shall attorn to said successor, provided said successor accepts the Premises subject to this Lease. Tenant shall upon request of Landlord or any such mortgagee, beneficiary under deed of trust or ground lessor, execute an attornment agreement confirming the same, in form and substance acceptable to Landlord. Such agreement shall provide, among other things, that said successor shall not be bound by (a) any prepayment of more than one (1) month's rent (except any Security Deposit) or (b) any material amendment of this Lease made after the later of the initial effective date of this Lease, or the date that such successor's lien or interest first arose, unless said successor shall have consented to such amendment. 19.3 Estoppel Certificates. Within fifteen (15) days after written request from Landlord, Tenant at Tenant's sole cost shall execute, acknowledge and deliver to Landlord a written statement certifying: (a) that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modifications and certifying that this Lease is in full force and effect as so modified), (b) the amount of any rent paid in advance and (c) that, to Tenant's knowledge, there are no uncured defaults on the part of Landlord, or specifying the nature of such defaults if any are claimed. Any such statement may be conclusively relied upon by any prosper tive purchaser of or lender on the Premises. if Tenant fails to deliver such statement within said 1 15-day period, Tenant shall be liable for the immediate payment of all foreseeable and unforeseeable damages, penalties and attorneys' fees and costs incurred by Landlord as a result of such failure. Tenant's failure to deliver such statement within said Today period shall constitute a conclusive acknowledgment by Tenant: (i) that this Lease is in full force and effect without modification except as may be represented by Landlord, (ii) that not more than one (1) month's rent has been paid in advance, and (iii) that there are no uncured defaults in Landlord's performance. 20. SURRENDER OF PREMISES. 20.1 Condition of Premises. Upon the expiration or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord, broom dean and in the same condition and state of repair as at the commencement of the Lease Term, except for ordinary wear and tear that Tenant is not otherwise obligated to remedy under the provisions of this Lease. Tenant shall deliver all keys to the Premises and the building of which the Premises are a part to Landlord. Upon Tenant's vacation of the Premises, Tenant shall remove all portable furniture, trade fixtures, machinery, equipment, signs and other items of personal property (unless prohibited from doing the same under Section 20.2), and shall remove any Alterations (whether or not made with Landlord's consent) that Landlord may require Tenant to remove. Tenant shall repair all damage to the Premises caused by such removal and shall restore the Premises to its prior condition, all at Tenant's expense. Such repairs shall be performed in a manner satisfactory to Landlord and shall include, but are not limited to, the following: capping all plumbing, capping all electrical wiring, repairing all holes in walls, restoring damaged floor and/or ceiling tiles, and thorough cleaning of the Premises. If Tenant fails to remove any items that Tenant has an obligation to remove under this Section when required by Landlord or otherwise, such items shall, at Landlord's option, become the property of Landlord and Landlord shall have the right to remove and retain or dispose of the same in any manner, without any obligation to account to Tenant for the proceeds thereof. Tenant waives all claims against Landlord for any damages to Tenant resulting from Landlord's retention or disposition of such Alterations or personal property. Tenant shall be liable to Landlord for Landlord's costs of removing, storing and disposing of such items. 20.2 Removal of Certain Alterations, Fixtures and Equipment Prohibited. All Alterations, fixtures (whether or not trade fixtures) machinery, equipment, signs and other items of personal properly that Landlord has not required Tenant to remove under Section 20.1 shall become Landlord's property and shall be surrendered to Landlord with the Premises, regardless of who paid for the same. In particular and without limiting the foregoing, Tenant shall not remove any of the following materials or equipment without Landlord's prior written consent regardless of who paid for the same and regardless of whether the same are permanently attached to the Premises: power wiring and power panels; piping for industrial gasses or liquids; laboratory benches, sinks, cabinets and casework; fume hoods or specialized air-handling and evacuation systems; drains or other equipment for the handling of waste water or hazardous materials; computer, telephone and telecommunications wiring, panels and equipment; lighting and lighting fixtures; wall coverings; drapes, blinds and other window coverings; carpets and other floor coverings; heaters, air conditioners and other heating or air conditioning equipment; fencing, security gates and systems; and other building operating equipment and decorations.*See below 20.3 Holding Over. Tenant shall vacate the Premises upon the expiration or earlier termination of this Lease, and Tenant shall indemnify Landlord against all liabilities, damages and expenses incurred by Landlord as a result of any delay by Tenant in vacating the Premises. If Tenant remains in possession of the Premises or any part thereof after the expiration of the Lease Term with Landlord's written permission Tenant's occupancy shall be a tenancy from month-to-month only, and not a renewal or extension hereof. All provisions of this Lease (other than those relating to the term) shall apply to such month-to-month tenancy, except that the Minimum Monthly Rent shall be increased to 200% of the Minimum Monthly Rent in effect during the last month of the Lease Term. No acceptance of rent, negotiation of rent checks or other act or omission of Landlord or its agents shall extend the Expiration Date of this Lease other than a writing executed by Landlord giving Tenant permission to remain in occupancy beyond the Expiration Date under the terms of the immediately preceding sentence. 21. DEFAULT BY TENANT. The occurrence of 'any of the following shall constitute an "Event of Default" under this Lease by Tenant: (a) Failure to pay when due the rent or any other monetary sums required hereunder. (b) Failure to perform any other agreement or obligation of Tenant hereunder, if such failure continues for fiflteen (15) days after written notice by Landlord to Tenant, except as to those Events of Default that are noncurable in which case no such grace period shall apply. Landlord's notice described herein is intended to satisfy, and is not in addition to, any and all legal notices required prior to commencement of an unlawful detainer action, including without limitation the notice requirements of California Code of Civil Procedure Sections 1161 et seq. (c) Abandonment or vacation of the Premises by Tenant, or failure to occupy the Premises for a period of ten (10) consecutive days. (d) If any of the following occurs: (i) a petition is filed for an order of relief under the federal Banckruptcy Code or for an order or decree of insolvency or reorganization or rearrangement under any state or federal law, and such petition is not dismissed within thirty (30) days after the filing thereof; (ii) Tenant makes a genera! assignment for the benefit of creditors; (iii) a receiver or trustee is appointed to take possession of any substantial part of Tenant's assets, unless such appointment is vacated within thirty (30) days after the date thereof (iv) Tenant consents to or suffers an attachment, execution or other judicial seizure of any substantial part of its assets or its interest under this Lease, unless such process is released or satisfied within thirty (30) days after the occurrence thereof; or (v) Tenant's net worth, determined in accordance with generally accepted accounting principles consistently applied, decreases, at any time during the Lease Term, below Tenant's net worth as of the date of execution of this Lease. If a court of competent jurisdiction determines that any of the foregoing events is not a default under this Lease, and a trustee is appointed to take possession (or if Tenant remains a debtor in possession), and such trustee or Tenant transfers Tenant's interest hereunder, then Landlord shall receive, as Additional Rent, the difference between the rent (or other consideration) paid in connection with such transfer and the rent payable by Tenant hereunder. Any assignee pursuant to the provisions of any bankruptcy law shall be deemed without further act to have assumed all of the obligations of the Tenant hereunder arising on or after the date of such assignment. Any such assignee shall, upon demand, execute and deliver to Landlord an instrument confirming such assumption. (e) The occurrence of any other event that is deemed to be an Event of Default under any other provision of this Lease. *Excepted from the application of Section 20.2 is any personal property and equipment (including hoods and cabinets) which are free standing and owned by Tenant. 22. REMEDIES. Upon the occurrence of any Event of Default Landlord shall have the following remedies, each of which shall be cumulative and in addition to any other remedies now or hereafter available at law or in equity: 22.1 Termination of Lease. Landlord can terminate this Lease and Tenant's right to possession of the Premises by giving written notice of termination and then re-enter the Premises and take possession thereof. No act by Landlord other than giving written notice to Tenant of such termination shall terminate this Lease. Upon termination Landlord has the right to recover all damages incurred by Landlord as a result of Tenant's default, including: (a) The worth at the time of award of any unpaid rent that had been earned at the time of such termination; plus (b) The worth at the time of award of the amount by which the unpaid rent that would have been earned after the date of termination until the time of award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided; plus (c) The worth at the time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (d) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's default, including, but not limited to (i) expenses for cleaning, repairing or restoring the Premises, (ii) expenses for altering, remodeling or otherwise improving the Premises for the purpose of reletting, (iii) brokers' fees and commissions, advertising costs and other expenses of reletting the Premises, (iv) costs of carrying the Premises, such as taxes, insurance premiums, utilities and security precautions, (v) expenses in retaking possession of the Premises, (vi) attorneys' fees and costs, (vii) any unearned brokerage commissions paid in connection with this Lease, and (viii) payment of any previously waived or abated Minimum Monthly Rent and/or Additional Rent; plus (e) At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time under applicable law. As used in paragraphs (a) and (b) above, the "worth at the time of award" shall be computed by allowing interest at the maximum permissible legal rate. As used in paragraph (c) above, the "worth at the time of award" 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 (1%). 22.2 Continuation of Lease. Landlord has the remedy described in California Civil Code Section 1951.4 (Landlord may continue the Lease in effect after tenant's breach and abandonment and recover rent as it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable limitations), as follows: (a) Landlord can continue this Lease in full force and effect without terminating Tenant's right of possession, and Landlord shall have the right to collect rent and other monetary charges when due and to enforce all other obligations of Tenant hereunder. Landlord shall have the right to enter the Premises to do acts of maintenance and preservation of the Premises, to make alterations and repairs in order to relet the Premises, and/or to undertake other efforts to relet the Premises. Landlord may also remove personal property from the Premises and store the same in a public warehouse at Tenant's expense and risk. No act by Landlord permitted under this paragraph shall terminate this Lease unless a written notice of termination is given by Landlord to Tenant or unless the termination is decredd by a court of competent jurisdiction. (b) In furtherance of the remedy set forth in this Section, Landlord may relet the Premises or any part thereof for Tenanfs account, for such term (which may extend beyond the Lease Term at such rent, and on such other terms and conditions as Landlord may deem advisable in its sole discretion. Tenant shall be liable immediately to Landlord for all costs Landlord incurs in reletting the Premises. Any rents received by Landlord from such reletting shall be applied to the payment of: (i) any indebtedness other than rent due hereunder from Tenant to Landlord, (ii) the costs of such reletting, including brokerage and attorneys' fees and costs, and the cost of any alterations and repairs to the Premises, and (iii) the payment of rent due and unpaid hereunder, including any previously waived or abated rent. Any remainder shall be held by Landlord and applied in payment of future amounts as the same become due and payable hereunder. In no event shall Tenant be entitled to any excess rent received by Landlord after an Event of Default by Tenant and the exercise of Landlord's remedies hereunder. If the rent from such reletting during any month is less than the rent payable hereunder, Tenant shall pay such deficiency to Landlord upon demand. (c) Landlord shall not, by any re-entry or other act, be deemed to have accepted any surrender by Tenant of the Premises or Tenant's interest therein, or be deemed to have terminated this Lease or Tenant's right to possession of the Premises or the liability of Tenant to pay rent accruing thereafter or Tenant's liability for damages under any of the provisions hereof, unless Landlord shall have given Tenant notice in writing that it has so elected to terminate this Lease. (d) Tenant acknowledges and agrees that the restrictions on the Transfer of the Lease set forth in Article 18 of this Lease constitute reasonable restrictions on such transfer for purposes of this Section and California Civil Code Section 1951.4. 22.3 Performance By Landlord. If Tenant fails to pay any sum of money or perform any other act to be performed by Tenant hereunder, and such failure continues for fifteen (15) days after notice by Landlord, Landlord shall have the right (but not the obligation) to make such payment or perform such other act without waiving or releasing Tenant from its obligations. All sums so paid by Landlord and all necessary incidental costs, together with interest thereon at the rate specified in Section 22.4, shall be payable to Landlord on demand. Landlord shall have the same rights and remedies in the event of nonpayment by Tenant as in the case of default by Tenant in the payment of the rent. 22.4 Late Charge; Interest on Overdue Payments. The parties acknowledge that late payment by Tenant of Minimum Monthly Rent or any Additional Rent will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult and impractical to determine, including, but not limited to, processing and accounting charges, administrative expenses, and additional interest expenses or late charges that Landlord may be required to pay as a result of late payment on Landlord's obligations. Therefore, if any / installment of Minimum Monthly Rent or Additional Rent is not received by Landlord on the due date, and without regard to whether Landlord/gives Tenant notice of such failure or exercises any of its remedies upon an Event of Default, Tenant shall pay a late charge equal to the greater of ten percent (10%) of the overdue amount or One Hundred Dollars ($100), as Additional Rent hereunder. The parties hereby agree that such late charge represents a fair and reasonable estimate of the damages Landlord will incur by reason of late payment by Tenant. In addition, any amount due from Tenant that is not paid when due shall bear interest at a rate equal to two percent (2%) over the then current Bank of America prime or reference rate or ten percent (10%) per annum, whichever is greater, but not in excess of the maximum permissible legal rate, from the date such payment is due until the date paid by Tenant. Landlord's acceptance of any interest or late charge shall not constitute a waiver of Tenant's default or prevent Landlord from exercising any other rights or remedies available to Landlord. 22.5 Landlord's Right to Require Advance Payment of Rent; Cashier's Checks. If Tenant is late in paying any component of rent more ore than three (3) times during the Lease Term, Landlord shall have the right, upon notice to Tenant, to require that all rent be paid three (3) months in advance. Additionally, if any of Tenants checks are resumed for nonsuflicient funds, or if Landlord at any time serves upon Tenant a Three Day Notice to Pay Rent or Quit (pursuant to California Civil Code Sections 1161 et seq. or any successor Of similar unlawful detainer statutes), Landlord may, at its option, require that all future rent (including any sums demanded in any subsequent three (3) day & exclusively by money order or cashier's check. 23. DEFAULT BY LANDLORD. 23.1 Notice to Landlord. Landlord shall not be in default under this Lease unless Landlord fails to perform an obligation required of Landlord within a reasonable Ume,but in no event later than thirty (30) days after written notice by Tenant to Landlord and to each Mortgagee as provided in Section 23.2, specifying the nature of the alleged default; provided, however, that if the nature of the obligation is such that more than thirty (30) business days are required for perfommance, then Landlord shall not be in default if Landlord commences perfommance within such 3Way period and thereafter diligently prosecutes the same to completion. 23.2 Notice to Mortgagees. Tenant agrees to give each mortgagee or tnust deed holder on the Premises or the Center ('Mortgagee'9, by registered mail, a copy of any notice of default served upon Landiord, provided that Tenant has been previously notified in writing of the address of such Mortgagee. Tenant further agrees that H Landlord fails to cure such default within the time provided for in this Lease, then the Mortgagees shall have an additional thirty (30) days within which to cure such default, or if such default cannot reasonably be cured within that Ume, then such additional time as may be necessary if, within said Today period, any Mortgagee has commenced and is diligently pursuing the remedies necessary to wire the default (induding but not limited to commencement of foreclosure proceedings if necessary to affect such cure), in which event this Lease shall not be temminated while such remedies are being so diligently pursued. 23.3 Limitations on Remedies Against Landlord. In the event Tenant has any claim or cause of action against Landlord: (a) Tenant's sole and exclusive remedy shall be against Landlord's interest in the building of which the Premises are a part, and neither Landlord nor any partner of Landlord nor any other properly of Landlord shall be liable for any deficiency, (b) no partner of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction over Landlord), (c) no service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction over the partnership), and no such partner shall be required to answer or otherwise plead to any service of process, (d) no judgment shall be taken against any partner of Landlord and any judgment taken against any partner may be vacated and set aside at any time, and (e) no writ of execution will ever be levied against the assets of any partner of Landlord. The covenants and agreements set forth in this Section shall be enforceable by Landlord and/or by any partner of Landlord. If Landlord fails to give any consent that a court later holds Landlord was required to give under the terms of this Lease, Tenant shall be entitled solely to specific performance and such other remedies as may be specifically reserved to Tenant under this Lease, but in no, event shall Landlord be responsible for monetary damages (including incidental and consequential damages) for such failure to give consent. 24. GENERAL PROVISIONS. 24.1 Action or Defense by Tenant. Any claim, demand, right or defense of any kind by Tenant that is based upon or arises in any connection with the Lease or negotiations prior to its execution shall be barred unless Tenant commences an action thereon or initiates a legal proceeding or defense by reason thereof within six (6) months after the date of the occurrence of the event, act or omission to which the claim demand, right or defense relates. Tenant acknowledges and understands that, after having had an opportunity to consult with legal counsel the purpose of this paragraph is to shorten the time period within which Tenant would otherwise have to raise such claims, demands or rights of defense. 24.2 Arbitration and Mediation; Waiver of Jury Trial. Except as provided in this Section, if any dispute ensues between Landlord and Tenant arising out of or concerning this Lease, and if said dispute cannot be settled through direct discussions between the parties, the parties shall first to attempt to settle the dispute through mediation before a mutually acceptable mediator. The cost of mediation shall be divided equally between the parties. Thereafter, any remaining, unresolved disputes or claims shall be resolved by binding arbitration in accordance with the rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator may be entered in any court of competent jurisdiction. The prevailing party in any such arbitration shall be entitled to recover reasonable costs and attorneys' fees and costs as determined by the arbitrator; provided, however, that the foregoing provisions regarding mediation and arbitration shall not apply to (a) any issue or claim that might properly be adjudicated in an unlawful detainer proceeding, or (b) to any issue or claim that Landlord elects not to have resolved through arbitration and with respect to which Landlord commences an action in law or equity to determine, the same. Without limiting the foregoing, Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim (including any claim of injury or damage and any emergency and other statutory remedy in respect thereof) brought by either against the other on any matter arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, or Tenant's use or occupancy of the Premises. 24.3 Attorneys' Fees. If either parry brings any legal action or proceeding, declaratory or otherwise, arising out of this Lease, including any suit by Landlord to recover rent or possession of the Premises or to otherwise enforce this Lease, the losing party shall pay the prevailing party's costs and attorneys' fees and costs incurred in such proceeding. If Landlord issues notice(s) to pay rent, notice(s) to perform Covenant, notice(s) of abandonment, or comparable documents as a result of Tenant's default under this Lease, and if Tenant cures such default, Tenant shall pay to Landlord the reasonable costs incurred by Landlord, including Landlord's attorneys' fees and costs, of preparation and delivery of same. 24.4 Authority of Tenant. Tenant represents and warrants that it has full power and authority to execute and fully perform its obligations under this Lease pursuant to its governing instruments, without the need for any further action, and that the person(s) executing this Agreement on behalf of Tenant are the duly designated agents of Tenant and are authorized to do so. Prior to execution of this Lease, Tenant shall supply Landlord with such evidence as Landlord may request regarding the authority of Tenant to enter into this Lease. Any actual or constructive taking of possession of the Premises by Tenant shall constitute a ratification of this Lease by Tenant. 24.5 Binding Effect. Subject to the provisions of Article 18 restricting transfers by Tenant and subject to Section 24.27 regarding transfer of Landlord's interest, all of the provisions of this Lease shall bind and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. 24.6 Brokers. Tenant warrants that it has had no dealings with any real estate broker or agent in connection with the negotiation of this transaction other than the broker(s) described in the Basic Lease Provisions (if any), and it knows of no other real estate broker or agent who are entitled to a commission in connection with this transaction. Tenant agrees to indemnify, defend and hold Landlord harmless from and against any obligation or liability to pay any commission or compensation to any other party arising from the act or agreement of Tenant. 24.7 Construction. The headings and captions used in this Lease are for convenience only and are not a part of the terms and provisions of this Lease. In any provision relating to the conduct, acts or omissions of Tenant, the Term "Tenant" shall include Tenant, its subtenants and assigns and their respective agents, employees, contractors, and invitees, and any others using the Premises with Tenant's express or implied permission Any use in this Lease, or in any addendum, amendment or other document related hereto, of the terms "lessor" or "lessee to refer to a parry to this Lease shall be deemed to be references to Landlord and Tenant, respectively. 24.8 Counterparts. This Lease may be executed in multiple copies, each of which shall be deemed an original, but all of which shall constitute one Lease binding on all parties after all parties have signed such a counterpart. 24.9 Covenants and Conditions. Each provision to be performed by Tenant shall be deemed to be both a covenant and a condition. 24.10 Entire Agreement This Lease, together with all exhibits and addenda, if any, attached hereto, constitutes the entire agreement between the parries with respect to the subject matter hereof. There are no oral or written agreements or representations between the parties hereto affecting this Lease, and this Lease supersedes, cancels, and merges any and all previous verbal or written negotiations, arrangements representations, brochures, displays, models, photographs, renderings, floor plans, elevations, projections, estimates, agreements and understandings if any, made by or between Landlord and Tenant and their agents, with respect to the subject matter, and none thereof shall I be used to interpret, construe, supplement or contradict this Lease. This Lease, and all amendments thereto, is and shall be considered to. I be the only agreement between the parties hereto and their representatives and agents. There are no other representations or warranties between the parties, and all reliance with respect to representations is solely based upon the representations and agreements contained in this Lease. 24.11 Exhibits. All exhibits, addenda and riders attached or referred to herein are hereby incorporated herein by reference. 24.12 Financial Statements. Within ten (10) days after written request from Landlord, Tenant shall deliver to Landlord such financial statements as are reasonably requested by Landlord to verify the net worth of Tenant, or any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall deliver to any proposed or actual lender or purchaser of the Premises designated by Landlord any financial statements required by such party to facilitate the sale, financing or refinancing of the Premises, including the past three (3) years' financial statements. Tenant represents and warrants to Landlord that: (a) each such financial statement is a true and accurate statement as of the date of such statement; and (b) at all times during the Lease Term or any extension thereof, Tenant's net worth shall not be reduced below Tenant's net worth as of the date of execution of this Lease. Landlord shall take reasonable precautions to protect the confidentiality of such financial statements. Tenant hereby irrevocably authorizes Landlord to conduct credit checks and other investigations into Tenant's financial affairs. 24.13 Force Majeure. If Landlord is delayed in performing any of its obligations hereunder due to strikes; labor problems: inability In procure utilities materials equipment or transportation; governmental regulations; weather conditions; riots, insurrection, or war; or other events beyond Landlor's control; then the time for performance of such obligation shall be extended to the extent reasonably necessary as a result of such event. 24.14 Governing Law. This Lease shall be governed, construed and enforced in accordance with the laws of the State of California. 24.15 Joint and Several Liability. If more than one person or entity executes this Lease as Tenant, each of them is jointly and severally liable for all of the obligations of Tenant hereunder. 24.16 Modification. The provisions of this Lease may not be modified of amended, except by a written instrument signed by all parties. 24.17 Modification for Lender. If, in connection with obtaining financing or refinancing for the Premisis or the Center, Landlord's lender requests reasonable modifications to this Lease, Tenant will not unreasonably withhold or delay its consent thereto, provided that such modifications do not increase the obligations of Tenant hereunder or materially and adversely affect Tenant's rights hereunder. 24.18 Non discrimination. Tenant for itself and its officers, directors, shareholders, partners, principals, employees, agents, representatives, and other related entities and individuals, agrees to comply fully with any and all laws and other requirements prohibiting discrimination against any person or group of persons on account of race, color, religion, creed, sex, martial status, secual orientation, national orgiin, ancestry, age, physical handicap or medical condition, in the use occupancy or patronage of the Premises and/or of Tenant's business. Tenant shall indemnify, defend and hold Landlord and Landlord's officers, directors, shareholders, partners, princaplas, employees and agents, and their respective successors and assigns, harmless form and against all damage and liability incurred by Landlord's in the event of any violation of the foregoing covenant or because of any event of or practice of discrimination against any such persons or group of persons by Tenant or its officers, directors, shareholders, partners, principals, employees, agents, representatives, and other related entities and individuals in accordance with the indemnification provisions of Article 13. 24.19 Notice. Any and all notices to either party shall be personally delivered or sent by regular mail, postage prepaid, addressed to the parry to be notified at the address specified Section 1.1, or at such other address as such party may from time to time designate in writing. Notice shall be deemed delivered on the date of personal delivery or three (3) business days after deposit in the U.S. Mail, certified, return receipt requested. 24.20 Partial Invalidity. If any provision of this Lease is determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Lease shall not be affected thereby. Each provision shall be valid and enforceable to the fullest extent permitted by law. 24.21 Quiet Enjoyment Landlord agrees that Tenant, upon paying the rent and performing the terms covenants and conditions of this Lease, may quietly have, hold and enjoy the Premises from and after Landlord's delivery of the Premises to Tenant and until the end of the Lease Term subject, however, to the lien and provisions of any mortgage or deed of trust to which this Lease is or becomes subordinate. 24.22 Recording. Tenant shall not record this Lease or any memorandum hereof without Landlord's prior written consent. 24.23 Relationship of the Parties. Nothing contained in this Lease shall be deemed or construed as creating a partnership, joint venture, principal-agent, or employer-employee relationship between Landlord and any other person or entity (including, without limitation, Tenant) or as causing Landlord to be responsible in any way for the debts or obligations of such other person or entity. 24.24 Relocation of Tenant. In the event Landlord requires the Premises for use in conjunction with other premises or for other reasons related to the planning program for the Center, Landlord, upon delivering written notice to Tenant (the "Relocation Notice"), shall have the right to relocate Tenant to other space in the Center, at Landlord's sole cost and expense (except that Tenant shall bear the cost of moving and installing private telephone systems), and the terms and conditions of the original Lease shall remain in full force and effect, except that the Premises will be in a new location. However if the new space does not meet with Tenant's reasonable approval, Tenant shall have the right to terminate this Lease upon delivering notice to Landlord within fifteen (15) days after Tenant's receipt of the Relocation Notice. If Tenant elects to terminate the Lease pursuant to this Section, the termination shall be effective on the effective date of the proposed relocation of Tenant as indicated in the Relocation Notice. 24.25 Rights of Redemption Waived. Tenant hereby expressly waives any and all rights of redemption under any present or future laws in the event Tenant is evicted or dispossessed for any cause, or in the event Landlord obtains possession of the Premises by reason of Tenant's violation of any of the covenants and conditions of this Lease or otherwise. 24.26 Time of Essence. Time is of the essence of each and every provision of this Lease. 24.27 Transfer of Landlord's Interest. In the event of a sale, assignment, exchange or other disposition of Landlord's interest in the Premises, other than a transfer for security purposes only, Landlord shall be relieved of all obligations and liabilities accruing hereunder after the effective date of said sale, assignment, exchange or other disposition, provided that any Security Deposit or other funds then held by Landlord in which Tenant has an interest are delivered to Landlord's successor. The obligations to be performed by Landlord hereunder shall be binding on Landlord's successors and assigns only during their respective periods of ownership. 24.28 Waiver. No provision of this Lease or the breach thereof shall be deemed waived, except by written consent of the party against whom the waiver is claimed. A waiver of any such breach shall not be deemed a waiver of any preceding or succeeding breach of the same or any other provision. No delay or omission by Landlord in exercising any of its remedies shall impair or be construed as a waiver thereof unless such waiver is expressly set forth in a written instrument signed by Landlord. The subset subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. THE SUBMISSION OF THIS LEASE FOR EXAMINATION AND/OR SIGNATURE BY TENANT IS NOT A COMMITMENT BY LANDLORD OR ITS AGENTS TO RESERVE THE PREMISES OR TO LEASE THE PREMISES TO TENANT. THIS LEASE SHALL BECOME EFFECTIVE AND LEGALLY BINDING ONLY UPON FULL EXECUTION AND DELIVERY BY BOTH LANDLORD AND TENANT. UNTIL LANDLORD DELIVERS A FULLY EXECUTED COUNTERPART HEREOF TO TENANT, LANDLORD HAS THE RIGHT TO OFFER AND TO LEASE THE PREMISES TO ANY OTHER PERSON TO THE EXCLUSION OF TENANT. EXECUTED, by Landlord and Tenant as of the date first written above. TENANT: LANDLORD: OCET Corporation, a Delaware Sorrento Square, a Corporation, a wholly owned subsidiary Limited Partnership, by: Collins of SGI International a Utah Corp. Development Company, General Partner By: /s/ MICHAEL L. ROSE By: /s/ Title: President Title: By: By: Title: Title: Tenant's Information: Driver's Lic. No. SSN/EIN FIRST ADDENDUM TO STANDARD INDUSTRIAL NET LEASE This addendum is made to that certain Standard Industrial Net Lease dated May 10, 2000, by and between Sorrento Square, a Limited Partnership ("Landlord") and OCET Corporation, a Delaware Corporation, a wholly owned subsidiary of S.G.I. International, a Utah Corporation ("Tenant") for Suites 20 & 21, located at 11588 Sorrento Valley Road, San Diego, California, containing approximately 5,060 square feet. A. Tenant Improvements: Landlord, at Landlord's expense, shall conduct the following repairs to the premises: - ------------------------ 1. Repair roof leaks and ceiling tiles as needed. However, if any leaks are found around Tenant's installed ductwork, Tenant shall pay the cost of repairing the roof leaks caused by its roof perforations. 2. Landlord shall provide up to a $2,000 allowance to evaluate and upgrade the heating and air conditioning duct work and balancing in the front office area. Any additional expense for the HVAC re-balancing, evaluation and upgrade shall be borne by the Tenant. 3. Install "instahot" type under sink water heaters in the downstairs restroom of Suite 20 and upstairs restroom in Suite 21. 4. Paint the office areas only. Tenant shall be responsible for moving its computer and office equipment. 5. Install weather-stripping, as needed, around office doors to keep breeze and dirt out of the of fice areas. 6. Replace ballast and fluorescent light fixtures as needed (it is agreed that Landlord shall not be responsible for replacing more than five light fixtures). 7. Repair the latch on the conference room door, as the striker is not aligned. 8. Landlord and Tenant shall coordinate a mutually agreeable time to complete the tenant improvements to minimize disruption of Tenant's business / operations. It is agreed that any additional tenant improvement costs not specifically itemized in this section shall be borne entirely by Tenant. All other terms and conditions contained in said lease shall remain in full force and effect. OCET Corporation, a Delaware Sorrento Square, a Limited Corporation, a wholly owned subsidiary Partnership, by : Collins Of SGI International a Utah Development Company, General Corporation Partner By /s/ MICHAEL L. ROSE By /s/ "Tenant" "Landlord" May 19, 2000 EXHIBIT "B" RULES AND REGULATIONS The following Rules and Regulations shall apply to the Center. Tenant agrees to comply with the same and to require its agents, employees, contractors, customers and invitees to comply with the same. Landlord shall have the right from time to time to amend or supplement these Rules and Regulations, and Tenant agrees to comply, and to require its agents, employees, contractors, customers and invitees to comply, with such amended or supplemented Rules and Regulations, provided that (a) notice of such amended or supplemental Rules and Regulations is given to Tenant, and (b) such amended or supplemental Rules and Regulations apply uniformly to all tenants of the Center. if Tenant or its subtenants, employees, agents, or invitees violate any of these Rules and Regulations, resulting in any damage to the Center or increased costs of maintenance of the Center, or causing Landlord to incur expenses to enforce the Rules and Regulations, Tenant shall pay all such costs to Landlord as Additional Rent. In the event of any conflict between the Lease and these or any amended or supplemental Rules and Regulations, the provisions of the Lease shall control. 1. Tenant shall be responsible at its sole cost for the removal of all of Tenant's refuse or rubbish. All garbage and refuse shall be disposed of outside of the Premises, shall be placed in the kind of container specified by Landlord, and shall be prepared for collection in the manner and at the times and places specified by Landlord. If Landlord provides or designates a service for picking up refuse and garbage, Tenant shall use the same at Tenant's sole cost. Tenant shall not bum any trash or garbage of any kind in or about the Premises. If Landlord supplies janitorial services to the Premises, Tenant shall not, without Landlord's prior written consent, employ any person or persons other than Landlord's janitorial service to dean the Premises. 2. No aerial, satellite dish, transceiver, or other electronic communication equipment shall be erected on the roof or exterior walls of the Premises, or in any other part of the Center, without Landlord's prior written consent. Any aerial, satellite dish, transceiver, or other electronic communication equipment so installed without Landlord's prior written consent shall be subject to removal by Landlord without notice at any time and without liability to Landlord. 3. No loudspeakers, televisions, phonographs, radios, or other devices shall be used in a manner so as to be heard or seen outside of the Premises without Landlord's prior written consent. Tenant shall conduct its business in a quiet and orderly manner so as not to create unnecessary or unreasonable noise. Tenant shall not cause or permit any obnoxious or foul odors that disturb the public or other occupants of the Center. If Tenant operates any machinery or mechanical equipment that causes noise or vibration that is transmitted to the structure of the building in which the Premises are located, or to other parts of the Center, to such a degree as to be objectionable to Landlord or to any other occupant of the Center, Tenant shall install and maintain, at Tenant's expense, such vibration eliminators or other devices sufficient to eliminate the objectionable noise or vibration. 4. Tenant shall keep the outside-areas immediately adjoining the Premises clean and free from dirt, rubbish, pallets and other debris to the satisfaction of Landlord. If Tenant fails to cause such outside areas to be maintained as required within twelve (12) hours after verbal notice that the same do not so comply, Tenant shall pay a fee equal to the greater of Fifty Dollars ($50.00) or the costs incurred by Landlord to dean up such outside areas. 5. Tenant shall not store any merchandise, inventory, equipment, supplies, finished or semi-finished products, raw materials, or other articles of any nature outside the Premises (or the building constructed thereon if the Premises includes any outside areas) without Landlord's prior written consent. 6. Tenant and Tenant's subtenants, employees, agents, or invitees shall park only the number of cars allowed under the Lease and only in those portions of the parking area designated for that purpose by Landlord. Upon request by Landlord, Tenant shall provide the license plate numbers of the cars of Tenant and Tenant's employees in order to facilitate enforcement of this regulation. Tenant and Tenant's employees shall not store vehicles or equipment in the parking areas, or park in such a manner as to block any of the accessways serving the Center and its occupants. 7 The Premises shall not be used for lodging, sleeping, cooking, or for any immoral or illegal purposes, or for any purpose that will damage the Premises or the reputation thereof. Landlord reserves the right to expel from the Center any person who is intoxicated or under the influence of liquor or drugs or who shall act in violation of any of these Rules and Regulations. Tenant shall not conduct or permit any sate by auction on the Premises. No video, pinball, or similar electronic game machines of any description shall be installed, maintained or operated upon the Premises without the prior written consent of Landlord. 8. Neither Tenant nor Tenant's employees or agents shall disturb, solicit, or canvas any occupant of the Center, and Tenant shall take reasonable steps to discourage others from doing the same. 9. Tenant shall not keep in, or allow to be brought into, the Premises or Center any pet, bird or other animal, other than "seeing-eye" dogs or other animals under the control of and specifically assisting any disabled person. 10. The plumbing facilities shall not be used for any other purpose than that for which they are constructed, and no foreign substance of any kind shall be disposed of therein. The expense of any breakage, stoppage, or damage resulting from a violation of this provision shall be borne by Tenant. Tenant shall not waste or use any excessive or unusual amount of water. 11. Tenant shall use, at Tenant's cost, such pest extermination contractor as Landlord may direct and at such intervals as Landlord may require. 12. Tenant will protect the carpeting from undue wear by providing carpet protectors under chairs with casters, and by providing protective covering in carpeted areas where spillage or excessive wear may occur. 13. Tenant shall be responsible for repair of any damage caused by the moving of freight, furniture or other objects into, within, or out of the Premises or the Center. No heavy objects (such as safes, fumiture, equipment, freight, etc.) shall be placed upon any floor without 15, No electrical wiring, electrical apparatus, or additional electrical outlets shall be installed in the Premises without Landlord's prior written approval. Any such installation not so approved by Landlord may be removed by Landlord at Tenant's expense. Tenant may not alter any existing electrical outlets or overburden them beyond their designed capacity. Landlord reserves the right to enter the Premises, with reasonable notice to Tenant, for the purpose of installing additional electrical wiring and other utilities for the benefit of Tenant or adjoining tenants. Landlord will direct electricians as to where and how telephone and affixed wires are to be installed in the Premises The location of telephones, call boxes, and other equipment affixed to the Premises shall be subject to the prior written approval of Landlord. 16. If Tenant's use of the Premises involves the sale and/or preparation of food, Tenant shall at all times maintain a health department rating of "A" (or such other highest health department or similar rating as is available). Any failure by Tenant to maintain such "A" rating twice in any twelve (12) month period shall, at the election of Landlord, constitute a noncurable Event of Default under the Lease. 17. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 18. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 19. If Tenant occupies any air-conditioned space, Tenant shall keep entry doors opening onto corridors, lobby or courtyard closed at all times. All truck and loading doors shall be closed at all times when not in use. 20. Tenant shall not paint any floor of the Premises without Landlord's prior written consent. Prior to surrendering the Premises upon expiration or termination of the Lease, Tenant shall remove any paint or sealer therefrom (whether or not previously permitted by Landlord) and restore the floor to its original condition as of the Commencement Date, reasonable wear and tear excepted. Tenant shall not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. /s/ MLR Tenant's Initials EX-10.2 4 0004.txt LEASE AGREEMENT AMENDMENT FOR SGI Second Amendment to Lease This Second Amendment, dated this 19th day of June 2000, shall be effective as of December 16, 2000, and is between La Jolla Financial Building, LLC (hereinafter referred to as "Landlord") and SGI International (hereinafter referred to as "Tenant"), with respect to the following facts. A. Landlord and Tenant have heretofore entered into a lease dated as of December 3, 1990 (hereinafter referred to as the "Master Lease") for certain space located on the Third Floor of the La Jolla Financial Building, Suite #325, located at 1200 Prospect Street, La Jolla, California 92037. B. Landlord and Tenant have heretofore entered into a First Amendment to Lease, dated October 17, 1995 for certain space located on the Third Floor of the La Jolla Financial Building, Suite #325 located at 1200 Prospect Street, La Jolla, California 92037. WHEREFORE the parties hereto agree as follows: 1. Space. Landlord hereby leases to tenant and Tenant hereby hires from Landlord, subject to all of the terms and conditions of the Master Lease and this First Amendment, 5,475 rentable square feet on the Third Floor identified as "Exhibit A" attached hereto. 2. Term. The term of this Lease shall be for sixty (60) months commencing upon December 16, 2000. 3. Annual Basic Rent. (a) Tenant agrees to pay Landlord as Annual Basic Rent for the Premises the sum of One Hundred Eighty Thousand Six Hundred Seventy Five Dollars and no/100 Dollars ($180,675.00) (subject to adjustment as hereinafter provided) in twelve (12) equal monthly installments of Fifteen Thousand and Fifty Six Dollars and 25/100 Dollars ($15,056.25) each, in advance on the first day of each calendar month during the term. If the term of this Lease commences or ends on a day other than the first day of a calendar month, then the rental for such period shall be prorated in the proportion that the number of days this Lease is in effect during such period bears to thirty (30). In addition to the Annual Basic Rent, Tenant agrees to pay as additional rental the amount of rental adjustments and other charges required by this Lease as described in Sections 3(b), 3(c), and 3(d) All rental shall be paid to Landlord, without prior demand and without any deduction or offset, in lawful money of the United States of America, at the address of Landlord designated at the end of the Lease or to such other person or at such other place Landlord may from time to time designate in writing. (b) The rental payable by Tenant shall be increased for each year of this lease commencing with the beginning of the second Lease Year by adjusting the Annual Basic Rental reserved in Section 3(a) to reflect any increase in the cost of living, which adjustment shall be determined as follows: (i) The monthly rent as set forth shall be increased each subsequent year of the term of this lease following the first year if the Consumer Price Index (the "Index") for the "Comparison Month" (described below) increases over the Index for the calendar month ("Base Month") which shall be the month the lease commences. The Base Month Index shall be compared with the Index for the same calendar month for each Subsequent Year ("Comparison Month"). If the Index for any Comparison Month is higher than the Base Month Index, then the monthly rent shall increase beginning with the first month of such subsequent year by ratio which shall be calculated by dividing the Comparison Month Index by the Base Month Index. ** In no event shall the increase be less than 1.015 per year or greater than 1.070 per year. By way of illustration only, if tenant commences paying monthly rent in August of 1981, then the Base Month Index would be that for August, 1981 (assume such Index at 130) and that Index shall be compared with Index for August, 1982 (assume such Index at 136). Because the Index for August, 1982 is four and six-tenths percent (4.6%) higher than the Index for August, 1981 based on the assumptions of 136 and 130, respectively, the monthly rent commencing in August of 1982 would be four and six-tenths percent (4.6%) higher than the monthly rent commencing August, 1981. Likewise, the Index for August, 1983 would be compared with the Index for August, 1981. Should said Bureau discontinue the publication of the above Index or publish the same less frequently, or alter the same in some other manner, then Landlord shall adopt a substitute index or substitute procedure which reasonably reflects and monitors consumer prices. (ii) For the purpose of this Lease, the term "Consumer Price Index" or "Index" shall refer to the "Consumer Price Index for All Urban Consumer Price Index for Los Angeles-Anaheim-Riverside Areas (all terms)" as published by the U.S. Government Printing office, or the successor thereto. (iii) If the base of the Consumer Price Index should hereafter be changed, then the new base shall be converted to the base in existence on the date of the execution of this amendment and the base as so converted shall be used. In the event that the Bureau shall cease to publish the Consumer Price Index, then the successor or most nearly comparable index thereto shall be used. (c) Late Charges. Within thirty (30) days after December 16, 2000, if Landlord has not received the monthly rent payment, or in the event Tenant fails to make any other payment for which Tenant is obligated under this lease on or before the fifth (5) day of each month, tenant agrees to pay, as a penalty, an amount equal to 10% of the monthly rent and or other payment due for each occurrence. (d) For purposes of Article 4 of the Master Lease the percentage occupied by Tenant with respect to the space is 6.46%. The base year for determination of the Direct Expense Base is 2001. 4. Tenant Improvement. Landlord will at its sole expense recarpet the premises with building standard carpet and repaint the suite as directed by Tenant. 5. Parking. Tenant shall for the term of the lease receive $640.00 a month in parking credits against its monthly rent to be used at the La Jolla Financial Building. 6. Incorporation of Master Lease. Except as otherwise expressly set forth herein, all other terms and provisions of the Master Lease shall be incorporated herein and apply. Said Additional space shall be deemed as part of the leased premises covered by said Master Lease. IN WITNESS WHEREOF, Landlord and Tenant have executed this First Amendment to Lease as of the date set forth above. SGI International "Tenant" By La Jolla Financial Building, LLC "Landlord" By EX-27 5 0005.txt FDS --
5 This schedule contains summary financial information extracted from SGI International's Form 10-QSB for the six month period ended June 30, 2000, and is qualified in its entirety by reference to such financial statements. 0000737955 SGI International 1 0 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1.000 308,737 0 1,053,818 71,587 412,672 1,862,063 3,883,453 1,486,372 6,431,100 3,907,754 0 0 605 52,471,503 (56,729,973) 6,431,100 2,381,402 2,381,402 1,812,178 1,812,178 2,786,629 0 413,716 (3,024,840) 0 (3,024,840) 0 0 0 (3,024,840) (0.05) (0.05)
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