-----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, KKBesQCWabJrfbSAii5SHFrmeAQip/fNw2S2TkBnU/55GX8PBik9gdHXdDmL9VET tjsd6pOrPwG2F9WzTPjfmw== 0000950117-96-001516.txt : 19961202 0000950117-96-001516.hdr.sgml : 19961202 ACCESSION NUMBER: 0000950117-96-001516 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961127 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRYENCO SCIENCES INC CENTRAL INDEX KEY: 0000798044 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 521471630 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-14996 FILM NUMBER: 96673017 BUSINESS ADDRESS: STREET 1: 3811 JOLIET ST CITY: DENVER STATE: CO ZIP: 80239 BUSINESS PHONE: 3033716332 MAIL ADDRESS: STREET 1: 3811 JOLIET STREET CITY: DENVER STATE: CO ZIP: 80239 FORMER COMPANY: FORMER CONFORMED NAME: GULF & MISSISSIPPI CORP DATE OF NAME CHANGE: 19920223 10-K405 1 CRYENCO SCIENCES, INC. 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 31, 1996 Commission file number 0-14996 - ----------------------------------------- ------------------------------ CRYENCO SCIENCES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 52-1471630 --------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 3811 Joliet Street, Denver, CO 80239 - -------------------------------------------------------------------------------- Address of principal executive offices (Zip Code) Registrant's telephone number, including area code: 303-371-6332 ------------ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ --- Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] The aggregate market value at November 25, 1996 of shares of the registrant's Common Stock, $.01 par value, held by non-affiliates of the registrant was approximately $13,334,638. On such date, the closing price of the Common Stock on the NASDAQ-National Market System was $2.00 per share. Solely for the purposes of this calculation, shares held by directors and executive officers of the registrant have been excluded. Such exclusion should not be deemed a determination or an admission by the registrant that such individuals are, in fact, affiliates of the registrant. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: At November 25, 1996, there were outstanding 6,996,997 shares of Class A Common Stock, $.01 par value. Documents Incorporated by Reference: Certain portions of the registrant's definitive proxy statement to be filed not later than December 29, 1996 pursuant to Regulation 14A are incorporated by reference in Items 10 through 13 of Part III of this Annual Report on Form 10-K. CRYENCO SCIENCES, INC. INDEX TO FORM 10-K
Item Number Page - ----------- ---- PART I Item 1. Business 2 Item 2. Properties 10 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 12 Item 6. Selected Consolidated Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 8. Financial Statements and Supplementary Data 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19 PART III Item 10. Directors and Executive Officers of the Registrant 20 Item 11. Executive Compensation 20 Item 12. Security Ownership of Certain Beneficial Owners and Management 20 Item 13. Certain Relationships and Related Transactions 20 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 21 Signatures 31
PART I ITEM 1. BUSINESS. GENERAL Cryenco Sciences, Inc., its subsidiaries and their predecessors (the "Company") have manufactured vacuum jacketed containment systems and related products since 1978. Vacuum jacketing provides a highly efficient and cost-effective insulation to prevent heat transfer and is therefore critical for many applications that are temperature-sensitive. The Company's products are used in such applications as magnetic resonance imaging ("MRI"), industrial gas transportation and storage, military cryogenics, liquefied natural gas transportation, storage and dispensing, vacuum jacketed intermodal transportation, and other applications requiring both custom and standard design and fabrication. The Company has significant expertise in the field of cryogenics, a branch of physics that deals with the production and effects of extremely cold temperatures on the properties of matter. To date, most applications for the Company's products have required the storing and handling of cryogenic liquids. Cryogenic liquids are typically atmospheric gases in the liquid state which have extremely low boiling points, such as liquid oxygen (-297 degrees Fahrenheit; 90 Kelvin), liquid nitrogen (-320 degrees Fahrenheit; 77 Kelvin) and liquid helium (-452 degrees Fahrenheit; 4 Kelvin), and density ratios reaching 700 to 1 compared to their atmospheric state. Cryogenic liquids are produced by compressing and cooling gases until they reach the liquid state. As liquids, they can be stored and transported with weight and volume advantages of five to ten times compared with compressed gases. The Company's vacuum jacketed containers minimize evaporation of these cryogenic liquids and preserve low temperature. The Company's expansion strategy is to extend vacuum jacketed technology into new areas, including high performance insulated containers which enhance energy conservation and environmental protection, and to take a leadership position in the introduction of products to advance the use of liquefied natural gas ("LNG") and compressed natural gas ("CNG") as alternatives to other fuels. Management believes that current international efforts to conserve energy together with growing concerns for environmental issues provide opportunities for the Company to broaden the applications for its existing technology, both within and outside of its historical focus. One such opportunity is a direct application of the Company's current manufacturing expertise to develop alternative fuel powered transportation systems including dispensing systems using LNG and CNG. Another application is the use of LNG for heat and power in areas which are not served by gas pipelines. LNG is less costly than propane and is a much more environmentally friendly fuel. The Company is working with various bus and engine manufacturers, transit authorities and private fleet operators to supply LNG fuel tanks and systems. See "Products -- Liquefied and Compressed Natural Gas Products." 2 PRODUCTS The Company offers a wide range of custom and standard vacuum systems, components and accessories to meet the needs and requirements of customers in the medical, industrial gas, transportation, chemical, pharmaceutical, food, and aerospace and defense industries, as well as national laboratories, semiconductor manufacturers and the United States Government. The Company's products generally include an inner vessel that is surrounded by a jacket casing. An annular space is created between the vessel and the jacket casing into which insulation such as aluminum foil, glass paper or fiberglass is installed and a vacuum is created. This insulated system is designed to prevent heat gain or, in some cases, to promote heat retention. Both the inner vessel and jacket casing are generally made of carbon steel, stainless steel or aluminum. While the Company's products differ substantially in their use, they all require close tolerance forming and sophisticated welding of stainless steel and aluminum to create microscopically leak-tight systems. MRI CRYOSTAT COMPONENTS MRI is generally regarded as a significant advance in medical diagnostics and has been found to offer benefits not provided by other forms of medical examination. From a clinical point of view, MRI may also be considered superior to other available techniques in providing images of the central nervous system, particularly in the brain. Unlike x-rays and certain other imaging techniques, such as computerized axial tomography, MRI is a non-invasive procedure where the patient is not exposed to radiation or required to ingest any liquids or receive injections of any type. Although MRI is a relatively expensive technology to purchase and to operate, its growth has been substantial. MRI use has replaced or complemented much of the imaging done by other techniques and can decrease the number of necessary tasks performed on a patient, thereby eliminating the need for many exploratory procedures and adding significantly to diagnostic knowledge. The basis of the MRI technique is the magnetic properties of certain nuclei of the human body which can be detected, measured and converted into images for analysis. MRI equipment uses high-strength magnetic fields, applied radio waves and high-speed computers to obtain cross-sectional images of the body. The major components of the MRI assembly are a series of concentric thermal shields and a supercooled magnet immersed in a liquid helium vessel (a "cryostat") that maintains a constant, extremely low temperature (-452 degrees Fahrenheit; 4 Kelvin) to achieve superconductivity. The Company manufactures large cryostats, various cryogenic interfaces, electrical feed-throughs and various other MRI components, that are used to transfer power and/or cryogenic fluids from the exterior of the MRI unit to the various layers of the cryostat and superconducting magnet. The Company currently sells all of its MRI cryostats to General Electric Company ("GE"), and is the exclusive supplier of GE's cryostats. GE is the leading worldwide manufacturer of MRI equipment. The Company will soon complete the second year of its current two-year contract with GE for the production of MRI cryostats, its tenth consecutive year of this work for GE. A new contract of two years is currently being negotiated with GE. It is anticipated that the contract will allow for price adjustments based upon the cost of material, which can be modified if GE changes specifications and contains options under which GE may adjust the number of units which it will purchase. Revenue from MRI cryostats and components was 35%, 36% and 50% of the Company's total revenue during the fiscal years 3 ended August 31, 1996, 1995 and 1994, respectively. The Company's backlog of purchase orders with GE was approximately $6.0 million and $4.3 million at September 30, 1996 and September 30, 1995, respectively. It is expected that all of the Company's current backlog for MRI cryostat components will be filled by August 31, 1997. TRANSPORTATION AND STORAGE EQUIPMENT Cryogenic Transport Trailers Cryogenic transport trailers are designed to hold a variety of gases in liquid or gaseous state and are capable of storing and transporting such gases without substantial evaporation, limiting the loss to less than one percent per day. Because of these characteristics, cryogenic liquids can be transported over relatively long distances with marginal loss. The Company designs and produces transport trailers to the specific requirement of its customers. The primary purchasers of cryogenic transport trailers are industrial gas companies, independent carriers which service producers and users of these gases, and independent carriers transporting LNG for use as an alternative fuel. During the past year, the increased demand for new cryogenic transport trailers, combined with the Company's success in obtaining a high percentage of trailer orders placed, has resulted in an increased level of trailer production by the Company. The Company also repairs transport trailers built by others and provides such services for its own trailers. Revenue from cryogenic transport trailers was 42%, 33% and 17% of the Company's total revenue for the fiscal years ended August 31, 1996, 1995 and 1994, respectively. Sales of cryogenic transport trailers to Jack B. Kelley, Inc. and affiliated companies accounted for 21%, 12% and 6% of total revenue for the fiscal years ended August 31, 1996, 1995 and 1994, respectively. The Company's backlog of cryogenic transport trailers at September 30, 1996 and September 30, 1995 was $2.7 million and $10.3 million, respectively. It is expected that the Company's current backlog of cryogenic transport trailers will be filled by August 31, 1997. TVAC(R) Intermodal Containers Intermodal containers, which are used to store and transport various items worldwide, are generally uniform in size and are transferable from one mode of transportation or carrier to another. Management believes that there are in excess of 70,000 intermodal tank containers worldwide, many of which rely on mechanical refrigeration or heating to maintain the temperature of their contents. The Company has designed a number of models of its proprietary TVAC intermodal tank container, which fall into two categories. The first category, which is used in the chemical, food and pharmaceutical industries, enables the transportation of up to 5,500 gallons of temperature sensitive hot or cold liquids by truck, rail and ship without mechanical refrigeration or heating. The Company has been producing these products since 1993 for applications involving the transportation of various temperature-sensitive products, including hot liquid chocolate, glacial acrylic acid and chilled fruit juices. The second category, for the transportation and storage of cryogenic liquids, was developed in 1994, and also transports up to 5,500 gallons of these liquids without the need for mechanical refrigeration. As of 4 October 31, 1996, over 175 TVACs have been produced and are in service transporting food and chemical products as well as various cryogenic liquids including liquid argon and LNG. Revenue from TVACs accounted for 13%, 21% and 13% of the Company's total revenue for the fiscal years ended August 31, 1996, 1995 and 1994, respectively. Sales of TVACs to Jack B. Kelley, Inc. and affiliated companies accounted for 9%, 20% and 8% of the Company's total revenue during the same years. The Company's backlog of TVACs at September 30, 1996 and September 30, 1995 was $7.3 million and $4.8 million, respectively. It is expected that the Company's current backlog of TVACs will be filled by August 31, 1997. Cryogenic Storage Tanks Large cryogenic storage tanks ("Big Tanks") are used for the storage of liquefied atmospheric gases and LNG at sites where a permanent storage facility is desired. The Company has designed a series of shop-built Big Tanks to accommodate storage of cryogenic liquids from 15,000 gallons through 60,000 gallons. These tanks are an alternative to fieldbuilt tanks, and often provide a more cost effective storage solution for customers. The Company made its initial deliveries of Big Tanks in the fiscal year ended August 31, 1996. LIQUEFIED AND COMPRESSED NATURAL GAS PRODUCTS The Company believes that LNG, used as an alternative fuel in the transportation sector, offers a significant opportunity for application of the Company's cryogenic equipment and technology. Natural gas burns more cleanly than gasoline or diesel fuel, and advanced natural gas-fueled vehicles have the potential to reduce carbon monoxide emissions by about 90% and carbon dioxide emissions by about 25% compared with most gasoline powered vehicles. Recent legislation, including the Clean Air Act of 1990, has prompted many governmental agencies to consider and require conversion of municipal vehicles to the utilization of natural gas. In addition, the cost of LNG in many areas has decreased in the past year, primarily due to the increasing supply of LNG. This has resulted, in some cases, in an economic advantage over other fuels in both vehicle and industrial applications. Natural gas may be used in compressed (CNG) or liquid (LNG) states, and the Company believes that LNG offers a superior alternative to CNG for certain transportation applications, providing substantially longer range before refueling is required and requiring significantly less vehicle tank space and weight. Additionally, the Company believes that compressed natural gas made from liquefied natural gas ("LCNG") offers some distinct advantages as an alternative fuel compared to traditional CNG. Currently, LNG production requires liquefaction plants to convert the gas into a liquid state and specialized cryogenic containers to store and transport the liquid gas to fueling stations. 5 The Company continues to develop proprietary products for the LNG and CNG transportation market. Among the products developed to date are LNG vehicle tanks for heavy vehicle applications, portable dispensing equipment for both LNG and LCNG, fueling facilities utilizing either a TVAC or a large permanent storage tank and dispensing equipment which looks and operates like a gasoline fuel station, a mobile refueling facility for dispensing both LNG and LCNG, and fuel gas modules for converting LNG to pipeline gas for industrial and commercial applications. Management believes that the Company's proprietary products developed for this market will be increasingly well received as the supply of LNG becomes more widespread, and as the advantages of LNG and LCNG as alternative fuels, including the economic advantages in an increasing number of cases, become apparent to the potential customers. The Company's joint venture with Jack B. Kelley, Inc., Applied LNG Technologies USA, LLC ("ALT-USA") has been active throughout the year in identifying opportunities for the use of LNG as an alternative fuel source, both for vehicle applications and for heat and power applications in areas not served by gas pipelines. The vehicle opportunities have recently been limited by an increased excise tax burden imposed by the Internal Revenue Service (the "IRS") for highway use of LNG as a motor fuel. On August 7, 1995 the IRS ruled that LNG is not a gaseous fuel, and should be taxed as a liquid motor fuel. The result of this ruling is to impose a much higher effective rate of tax on LNG, one that is 25.1 cents higher than CNG and 7.1 cents higher than diesel fuel. This tax penalty compared to diesel fuel has virtually halted the conversion of medium and large trucks from diesel to LNG. A number of bills have been introduced in Congress to eliminate this disparity, and this issue is currently working its way through the legislative process. While there appears to be substantial support for a reduction of the tax on LNG to a rate equaling the tax on CNG, the outcome of the effort and the timing are in question. The Company continues to seek international sales agents, licensees and joint venture partners, and continues to pursue the sale of LNG fuel tanks and systems to a number of potential domestic customers, including municipal and private fleets. TADOPTR The Company has obtained exclusive rights to license technology from the Los Alamos National Laboratory which management believes may enable the Company to produce a low cost, low maintenance, reliable cryogenic refrigerator, known as "TADOPTR", to be used as a liquefier to produce LNG and CNG in a variety of locations and applications. The TADOPTR refrigerator's maximum theoretical efficiency occurs at approximately 110 Kelvin (-260 degrees Fahrenheit), the liquefication temperature for natural gas. 6 In June 1994, the Company received $780,000 in funding from a limited partnership for the purpose of developing a 500 gallon per day TADOPTR. In return for the partnership's investment, the Company issued warrants to purchase 200,000 shares of the Company's Common Stock at $3.00 per share, and entered into a Royalty Rights and Technology Development Agreement with the partnership pursuant to which royalties will be paid to the partnership on net revenues from the sale of TADOPTRs. The royalties are payable for a period of 20 years from the execution of the agreement. The Company spent the funds provided by the partnership for the development of a 500 gallon per day TADOPTR during the years ended August 31, 1995 and 1994. Should the development under this contract be successful, management believes that there are numerous potential applications for this technology, including use at fueling stations for LNG and CNG vehicles, use for liquefaction of natural gas at remote well locations and use in other commercial liquefaction applications. In May, 1995, the Company received a contract from BDM-Oklahoma, Inc., a program manager for the U.S. Department of Energy administering funding for LNG and CNG research, in the amount of $452,500 for further development of and additional enhancements to the TADOPTR liquefier and LNG dispenser system. During the year ended August 31, 1996, the Company billed approximately $120,000 against this contract. In October 1995, the Company successfully liquefied a stream of natural gas, utilizing a compressor to power the OPTR phase of the TADOPTR, which demonstrates that the OPTR technology can be scaled to a large size. In August 1996, the Company successfully operated a TAD power source, designed to operate a 500 gallon per day TADOPTR, which demonstrates that the TAD technology can also be scaled to a large size. Currently the Company is working to integrate the TAD and the OPTR hardware as well as developing related liquefier products. Considerable additional development is required to transition these developments to a refrigerator that will produce LNG efficiently and economically. MANUFACTURING The Company's reputation as an innovative and effective problem solver is supported by its engineering expertise and manufacturing capabilities. Customized products often result from extended efforts between the Company's engineers and the customers' design staff. The Company meets stringent industrial and governmental specifications throughout the entire design and manufacturing process and produces fabrications in accordance with the requirements of the American Society of Mechanical Engineers ("ASME") and the Boiler and Pressure Container Vessel Code ("ASME Code"). The ASME Code sets forth generally recognized standards for manufacturing, inspection and testing of containers for pressurized gases and liquids. The ASME, through the National Board of Pressure Vessel Inspectors, has examined and approved the Company's quality control system. This approval permits the Company to stamp its pressure containers with a symbol indicating that the equipment was built according to the requirements of the ASME Code. In addition, many of the Company's products are designed to meet various international standards for containers used for transporting regulated materials, such as the International Maritime Organization standards. The Company believes that, in many cases, its ability to meet such standards gives it a competitive advantage. 7 To the extent that the Company's products transport cryogenic liquids in interstate commerce, they are also subject to regulation by the United States Department of Transportation. These regulations provide safety inspections that vary according to the method of transportation and the nature of the substance being transported. Also, many states and localities impose safety requirements which are independent of federal requirements. The Company's quality control procedures incorporate many "inspection points." Such inspection points require review of the quality of raw materials used by the Company, review of the engineering design, inspections throughout the manufacturing process and postmanufacture tests to insure the structural integrity of the container, its durability and its impermeability to leaks. At each inspection point, the quality control review is conducted both by employees of the Company and by representatives of an independent agency acceptable to the ASME. The frequency of inspections varies according to the nature of the manufacturing projects underway at any given time. The Company generally warrants its manufactured products against defective materials and workmanship for a period of one year from the date of delivery of the product. The principal raw materials and supplies used by the Company in its manufacturing processes are stainless steel, carbon steel, aluminum, valves, pressure gauges, liquid level detectors and insulation materials, such as aluminum foil. These materials are generally available at competitive prices from many sources. SALES AND MARKETING The Company currently has five sales account executives. These sales account executives are responsible for specific customer and industry relationships. To facilitate its sales and marketing efforts, the Company has a sales administration department consisting of a sales manager, a sales administrator, an order entry clerk and a contract administrator, and agreements with marketing representatives to cover parts of the United States and Europe. In addition, the Company utilizes a team selling effort which draws upon the expertise of senior management from areas such as engineering, manufacturing, operations and finance. To supplement its direct sales efforts, the Company also has an indirect sales and marketing network, utilizing the personnel of customers and affiliates, including Chemical Leaman Tank Lines, Jack B. Kelley, Inc. and ALT-USA. The Company believes that its team approach and the utilization of outside resources enables it to address its customers' requirements more effectively and provide a more complete understanding of the costs involved in a particular project, allowing the Company to bid more competitively and maximize the opportunity for longer-term, high volume contracts. 8 CUSTOMERS Over the past several years, the Company has developed close working relationships with several significant customers, including GE, Jack B. Kelley, Inc., Chemical Leaman Tank Lines, MG Industries, BOC Gases, Air Products, the Department of Defense (the "DOD") and others. The Company's recent focus on broadening its product lines is reducing customer concentration to levels where the loss of a single contract or customer, other than GE and Jack B. Kelley, Inc., would not have a material adverse effect on the Company's overall business. GE and Jack B. Kelley, Inc. have accounted for substantial percentages of the Company's revenues during the past three fiscal years. See "Products -- MRI Cryostat Components" and "Products -- Transportation Equipment." The Company anticipates that its dependence on these customers will be reduced in future years. Historically, the Company's products were sold pursuant to customer orders which called for delivery on a relatively short term basis. Over the past several years, the Company has developed proprietary products which has enabled it to enter into longer term contracts with certain of its major customers. Such contracts contain product specifications, numbers of units, and pricing per unit, subject in some cases to adjustment for changes in cost of materials and product specifications. During the term of these contracts, the customer will issue specific purchase orders against which the Company will commence production. These orders are counted in the backlog when purchase orders are received. At September 30, 1996, the Company had a total backlog of $18.8 million, compared to a backlog of $21.2 million at September 30, 1995. The Company estimates that all of the current backlog will be filled by August 31, 1997. The Company's backlog fluctuates depending on placement of large orders from certain customers. COMPETITION The Company has competitors in each of its product lines. Certain of these competitors are significantly larger and have greater financial resources than the Company. The Company believes that the principal competitive factors in the markets in which it competes are product expertise, quality, service and price. The Company believes that its products have achieved market acceptance due to the Company's ability to meet stringent industrial and governmental specifications, innovative design and attention to customer service. The Company has achieved significant market position in the fields of MRI cryostats, cryogenic truck trailers, cryogenic intermodal tank containers and LNG fueling systems, and has historically been one of the largest suppliers of cryogenic tankage to the DOD. EMPLOYEES At September 30, 1996, the Company employed 210 persons, including 167 in manufacturing, 5 in quality control, 12 in administration, 11 in sales and 15 in engineering. The Company depends on many skilled employees, and the Company's success is affected by its ability to retain such employees. None of the Company's employees is represented by a union or other collective bargaining group, and management believes that its relationships with its employees are generally good. 9 ITEM 2. PROPERTIES. The Company leases 14,700 square feet of office space and 105,100 square feet of manufacturing space for its primary offices and plant under a lease expiring in 2006 at 3811 Joliet Street, Denver, Colorado. Lease expense is $3.75 per square foot per year, to be increased every two years at an annual rate of between 3% and 5%, depending upon the level of inflation. Additionally, the Company is required to pay all maintenance for the premises and the cost of insurance and property taxes. The Company also leases approximately 13,700 square feet of office space and 91,300 square feet of manufacturing space at 5995 North Washington Street, Denver, Colorado under a lease expiring in 1999. The facility was remodeled in 1989 and substantial leasehold improvements were made to the manufacturing area to facilitate production and improve efficiencies. Lease expense is $3.25 per square foot per year and the Company is required to pay all taxes, insurance and maintenance for the premises. The Company has a right of first refusal to purchase the facility. The Company believes that its facilities are generally in good repair and provide suitable and adequate capacity for its present needs. Additional facilities may be required for future expansion of operations. ITEM 3. LEGAL PROCEEDINGS. Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable 10 EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information concerning the executive officers of the Company.
Positions and offices held Name Age during the past fiscal year ---- --- --------------------------- Alfred Schechter................ 76 Chairman of the Board, Chief Executive Officer and President of the Company; Chairman of the Board, Chief Executive Officer and President of Cryenco, Inc. James A. Raabe.................. 44 Vice President, Treasurer, Chief Financial Officer and Secretary of the Company; Vice President, Treasurer, Chief Financial Officer and Secretary of Cryenco, Inc.
Each executive officer serves at the pleasure of the Board of Directors and until his or her successor is duly elected and qualifies. ALFRED SCHECHTER has been Chairman of the Board and Chief Executive Officer of Cryenco, Inc. since September 1991, President of Cryenco, Inc. since September 1996 and Chairman of the Board, Chief Executive Officer and President of the Company since February 1992. Mr. Schechter has been a Director of Charterhouse Group International, Inc. ("Charterhouse") since 1985. Mr. Schechter served as Chairman of the Board and Chief Executive Officer of Charter-Crellin, Inc., a designer, manufacturer and marketer of proprietary injected molded plastic products, from 1985 to 1989 and as Chairman of the Board and Chief Executive Officer of Paco Pharmaceutical Services, Inc., a pharmaceutical contract packaging company, from 1975 to 1988. Mr. Schechter is also a member of The Advisory Board of The Recovery Group, L.P., which invests in debt and equity securities of distressed companies. Mr. Schechter has held the positions of Chairman of Stanley Interiors Corporation, a manufacturer of home furnishings, Vice Chairman of Joseph Kirschner Company, Inc., a manufacturer of processed meat products, and Director of Paco Pharmaceutical Services, Inc., WDP, Inc., a brick refractory servicing the steel industry, Dreyers Grand Ice Cream, Inc., a manufacturer of ice cream products, Marathon Enterprises Inc., a manufacturer of processed meat products, and Garden America Corporation, a manufacturer and distributor of garden products. JAMES A. RAABE became Vice President and Chief Financial Officer of Cryenco, Inc. and Chief Financial Officer of the Company in July 1994. He later became Vice President of the Company and Treasurer of Cryenco, Inc. in January 1995 and Secretary and Treasurer of the Company and Secretary of Cryenco, Inc. in July 1995. Mr. Raabe was employed by Cryenco, Inc. in March 1994 as Financial Manager. Mr. Raabe was previously employed by Stanley Aviation Corporation, a manufacturer of aerospace products, from 1977 to 1993, where he was Vice President - Finance, Corporate Secretary and a Director of the Company. Mr. Raabe received his B.A. degree in Business Administration from California State University, Fullerton, and is a Certified Public Accountant. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION The Company's Common Stock is traded on the NASDAQ National Market System under the symbol CSCI. The following table sets forth the high and low sales prices for the Company's Common Stock as reported on the NASDAQ National Market System from September 1, 1994 to November 25, 1996. The prices set forth reflect interdealer quotations, without retail markups, markdowns or commissions, and do not necessarily represent actual transactions.
High Low ---- --- Fiscal Quarter Ended November 30, 1994....................................................... $5 1/2 $3 1/8 February 28, 1995....................................................... 4 1/2 2 1/2 May 31, 1995............................................................ 4 1/2 3 August 31, 1995......................................................... 4 1/4 3 1/4 November 30, 1995....................................................... $5 $3 5/8 February 29, 1996....................................................... 5 1/8 3 3/8 May 31, 1996............................................................ 4 3/8 3 August 31, 1996......................................................... 4 3/4 2 5/8 November 30, 1996 (through November 25, 1996)........................... $3 3/4 $1 3/8
The closing price of the Company's Common Stock on November 25, 1996 was $2.00 per share. At November 25, 1996, there were approximately 200 stockholders of record. However, the Company believes that at such date there were in excess of 500 beneficial stockholders. DIVIDENDS The Company has never declared or paid any cash dividends on its Common Stock and currently intends to retain any earnings for use in its business. The Company's ability to pay cash dividends is currently limited by credit agreements and the Company does not anticipate paying any cash dividends in the foreseeable future. 12 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. The selected consolidated financial data at and for the fiscal years ended August 31, 1996, 1995, 1994 and 1993 are derived from financial statements which have been audited by Ernst & Young LLP, independent auditors. The selected consolidated financial data at and for the fiscal year ended August 31, 1992 are derived from the consolidated financial statements which have been audited by KPMG Peat Marwick LLP, independent auditors. This information should be read in conjunction with the Company's consolidated financial statements and related notes and other financial information appearing elsewhere herein.
Fiscal year ended August 31, ----------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands, except per share data) Statement of income data: Contract Revenue $31,259 $27,215 $17,665 $13,099 $22,198 Cost of revenue 24,898 22,350 14,670 12,198 16,398 ------- ------- ------- ------- ------- Gross Profit 6,361 4,865 2,995 901 5,800 Selling, general and administrative expenses 3,288 2,867 2,834 3,396 2,366 Research and development expenses 792 70 86 701 319 Amortization expense 346 346 338 286 321 ------- ------- ------- ------- ------- Operating income (loss) 1,935 1,582 (263) (3,482) 2,794 Interest expense, net 943 987 1,105 1,057 1,282 Other nonoperating expense (income), net 9 40 (69) (19) 111 ------- ------- ------- ------- ------- Income (loss) before income taxes and extraordinary item 983 555 (1,229) (4,500) 1,401 Income tax (expense) benefit (363) (194) 403 1,196 (483) ------- ------- ------- ------- ------- Income from operations before extraordinary item 620 361 (896) (3,304) 918 Extraordinary item, net of taxes 93 -- -- -- -- ------- ------- ------- ------- ------- Net income (loss) $ 527 $ 361 $ (896) $(3,304) 918 ======= ======= ======= ======= ======= Earnings (loss) per share (1) $ .06 $ .04 $ (.17) $ (.62) $ .20 ======= ======= ======= ======= ======= Balance sheet data: Total assets $25,704 $23,377 $18,404 $20,344 $21,644 Long-term debt, excluding current maturities 8,634 5,629 6,928 8,191 7,558 Stockholders' equity 11,673 11,236 7,047 7,191 10,420
(1) Net income (loss) per share for the fiscal years ended August 31, 1996, 1995, 1994, 1993 and 1992 have been calculated based on 7,230,773, 6,620,055, 5,346,760, 5,326,936 and 4,491,392 weighted average common and common equivalent shares outstanding during the year, respectively. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Annual Report on Form 10-K contains certain forward-looking statements that involve risks and uncertainties. Discussions containing such forward-looking statements may be found in the materials set forth under "Business" and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth below. The Company's actual results could differ materially from those anticipated in the forward-looking statements. GENERAL The Company's operating subsidiary, Cryenco, Inc. was organized in 1978. Effective August 30, 1991, Cryenco Holdings, Inc. ("CHI") acquired all of the outstanding common stock of Cryenco, Inc. On February 11, 1992, CHI was merged with and into Gulf & Mississippi Corporation and Gulf & Mississippi Corporation changed its name to Cryenco Sciences, Inc. (the "Merger"). The Merger has been accounted for as a reverse acquisition, whereby CHI is considered to be the acquirer of Gulf & Mississippi Corporation for accounting and financial reporting purposes. The discussion and analysis set forth below refers to the financial condition and results of operations of the Company, including its predecessor, Cryenco, Inc. The Company accounts for its revenue using the percentage-of-completion method, units delivered or completed contract, whichever is deemed more appropriate for the contract. See Note 1 to the consolidated financial statements. Revenue has been generated primarily from sales of cryogenic components and systems to a small number of significant customers. During the fiscal years ended August 31, 1996, 1995 and 1994, revenue from MRI cryostats and components accounted for 35%, 36% and 50%, respectively, of total contract revenue. Revenue from the sale and repair of cryogenic transport trailers and intermodal tank containers accounted for 55%, 55% and 40% of total contract revenue for the fiscal years ended August 31, 1996, 1995 and 1994, respectively. During fiscal 1996, the Company continued to concentrate its efforts on developing new domestic and international markets with an emphasis on product lines offering repeatability and higher volume potential while de-emphasizing its traditional job shop or short product run products. During this period, the Company expanded certain segments of its operations, including personnel and plant capacity, to support the growth from these new markets for its cryogenic technology. Management believes that the Company has been successful in securing the majority of the orders placed during the past year for these trailers. The markets for LNG fuel tanks and systems both in the United States and internationally are growing, but much more slowly than the Company had hoped. Nevertheless, this market appears to be improving as an increased availability of LNG and new products, including the Company's dispensing equipment and TVAC, have made LNG vehicles more economically viable. 14 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items as a percentage of revenue:
Fiscal Year Ended August 31, -------------------------- 1996 1995 1994 ---- ---- ---- Contract revenue.............................................. 100.0% 100.0% 100.0% Cost of revenue............................................... 79.7 82.1 83.0 ----- ----- ----- Gross profit.................................................. 20.3 17.9 17.0 Selling, general and administrative expenses.................. 10.5 10.5 16.1 Research and development expenses............................. 2.5 0.3 0.5 Amortization expense.......................................... 1.1 1.3 1.9 ----- ----- ----- Operating (loss) income ...................................... 6.2 5.8 (1.5) Interest expense, net......................................... 3.0 3.6 6.3 Other nonoperating (income) expense, net...................... 0.0 0.2 (0.4) ----- ----- ----- Income (loss) before income taxes and extraordinary item...... 3.2 2.0 (7.4) Income tax (expense) benefit.................................. (1.2) (0.7) 2.3 ----- ----- ----- Income (loss) before extraordinary item....................... 2.0 1.3 (5.1) Extraordinary item............................................ 0.3 -- -- ----- ----- ----- Net income (loss)..................................... 1.7% 1.3% (5.1)% ===== ===== =====
FISCAL YEARS ENDED AUGUST 31, 1996 AND 1995 Contract revenue increased 14.9% to $31.3 million in 1996 from $27.2 million in 1995, primarily as a result of the increase in revenue derived from the sale of industrial gas and LNG transport trailers, as well as revenue derived from the sale of various products to ALT-USA. Additionally, the Company recognized smaller increases in revenue from the production of MRI cryostats and sales of LNG products. Gross profit in 1996 increased 30.8% to $6.4 million from $4.9 million in 1995 and gross profit as a percentage of contract revenue increased to 20.3% in 1996 from 17.9% in 1995. This increase is the result of higher production levels which reduced the unabsorbed overhead, as well as the increasing gross margins in Transportation Equipment. Additionally, excess and obsolete inventory costs increased to $269,000 in 1996 from $55,000 in 1995, while warranty costs decreased from $663,000 in 1995 to $379,000 in 1996. The increase in obsolete inventory costs is primarily due to the changing of the Company's products during the past few years, which has resulted in certain inventory items having no anticipated production use, and an increase in the reserve for obsolete inventory. The decrease in warranty costs is primarily based on the improved quality of the Company's products. At August 31, 1996 the reserve for obsolete inventory was $150,000, compared to the $100,000 reserve at August 31, 1995. Selling, general and administrative expenses increased 14.7% to $3.3 million in 1996 from $2.9 million in 1995 and remained at 10.5% of contract revenue. 15 Research and development expenses increased to $792,000 in 1996 from $70,000 in 1995. This increase is primarily due to the Company's funding of research and development for the TADOPTR program and for the further development of LNG products, both of which were in excess of amounts reimbursed from customers. Amortization expense remained at $346,000 in both 1996 and 1995. Interest income decreased to $1,000 in 1996 from $20,000 in 1995. This decrease is primarily due to the lower level of excess cash invested in short-term interest bearing accounts. Interest expense decreased to $944,000 in 1996 from $1.0 million in 1995. This decrease is the result of slightly higher average borrowings during the year which is more than offset by lower interest rates. Other nonoperating expense decreased to $9,000 in 1996 from $40,000 in 1995. This decrease is primarily due to the expenses from the Company's investment in ALT-USA in 1995 that did not recur in 1996. Income tax expense increased to $363,000 in 1996 from $194,000 in 1995, due primarily to the increased profit in 1996 compared to 1995. In 1996, the Company recorded an extraordinary expense of $93,000 net of income tax benefit of $54,000, with no corresponding expense in 1995. This amount is the result of the expensing in the current period of certain deferred financing expenses, due to the early retirement of the Chemical Bank loans and a portion of The CIT Group/Equity Investments, Inc. ("CIT") note. Net income increased to $527,000 in 1996 from $377,000 in 1995. The resulting net income is the result of the cumulative effect of the above factors. Net cash used by operating activities in 1996 amounted to $356,000 compared to $1.2 million in 1995. The use of cash in 1996 is primarily the result of an increase in accounts receivable resulting from the Company discontinuing its policy of granting cash discounts, combined with a decrease in accounts payable following the increase in borrowing capacity from FBS Business Finance Corporation. This use of funds was only partially offset by the decrease in costs and estimated earnings in excess of billings on uncompleted contracts during 1996. FISCAL YEARS ENDED AUGUST 31, 1995 AND 1994 Contract revenue increased 54.1% to $27.2 million in 1995 from $17.7 million in 1994, primarily as a result of the increase in revenue derived from the sale of industrial gas and LNG transport trailers and TVAC intermodal containers. Additionally, the Company recognized smaller increases in revenue from the production of MRI cryostats and sales of LNG products. 16 Gross profit in 1995 increased 62.4% to $4.9 million from $3.0 million in 1994 and gross profit as a percentage of contract revenue increased to 17.9% in 1995 from 17.0% in 1994. This increase is the result of higher production levels which reduced the unabsorbed overhead, as well as the increasing gross margins in Transportation Equipment and LNG Products. Additionally, the excess and obsolete inventory costs decreased to $55,000 in 1995 from $142,000 in 1994, while warranty costs increased from $287,000 in 1994 to $663,000 in 1995. The increase in warranty costs is primarily due to costs incurred on cryogenic transport trailers produced in 1993, and an increase in the warranty reserve. At August 31, 1995 the reserve for warranty costs was $200,000, compared to the $144,000 reserve at August 31, 1994, and the allowance for excess and obsolete inventory increased from $52,000 at August 31, 1994 to $100,000 at August 31, 1995. Selling, general and administrative expenses increased 1.2% to $2.9 million in 1995 from $2.8 million in 1994 and decreased as a percentage of contract revenue to 10.6% from 16.1%. This decrease resulted from continuing savings resulting from the Company's cost reduction efforts and the fixed nature of certain general and administrative expenses in relation to increased revenue. Research and development expenses decreased to $70,000 in 1995 from $86,000 in 1994. In both years, the costs for the continuing development of products were generally charged against specific customer orders. Amortization expense increased to $346,000 in 1995 from $338,000 in 1994. This increase is the result of the increased warrant amortization resulting from the 1993 debt restructuring with Chemical Bank, CIT and the Company's junior subordinated debt holders. Interest income decreased to $20,000 in 1995 from $103,000 in 1994. This decrease is primarily due to the lower level of excess cash invested in short-term interest bearing accounts. Interest expense decreased to $1.0 million in 1995 from $1.2 million in 1994. This decrease is primarily due to reduced level of interest bearing debt in 1995 compared to 1994. Other nonoperating expense increased to $40,000 in 1995 from the nonoperating income of $69,000 in 1994. This increase is primarily due to expenses from the Company's investment in ALT-USA in the current year compared to a reimbursement received for warranty claims in the prior year. Income tax expense increased to $194,000 in 1995 from a tax benefit of $403,000 in 1994, due primarily to the profit in 1995 compared to the loss in 1994. Net income increased to $361,000 in 1995 from a net loss of $896,000 in 1994. The resulting net income is the result of the cumulative effect of the above factors. Net cash used by operating activities in 1995 amounted to $1.2 million compared to $1.9 million provided by operating activities in 1994. The difference of $3.2 million is due to 17 the increased level of operating activities of the Company, which has resulted in increased inventories and costs and estimated earnings in excess of billings on uncompleted contracts, which are only partially offset by the increase in accounts payable. LIQUIDITY AND CAPITAL RESOURCES At August 31, 1996, the Company's working capital was $9.8 million, which represented a current ratio of 2.8 to 1. Also, the Company's outstanding indebtedness under the Credit and Security Agreement with FBS Business Finance Corporation ("FBS") was $7.8 million, of which $615,000 represented term indebtedness and $7.2 million represented revolving indebtedness. At August 31, 1996, the Company's outstanding indebtedness to CIT was $1.7 million which represented subordinated indebtedness. In December 1995, the Company entered into a Credit and Security Agreement with FBS. Under the agreement, FBS is providing a revolving loan facility of up to $10,000,000 and a term loan facility of up to $2,960,000, subject to the amount of the Company's borrowing base and manufacturing equipment additions in the fiscal year ended August 31, 1996, respectively. The revolving loan initially bore interest at the First Bank National Association reference rate (the "Reference Rate") plus 0.5%, while the term loan bears interest at the Reference Rate plus 0.75%. The revolving loan has a provision for incentive pricing whereby the rate may adjust upward or downward on a quarterly basis depending upon the performance of the Company. On January 16, 1996, the Company obtained the initial funding under the revolving loan in the amount of $5,825,000. The proceeds of this loan were used to retire the outstanding Chemical Bank revolving credit facility ($2,200,000), to retire the outstanding Chemical Bank term loan ($2,125,000), to make a partial payment on the outstanding note payable to CIT ($500,000), and for general corporate purposes ($1,000,000). The Credit and Security Agreement limits the Company's ability to make capital expenditures to $6.5 million for fiscal 1997, and $4.5 million for fiscal 1998. As necessary to supplement capital expenditure needs, Cryenco, Inc. intends to utilize leasing arrangements to the extent they are available on commercially reasonable terms. The Company intends to fund capital expenditure needs from cash flow from operations, future borrowing capacity under the Credit and Security Agreement, if any, and, as necessary, future financing. The Company believes that its existing capital resources, together with its cash flow from future operations will be sufficient to meet its short term working capital needs. Additional financing may be required for future expansion of operations and research and development, as necessary, including for the continued development of the Company's TADOPTR products. 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See pages F-1 and S-2. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. EXECUTIVE OFFICERS OF THE COMPANY. See Part I, page 11. "Executive Officers of the Company." Other information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than December 29, 1996 pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended ("Regulation 14A"). ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than December 29, 1996 pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than December 29, 1996 pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than December 29, 1996 pursuant to Regulation 14A. 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Consolidated Financial Statements of Registrant. Report of Independent Auditors...........................................F-2 & S-1 Consolidated Balance Sheets as of August 31, 1996 and 1995...............F-3 Consolidated Statements of Operations for the Years Ended August 31, 1996, 1995 and 1994.........................................F-5 Consolidated Statements of Stockholders' Equity for the Years Ended August 31, 1996, 1995 and 1994.............................F-6 Consolidated Statements of Cash Flows for the Years Ended August 31, 1996, 1995 and 1994.........................................F-7 Notes to Consolidated Financial Statements...............................F-9 (a)(2) Schedule II..............................................................S-2
All other schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (a)(3) Exhibits.
Exhibit Description ------- ----------- 3.1 - Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-2, File No. 33-48738, filed on June 19, 1992 (the "S-2 Registration Statement"). 3.2 - By-laws of the Registrant, incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, File No. 33-7532, filed on July 25, 1986 (the "S-1 Registration Statement"). 3.3 - Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1995 (the "1995 Annual Report").
21
Exhibit Description ------- ----------- 3.4 - Certificate of Designation, Preferences and Rights of the Series A Preferred Stock of the Registrant, incorporated by reference to Exhibit 3.4 to the 1995 Annual Report. 3.5 - Corrected Certificate of Amendment of Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.5 to the 1995 Annual Report. 4.1 - See Article Fourth of the Restated Certificate of Incorporation, as amended and corrected, of the Registrant (Exhibit 3.5 hereof), incorporated by reference to Exhibit 4.1 to the 1995 Annual Report. 4.2 - Forms of Common Stock and Class B Common Stock certificates of the Registrant, incorporated by reference to Exhibit 4.3 of the Registrant's Registration Statement on Form S-4, File No. 33- 43782, filed on December 19, 1991 (the "S-4 Registration Statement"). 4.3 - Registration Rights Agreement dated as of August 30, 1991 among CHI, CIT, Chemical Bank and the Investors named therein, incorporated by reference to Exhibit 4.3 to the 1995 Annual Report. 4.4 - Warrant Agreement dated as of August 30, 1991 between Chemical Bank, CHI and the Registrant, incorporated by reference to Exhibit 4.4 to the 1995 Annual Report. 4.5 - Letter Agreement dated April 15, 1992 among the Registrant, CIT and Chemical Bank relating to the Warrants referred to herein at Exhibits 4.8 and 4.9, incorporated by reference to Exhibit 4.9 to the S-2 Registration Statement. 4.6 - Letter Agreement dated August 12, 1992 between the Registrant and Chemical Bank relating to the Warrants referred to herein at Exhibit 4.8, incorporated by reference to Exhibit 4.6 to the 1995 Annual Report. 4.7 - Letter Agreement dated August 12, 1992 between the Registrant and CIT relating to the Warrants referred to herein at Exhibit 4.9, incorporated by reference to Exhibit 4.7 to the 1995 Annual Report.
22
Exhibit Description ------- ----------- 4.8 - Warrants issued to Chemical Bank each dated April 27, 1992, incorporated by reference to Exhibit 4.8 to the 1995 Annual Report. 4.9 - Warrants issued to CIT each dated April 27, 1992, incorporated by reference to Exhibit 4.9 to the 1995 Annual Report. 4.10 - Warrant issued to Dain Bosworth Incorporated dated August 20, 1992, incorporated by reference to Exhibit 4.12 to the S-2 Registration Statement. 4.11 - Warrant Agreement dated as of March 12, 1993 between the Registrant and Alfred Schechter, incorporated by reference to Exhibit 4.11 to the 1995 Annual Report. 4.12 - Warrant Agreement dated as of March 12, 1993 between the Registrant and Don M. Harwell, incorporated by reference to Exhibit 4.12 to the 1995 Annual Report. 4.13 - Warrant Agreement dated as of March 12, 1993 between the Registrant and MCC, incorporated by reference to Exhibit 4.13 to the 1995 Annual Report. 4.14 - Warrant issued to Alfred Schechter dated March 12, 1993, incorporated by reference to Exhibit 4.14 to the 1995 Annual Report. 4.15 - Warrant issued to Don M. Harwell dated March 12, 1993, incorporated by reference to Exhibit 4.15 to the 1995 Annual Report. 4.16 - Warrant issued to MCC dated March 12, 1993, incorporated by reference to Exhibit 4.16 to the 1995 Annual Report. 4.17 - Letter Agreement dated as of June 9, 1993 between the Registrant and Alfred Schechter with respect to the Exercise Price for the Warrant referred to herein at Exhibit 4.14, incorporated by reference to Exhibit 4.17 to the 1995 Annual Report. 4.18 - Letter Agreement dated as of June 9, 1993 between the Registrant and Don M. Harwell with respect to the Exercise Price for the Warrant referred to herein at Exhibit 4.15, incorporated by reference to Exhibit 4.18 to the 1995 Annual Report.
23
Exhibit Description ------- ----------- 4.19 - Letter Agreement dated as of June 9, 1993 between the Registrant and MCC with respect to the Warrant referred to herein at Exhibit 4.16, incorporated by reference to Exhibit 4.19 to the 1995 Annual Report. 4.20 - Warrant issued to Chemical Bank dated November 24, 1993, incorporated by reference to Exhibit 4.20 to the 1995 Annual Report. 4.21 - Warrant issued to CIT dated November 24, 1993, incorporated by reference to Exhibit 4.21 to the 1995 Annual Report. 4.22 - Warrant Agreement dated as of January 26, 1995 between the Company and Alfred Schechter, incorporated by reference to Exhibit 4.22 to the 1995 Annual Report. 4.23 - Warrant Agreement dated as of January 26, 1995 between the Company and Don M. Harwell, incorporated by reference to Exhibit 4.23 to the 1995 Annual Report. 4.24 - Warrant Agreement dated as of January 26, 1995 between the Company and MCC, incorporated by reference to Exhibit 4.24 to the 1995 Annual Report. 4.25 - Warrant issued to Alfred Schechter dated January 26, 1995, incorporated by reference to Exhibit 4.25 to the 1995 Annual Report. 4.26 - Warrant issued to Don M. Harwell dated January 26, 1995, incorporated by reference to Exhibit 4.26 to the 1995 Annual Report. 4.27 - Warrant issued to MCC dated January 26, 1995, incorporated by reference to Exhibit 4.27 to the 1995 Annual Report. 4.28 - See the Certificate of Designation, Preferences and Rights of the Series A Preferred Stock of the Registrant (Exhibit 3.4 hereof), incorporated by reference to Exhibit 4.28 to the 1995 Annual Report. 4.29 - Warrant Agreement dated as of June 8, 1994 between the Registrant and Cryogenic TADOPTR Company, L.P. and the Form of Warrant Certificate issued pursuant thereto, incorporated by reference to Exhibit 4.29 to the 1995 Annual Report.
24
Exhibit Description ------- ----------- 4.30 - Warrant Agreement dated as of December 20, 1994 between the Registrant and The Edgehill Corporation, incorporated by reference to Exhibit 4.30 to the 1995 Annual Report. 4.31 - Warrant issued to The Edgehill Corporation dated as of December 20, 1994, incorporated by reference to Exhibit 4.31 to the 1995 Annual Report. 4.32 - Registration Rights Agreement dated as of December 20, 1994 among the Registrant, certain parties named therein and International Capital Partners, Inc., incorporated by reference to Exhibit 4.32 to the 1995 Annual Report. 4.33 - Form of Warrant issued to each of International Capital Partners, Inc. and the parties named in the Registration Rights Agreement dated as of December 20, 1994 (Exhibit 4.32 hereof), incorporated by reference to Exhibit 4.33 to the 1995 Annual Report. 10.1 - 1986 Non-Qualified Stock Option Agreement, incorporated by reference to Exhibit 10.1 to the 1995 Annual Report. 10.2 - Stockholders Agreement dated as of August 30, 1991 among the Registrant, CHI and other stockholders of CHI, incorporated by reference to Exhibit 10.2 to the 1995 Annual Report. 10.3 - Securities Purchase Agreement dated as of August 30, 1991 among CIT, CHI, the Registrant, CEC Acquisition Corp. and Cryogenic Energy Company, incorporated by reference to Exhibit 10.3 of the 1995 Annual Report. 10.4 - Credit Agreement dated as of August 30, 1991 among Cryenco, Inc., the Lenders named therein, and Chemical Bank, as Agent, incorporated by reference to Exhibit 10.7 to the S-4 Registration Statement. 10.5 - Form of Amended and Restated Pledge Agreement dated February 11, 1992 relating to the capital stock of Cryenco, Inc. executed by CSCI Corporation in favor of Chemical Bank, incorporated by reference to Exhibit 10.6 to the S-4 Registration Statement.
25
Exhibit Description ------- ----------- 10.6 - Employment Agreement dated as of September 1, 1991 between Cryenco, Inc. and Alfred Schechter, incorporated by reference to Exhibit 10.8 of the S-4 Registration Statement. 10.7 - 1992 Employee Incentive and Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, File No. 33-65864, filed on July 12, 1993 (the "S-8 Registration Statement"). 10.8 - Form of Option Agreement under the 1992 Employee Incentive and Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 4.2 to the S-8 Registration Statement. 10.9 - 1993 Non-Employee Director Stock Option Program, incorporated by reference to Exhibit 4.3 to the S-8 Registration Statement. 10.10 - Form of Option Agreement under the 1993 Non- Employee Director Stock Option Program (contained in the 1993 Non-Employee Director Stock Option Program referred to herein at Exhibit 10.9), incorporated by reference to Exhibit 4.4 to the S-8 Registration Statement. 10.11 - 1991 Incentive Compensation Plan of Cryenco, Inc., as amended, incorporated by reference to Exhibit 10.9 to the S-2 Registration Statement. 10.12 - Lease, as amended, dated August 22, 1989 concerning the property leased by the Registrant located at 5995 North Washington Street, Denver, Colorado, incorporated by reference to Exhibit 10.10 to the S-2 Registration Statement. *10.13 - Lease, as amended, dated June 19, 1996 concerning the property leased by the Registrant located at 3811 Joliet Street, Denver, Colorado. 10.14 - Consulting Agreement dated August 30, 1991 between the Registrant and Charterhouse, incorporated by reference to Exhibit 10.12 to the S-2 Registration Statement.
26
Exhibit Description ------- ----------- 10.15 - Waiver and Amendment Agreement dated as of February 28, 1993 among Cryenco, Inc., the Lenders named therein and Chemical Bank, amending the Credit Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 10.15 to the 1995 Annual Report. 10.16 - Waiver and Amendment Agreement dated as of February 28, 1993 among Cryenco, Inc., the Registrant and CIT, amending the Securities Purchase Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 10.16 to the 1995 Annual Report. 10.17 - Funding Agreement dated March 12, 1993 among Alfred Schechter, Don M. Harwell, MCC and the Registrant, incorporated by reference to Exhibit 10.17 to the 1995 Annual Report. 10.18 - Intentionally left blank. 10.19 - Form of Indemnification Agreement entered into between the Registrant and certain of its officers and directors dated March 16, 1993, incorporated by reference to Exhibit 10.19 to the 1995 Annual Report. 10.20 - Second Waiver and Amendment Agreement dated as of August 31, 1993 among Cryenco, Inc., the Lenders named therein and Chemical Bank, amending the Credit Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 10.20 to the 1995 Annual Report. 10.21 - Second Waiver and Amendment Agreement dated as of October 31, 1993 among Cryenco, Inc., the Registrant and CIT, amending the Securities Purchase Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 10.21 to the 1995 Annual Report. 10.22 - Letter Agreement dated April 13, 1994 among the Registrant, Cryenco, Inc., Chemical Bank and CIT, incorporated by reference to Exhibit 10.22 to the 1995 Annual Report. 27
Exhibit Description ------- ----------- 10.23 - Exchange Agreement dated April 13, 1994 among Alfred Schechter, Don M. Harwell, MCC and the Registrant, incorporated by reference to Exhibit 10.23 to the 1995 Annual Report. 10.24 - Royalty Rights and Technology Development Agreement dated June 8, 1994 between the Registrant and Cryogenic TADOPTR Company, L.P., incorporated by reference to Exhibit 10.24 to the 1995 Annual Report. 10.25 - Third Waiver and Amendment Agreement dated as of November 29, 1994 among Cryenco, Inc., the Lenders named therein and Chemical Bank, as Agent, amending the Credit Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 10.25 to the 1995 Annual Report. 10.26 - Third Waiver and Amendment Agreement dated as of November 29, 1994 among Cryenco, Inc., the Registrant and CIT, amending the Securities Purchase Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 10.26 to the 1995 Annual Report. 10.27 - Purchase Agreement dated as of November 29, 1994 among the Registrant, International Capital Partners, Inc. and the Purchasers named therein, incorporated by reference to Exhibit 10.27 to the 1995 Annual Report. 10.28 - Fourth Waiver and Amendment Agreement dated as of December 20, 1994 among the Registrant, Cryenco, Inc., the Lenders named therein and Chemical Bank, as Agent, amending the Credit Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 10.28 to the 1995 Annual Report. 10.29 - Fourth Waiver and Amendment Agreement dated as of December 20, 1994 among Cryenco, Inc., the Registrant and CIT, amending the Securities Purchase Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 10.29 to the 1995 Annual Report.
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Exhibit Description ------- ----------- 10.30 - First Amendment to the Purchase Agreement dated as of December 20, 1994 among the Registrant, International Capital Partners, Inc. and the Purchasers named therein, amending the Purchase Agreement dated as of November 29, 1994, incorporated by reference to Exhibit 10.30 to the 1995 Annual Report. 10.31 - Second Amendment to the Purchase Agreement dated as of January 30, 1994 among the Registrant, International Capital Partners, Inc. and the Purchasers named therein, amending the Purchase Agreement dated as of November 29, 1994, as amended, incorporated by reference to Exhibit 10.31 to the 1995 Annual Report. 10.32 - Amended and Restated Employment Agreement dated January 18, 1995 between Cryenco, Inc. and Dale A. Brubaker, incorporated by reference to Exhibit 10.32 to the 1995 Annual Report. 10.33 - Letter Agreement dated May 18, 1995 among the Registrant, International Capital Partners, Inc. and the Purchasers named therein, incorporated by reference to Exhibit 10.33 to the 1995 Annual Report. 10.34 - Fifth Waiver and Amendment Agreement dated as of May 30, 1995 among Cryenco, Inc., the Lenders named therein and Chemical Bank, as Agent, amending the Credit Agreement dated as of August 30, 1995, as amended, incorporated by reference to Exhibit 10.34 to the 1995 Annual Report. 10.35 - Credit and Security Agreement dated as of December 19, 1995 and Supplement A thereto between Cryenco, Inc., the Company and FBS Business Finance Corporation, incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 1995.
29
Exhibit Description ------- ----------- 10.36 - First Amendment dated as of January 16, 1996 between FBS Business Finance Corporation, Cryenco, Inc., the Company and Cryenex, Inc., amending the Credit and Security Agreement dated as of December 19, 1995, incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 1996 (the "February 29, 1996 Quarterly Report"). 10.37 - Letter Agreement dated January 12, 1996 between CIT and FBS Business Finance Corporation, incorporated by reference to Exhibit 10.2 to the February 29, 1996 Quarterly Report. *21 - Subsidiaries of the Registrant *23.1 - Consent of Ernst & Young LLP *27 - Financial Data Schedule pursuant to Article 5 of Regulation S-X filed with EDGAR filing only.
- ------------------------- * Filed herewith (b) Reports on Form 8-K: None 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CRYENCO SCIENCES, INC. (Registrant) By: /s/ Alfred Schechter -------------------------- Alfred Schechter, Chairman of the Board November 25, 1996 ------------------ Date Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE DATE CAPACITY IN WHICH SIGNED --------- ---- ------------------------ /s/ Alfred Schechter November 25, 1996 Chairman of the Board, Chief Executive ------------------- Officer, President and Director of the Alfred Schechter Company (Principal Executive Officer) /s/ James A. Raabe November 25, 1996 Vice President, Treasurer, Chief ------------------- Financial Officer and Secretary of the James A. Raabe Company, Vice President, Treasurer, Chief Financial Officer and Secretary of Cryenco, Inc. (Principal Financial and Accounting Officer) /s/ Jerome L. Katz November 25, 1996 Director of the Company ------------------- Jerome L. Katz /s/ Russell R. Haines November 25, 1996 Director of the Company ------------------- Russell R. Haines /s/ Burton J. Ahrens November 25, 1996 Director of the Company ------------------- Burton J. Ahrens /s/ Ajit G. Hutheesing November 25, 1996 Director of the Company ------------------- Ajit G. Hutheesing
31 Consolidated Financial Statements Cryenco Sciences, Inc. Years ended August 31, 1996, 1995 and 1994 with Report of Independent Auditors Cryenco Sciences, Inc. Consolidated Financial Statements Years ended August 31, 1996, 1995 and 1994 CONTENTS
Report of Independent Auditors .....................................................F-2 Audited Consolidated Financial Statements Consolidated Balance Sheets.........................................................F-3 Consolidated Statements of Operations...............................................F-5 Consolidated Statements of Stockholders' Equity.....................................F-6 Consolidated Statements of Cash Flows...............................................F-7 Notes to Consolidated Financial Statements .........................................F-9
F-1 Report of Independent Auditors The Board of Directors and Stockholders Cryenco Sciences, Inc. We have audited the accompanying consolidated balance sheets of Cryenco Sciences, Inc. as of August 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cryenco Sciences, Inc. at August 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Denver, Colorado October 5, 1996 F-2 Cryenco Sciences, Inc. Consolidated Balance Sheets (In Thousands, except share amounts)
AUGUST 31 1996 1995 ----------------------------- ASSETS Current assets: Cash and cash equivalents $ 111 $ 632 Accounts receivable, trade, net of allowance of $12 in 1996 and $14 in 1995 5,352 2,738 Accounts receivable, affiliate 1,423 83 Costs and estimated earnings in excess of billings on uncompleted contracts 3,944 6,707 Inventories 4,333 4,208 Prepaid expenses 57 116 ----------------------------- Total current assets 15,220 14,484 Property and equipment: Leasehold improvements 739 684 Machinery and equipment 5,355 3,979 Office furniture and equipment 1,231 402 ----------------------------- 7,325 5,065 Less accumulated depreciation 3,099 2,249 ----------------------------- 4,226 2,816 Property on operating leases, net of accumulated depreciation of $7 604 - Deferred financing costs, net of accumulated amortization of $177 in 1996 and $738 in 1995 120 256 Organizational costs, net of accumulated amortization of $507 in 1996 and $404 in 1995 - 103 Goodwill, net of accumulated amortization of $738 in 1996 and $589 in 1995 5,226 5,375 Other assets 308 343 ----------------------------- Total assets $25,704 $23,377 ============================= F-3
AUGUST 31 1996 1995 ----------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,224 $ 3,469 Accrued expenses 1,123 880 Accrued management fees 324 324 Current portion of long-term debt and capital lease obligations 1,382 1,593 Income tax payable 344 246 ----------------------------- Total current liabilities 5,397 6,512 Long-term debt and capital lease obligations, less current portion 8,634 5,629 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, authorized shares - 2,000,000, preferences, limitations and relative rights to be established by the Board of Directors: Series A, nonvoting, authorized shares - 150,000 Issued and outstanding shares - 67,838 (aggregate liquidation preference of $678,380) 1 1 Common stock, $.01 par value: Class A, voting, authorized shares - 21,500,000 Issued and outstanding shares - 6,996,997 at August 31, 1996 and 6,842,828 at August 31, 1995 70 68 Class B, nonvoting, authorized shares - 1,500,000 Issued and outstanding shares - none - - Additional paid-in capital 14,020 14,022 Warrants 169 169 Retained earnings (deficit) (2,587) (3,024) ----------------------------- Total stockholders' equity 11,673 11,236 ----------------------------- Total liabilities and stockholders' equity $25,704 $23,377 =============================
See accompanying notes. F-4 Cryenco Sciences, Inc. Consolidated Statements of Operations (In Thousands, except share and per share amounts)
YEAR ENDED AUGUST 31 1996 1995 1994 ------------------------------------------ Contract revenue $31,259 $27,215 $17,665 Cost of revenue 24,898 22,350 14,670 ------------------------------------------ Gross profit 6,361 4,865 2,995 Selling, general and administrative expenses 3,288 2,867 2,834 Research and development expenses 792 70 86 Amortization expense 346 346 338 ------------------------------------------ Operating income (loss) 1,935 1,582 (263) Other (income) expense: Interest income (1) (20) (103) Interest expense 944 1,007 1,208 Other nonoperating (income) expense, net 9 40 (69) ------------------------------------------ Income (loss) from operations before income taxes and extraordinary item 983 555 (1,299) Income tax expense (benefit) 363 194 (403) ------------------------------------------ Income (loss) from operations before extraordinary item 620 361 (896) Extraordinary item (net of income tax benefit of $54) 93 - - ------------------------------------------ Net income (loss) $ 527 $ 361 $ (896) ========================================== Earnings (loss) per common share and common share equivalent: Income (loss) from operations before extraordinary item $ .07 $ .04 $ (.17) Extraordinary item (.01) - - ------------------------------------------ Net income (loss) $ .06 $ .04 $ (.17) ========================================== Weighted average number of shares outstanding during year 7,230,773 6,620,055 5,346,760 ==========================================
See accompanying notes. F-5 Cryenco Sciences, Inc. Consolidated Statements of Stockholders' Equity (In Thousands, except share and per share amounts)
Preferred Common Additional Retained Stock Stock Paid-In Earnings ------------------------------------ Shares Amount Shares Amount Capital Warrants (Deficit) Total ------------------------------------------------------------------------------ Balance at August 31, 1993 - $- 5,326,936 $53 $ 9,469 $ 55 $(2,386) $ 7,191 Issuance of warrants - - - - - 94 - 94 Issuance of preferred stock 67,838 1 - - 678 - - 679 Issuance of common stock in exchange for warrants exercised - - 56,974 1 (1) - - - Cash dividends paid on preferred stock ($.32 per share) - - - - - - (21) (21) Net loss - - - - - - (896) (896) ------------------------------------------------------------------------------ Balance at August 31, 1994 67,838 1 5,383,910 54 10,146 149 (3,303) 7,047 Sale of common stock - - 800,000 8 2,223 - - 2,231 Issuance of warrants - - - - - 74 - 74 Issuance of common stock in exchange for warrants exercised - - 658,918 6 1,653 (54) - 1,605 Cash dividends paid on preferred stock ($1.22 per share) - - - - - - (82) (82) Net income - - - - - - 361 361 ------------------------------------------------------------------------------ Balance at August 31, 1995 67,838 1 6,842,828 68 14,022 169 (3,024) 11,236 Issuance of common stock in exchange for warrants exercised - - 154,169 2 (2) - - - Dividends on preferred stock ($1.32 per share) - - - - - - (90) (90) Net income - - - - - - 527 527 ============================================================================== Balance at August 31, 1996 67,838 $1 6,996,997 $70 $14,020 $169 $(2,587) $11,673 ==============================================================================
See accompanying notes. F-6 Cryenco Sciences, Inc. Consolidated Statements of Cash Flows (In Thousands)
YEAR ENDED AUGUST 31 1996 1995 1994 ------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ 527 $ 361 $ (896) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation 857 684 571 Amortization 436 346 338 Deferred taxes 26 - - Write-down of deferred financing costs 147 - - Changes in operating assets and liabilities: Accounts receivable (3,954) (48) 525 Costs and estimated earnings in excess of billings on uncompleted contracts 2,763 (3,191) (293) Inventories (125) (1,562) (114) Income tax payable 72 596 863 Prepaid expenses and other assets (101) 14 228 Accounts payable (1,245) 2,107 217 Accrued expenses 220 (16) 87 Accrued management fees - 80 133 Customer deposits - (607) 285 ------------------------------------------- Net cash provided (used) by operating activities (377) (1,236) 1,944 INVESTING ACTIVITIES Purchases of property and equipment (1,956) (1,402) (601) Payments for operating lease property (611) - - Proceeds from sale of property and equipment - 6 17 ------------------------------------------- Net cash used by investing activities (2,567) (1,396) (584) FINANCING ACTIVITIES Net proceeds from issuance of common stock - 3,892 - Net proceeds from issuance of stock warrants - 72 60 Principal payments on long-term debt and capital lease obligations (31,322) (1,343) (1,927) Proceeds from long-term debt borrowings, net of expenses 33,812 - - Exercise of common stock options and warrants - (54) - Dividends paid on preferred stock (67) (82) (21) ------------------------------------------- Net cash provided (used) by financing activities 2,423 2,485 (1,888) -------------------------------------------
F-7 Cryenco Sciences, Inc. Consolidated Statements of Cash Flows (continued) (In Thousands)
YEAR ENDED AUGUST 31 1996 1995 1994 ------------------------------------------- Net decrease in cash and cash equivalents $ (521) $ (147) $ (528) Cash and cash equivalents at beginning of year 632 779 1,307 ------------------------------------------- Cash and cash equivalents at end of year $ 111 $ 632 $ 779 =========================================== Supplemental disclosures of cash flow information: Cash paid for income taxes $ 247 $ - $ - Cash paid for interest 787 875 1,267 Supplemental disclosures of noncash financing activities: Equipment acquired and financed under capital leases 304 317 87 Retirement of debt in exchange for issuance of Series A preferred stock - - 678 Issuance of common stock in exchange for warrants exercised 2 2 1 Issuance of warrants as part of debt restructurings - - 35
See accompanying notes. F-8 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements August 31, 1996 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF THE BUSINESS Cryenco Sciences, Inc. (the Company) designs and manufactures controlled atmospheric enclosures and products to transport, store and dispense cryogenic materials. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Cryenco Sciences, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. INCOME TAXES Deferred tax liabilities or assets (net of a valuation allowance) are provided in the financial statements by applying the provisions of applicable tax laws to measure the deferred tax consequences of temporary differences that will result in net taxable or deductible amounts in future years as a result of events recognized in the financial statements in the current or preceding years. CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. CONTRACT REVENUE AND COST RECOGNITION Revenue and costs on long-term contracts (contracts with a value in excess of $100,000 and requiring more than six months to complete) are recognized using the percentage-of-completion method (measured by the percentage of costs incurred to date to total estimated costs for each contract) or units delivered, whichever is deemed more appropriate for the contract. Revenue and costs on short-term contracts (contracts with a value less than $100,000 and requiring six months or less to complete) are recognized using the completed contract method, which results in the deferral of revenue and costs until such time as the contracts F-9 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) are complete. A contract is considered complete when all costs, except insignificant items, have been incurred and the units have been delivered to the customer. Contract costs include all direct material and labor costs and those indirect costs related to contract performance such as indirect labor, building and equipment rental, supplies, freight and depreciation costs. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period such losses are determined. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. The Company records an allowance for excess and obsolete inventory based on periodic reviews. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. DEFERRED FINANCING COSTS Deferred financing costs are amortized using the straight-line method over the term of the related indebtedness. ORGANIZATIONAL COSTS Organizational costs are amortized using the straight-line method over five years. GOODWILL Goodwill is being amortized using the straight-line method over forty years. The Company periodically evaluates goodwill impairment on the basis of whether the goodwill is fully recoverable from projected, undiscounted operating cash flows. F-10 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESEARCH AND DEVELOPMENT Research and development expenses are typically charged to expense as incurred or are charged against a specific contract, if to be reimbursed by the customer. In May 1995, the Company entered into an arrangement with a corporation under which the corporation would provide $452,500 to the Company for the development, demonstration, delivery, and installation of an on-site Thermo-Acoustic Driven Orifice Pulse Tube Refrigerator (TADOPTR) liquefier and LNG dispensing system. The period of performance under the arrangement was over twelve months. For the year ended August 31, 1995, the Company incurred approximately $255,000 in costs for development for which it was fully reimbursed. For the year ended August 31, 1996, the Company incurred approximately $504,000 in costs for development and received $120,000 of reimbursement. WARRANTIES The Company records a warranty accrual at the time of sale for estimated claims, based on actual claims experience. The warranty for the Company's products generally is for defects in material and workmanship for a period of twelve months. EARNINGS (LOSS) PER COMMON SHARE Net earnings (loss) per common share is computed using the weighted average number of shares of common stock outstanding. When dilutive, stock options and warrants are included as share equivalents using the treasury stock method. In calculating net earnings (loss) per share, preferred dividends of $89,661 and $82,538 decreased the net earnings during 1996 and 1995, respectively. Preferred dividends of $21,150 increased the net loss during 1994. Fully diluted net earnings (loss) per common share is not significantly different from primary net earnings (loss) per common share. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS During the fiscal years ended August 31, 1996, 1995 and 1994, revenue from one customer, General Electric, was approximately $11,067,000 (35% of revenue), F-11 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) $9,702,000 (36% of revenue), and $8,888,000 (50% of revenue), respectively. This customer also represented $1,140,000 (21%) and $659,000 (24%) of accounts receivable at August 31, 1996 and 1995, respectively, and $2,775,000 (70%) and $2,734,000 (40%) of costs and estimated earnings in excess of billings on uncompleted contracts at August 31, 1996 and 1995, respectively. Revenue from Jack B. Kelley, Inc. and affiliates totaled approximately $9,566,000 (31% of revenue) in 1996, $9,854,000 (36% of revenue) in 1995 and $2,545,000 (14% of revenue) in 1994. Jack B. Kelley, Inc. and affiliates also represent $1,835,000 (34%) and $821,000 (30%) of accounts receivable and $435,000 (11%) and $2,182,000 (32%) of costs and estimated earnings in excess of billings on uncompleted contracts at August 31, 1996 and 1995, respectively. Revenue from Air Products totaled approximately $4,024,000 (13% of revenue) in 1996. Air Products also represents $408,000 (8%) of accounts receivable and $960,000 (24%) of costs and estimated earnings in excess of billings on uncompleted contracts as of August 31, 1996. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables are generally due within 30 days. Credit losses consistently have not been significant. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Actual results could differ from those estimates. FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying values of the Company's financial assets approximate fair value. The fair values of debt are estimated using discounted cash flow analyses with discount rates equal to the interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. While the Company believes the carrying value of its note payable generally approximates fair value, a reasonable estimate of the fair market value could not be made without incurring excessive costs. F-12 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK BASED COMPENSATION In October 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 123, Accounting for Stock-Based Compensation. Statement No. 123 is applicable for fiscal years beginning after December 15, 1995 and gives the option to either follow fair value accounting or to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations. The Company has determined it will follow APB No. 25 and related interpretations in accounting for its employee stock options. The Company has not yet determined the impact on its financial position or results of operations had fair value accounting been adopted. LONG-LIVED ASSETS In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present. The Company is required to adopt Statement No. 121 in the first quarter of fiscal year 1997 and, based on current circumstances, does not believe the effect of adoption will be material. 2. INVENTORIES At August 31, inventories consist of:
1996 1995 --------------------------------- (In Thousands) Raw materials $3,344 $3,514 Finished goods and work-in-process 1,139 794 --------------------------------- 4,483 4,308 Less reserve for obsolescence 150 100 --------------------------------- $4,333 $4,208 =================================
F-13 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 3. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS At August 31, costs and estimated earnings in excess of billings on uncompleted contracts consist of:
1996 1995 --------------------------------- (In Thousands) Costs on uncompleted contracts $5,436 $ 8,776 Estimated gross profit to date 2,203 2,616 --------------------------------- Estimated revenue 7,639 11,392 Less billings to date 3,695 4,685 --------------------------------- $3,944 $ 6,707 =================================
4. LONG-TERM DEBT Long-term debt is comprised of the following:
AUGUST 31 1996 1995 --------------------------- (In Thousands) Note payable bearing interest at 14%, subordinated, unsecured. Interest is payable quarterly and principal payments of $275,000 are payable quarterly beginning November 30, 1996. $ 1,700 $2,200 Term loan maturing December 31, 1998 bearing interest at the reference rate (as defined in the loan agreement) plus 3/4% (9.0% at August 31, 1996) payable monthly. Principal payments of $12,806 are payable monthly beginning September 15, 1996. 615 - Term loan bearing interest at the adjusted LIBO rate plus 3 1/2%. - 2,500 Revolving credit facility. Interest payable at the adjusted LIBO rate plus 3 1/2%. - 2,200
F-14 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 4. LONG-TERM DEBT (CONTINUED)
AUGUST 31 1996 1995 --------------------------- (In Thousands) Revolving credit facility maturing December 31, 1998 bearing interest at the reference rate (as defined in the loan agreement) plus up to an additional 1.0% depending upon financial performance (9.25% at August 31, 1996). $ 7,210 $ - Capital lease obligations 491 322 --------------------------- 10,016 7,222 Less current portion 1,382 1,593 --------------------------- $ 8,634 $5,629 ===========================
In December 1995, the Company entered into a Credit and Security Agreement (the Agreement) with FBS Business Finance Corporation (FBS). Under the Agreement, FBS has provided a revolving loan facility of up to $9,000,000 through December 31, 1997, increasing to $10,000,000 through December 31, 1998, subject to the amount of the Company's borrowing base, and a term loan facility of up to $2,960,000, subject to eligible manufacturing additions for the year ended August 31, 1996. On January 16, 1996, the Company obtained the initial funding under the revolving loan in the amount of $5,825,000. The proceeds of this loan were used to retire the outstanding revolving credit facility ($2,200,000), to retire the outstanding term loan ($2,125,000), to make a partial payment on the outstanding note payable ($500,000) and for general corporate purposes ($1,000,000). As a result of the early retirement of the term loan, the revolving credit facility, and the partial payment on the note payable, the Company recognized an extraordinary expense of $93,000 (net of the related tax benefit of $54,000) for the write-down of deferred financing expenses related to these debts. The term loan and revolving credit facility are secured by the common stock of Cryenco, Inc. and all accounts receivable, inventories, property and equipment and intangible assets of the Company. The Company must comply with certain debt covenants, including the maintenance of certain financial ratios and restrictions on dividends. F-15 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 4. LONG-TERM DEBT (CONTINUED) The aggregate maturities of long-term debt are as follows (in thousands):
Year ending August 31: 1997 $ 1,382 1998 899 1999 7,648 2000 74 2001 13 ----------- $10,016 ===========
5. LEASES Office space, production facilities, and certain equipment are leased under agreements which are classified as operating leases for financial reporting purposes. The facilities leases provide for renewal options of up to five and ten years at approximately the same rates. Total rental expense charged to operations for the years ended August 31, 1996, 1995 and 1994 was $784,000, $853,000 and $828,000, respectively. The Company's assets held under capital leases, which are included in property and equipment, consist of the following at August 31:
1996 1995 ----------------------------- Machinery and equipment $628,003 $418,039 Less accumulated depreciation 110,481 52,824 ----------------------------- $517,522 $365,215 =============================
F-16 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 5. LEASES (CONTINUED) Future minimum lease payments under capital and noncancelable operating leases are as follows (in thousands):
CAPITAL OPERATING LEASES LEASES ----------------------------- Year ending August 31: 1997 $180 $ 860 1998 180 360 1999 155 359 2000 80 42 2001 20 13 ----------------------------- Total minimum lease payments 615 $1,634 =========== Less interest 124 -------------- Present value of minimum lease payments $491 ==============
Depreciation expense relating to assets held under capital leases for the years ended August 31, 1996, 1995 and 1994 was $98,323, $36,023 and $16,801, respectively. Subsequent to August 31, 1996, the property located at 3811 Joliet Street, Denver, Colorado, was sold and a new lease agreement between the Company and the new owners became effective. Under the terms of the lease, the Company is obligated to pay a minimum rent of $38,841 per month for 10 years (subject to increases based on an inflation index), property taxes and insurance. This lease replaces the Company's lease with the prior owners which had one year remaining with rent of $41,666 per month, and is not included in the future minimum lease payments shown above. 6. EQUIPMENT LEASING During the year ended August 31, 1996, the Company entered into lease agreements under which equipment manufactured by the Company is leased to customers. These leases have been classified as operating leases by the Company. F-17 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 6. EQUIPMENT LEASING (CONTINUED) Future minimum lease payments under noncancelable operating leases are as follows (in thousands):
Year ending August 31: 1997 $ 81 1998 74 ---------- $155 ==========
7. COMMON STOCK, PREFERRED STOCK, WARRANTS, AND OPTIONS In connection with a term loan and subordinated note payable, the Company issued warrants to purchase 197,456 shares of its Class A common stock and 543,372 shares of its Class B common stock for $.86112 per share (the original warrants). At April 15, 1992, the Company issued warrants to purchase a total of 38,323 additional shares of Class B common stock at $5 per share (the new warrants) to the holders of the original Class A and Class B warrants in exchange for the removal of a feature of the original warrants whereby the holders had the option to require the Company to purchase the warrants or the stock issued pursuant to the warrants. During 1995, the Company increased the number of original warrants to purchase an additional 1,443 shares of its Class A common stock and 16,854 shares of its Class B common stock and reduced the exercise price to $.8352 per share as a result of antidilutive provisions which were invoked when the Company issued the shares of common stock described below. In addition, the new warrants were increased to purchase an additional 1,189 shares of Class A common stock and the exercise price was reduced to $4.8496 per share. The holders of the original warrants, as amended, and the new warrants have a "cashless exercise right," whereby the holders may reduce the number of shares to be received to pay the exercise price, such reduction to be equal to the exercise price to be paid divided by the then fair market value per share. These warrants expire August 29, 2003. During the years ended August 31, 1996, 1995 and 1994, warrants for 191,766, 150,000 and 75,925 shares, respectively, were exercised, using the cashless exercise option, which resulted in the issuance of 154,169, 118,918 and 56,974 shares, respectively, of Class A common stock. In 1992, 130,000 outstanding options and warrants to acquire shares of Gulf & Mississippi Corporation, which had acquired the Company in a reverse acquisition, were converted into options and warrants to purchase the same number of shares of Class A common stock of the Company. Warrants to purchase 100,000 shares of the Company's Class A common stock at $3.6956 per share expired July 9, 1995 and options to purchase 30,000 shares of the Company's Class A common stock at $16 per share are exercisable F-18 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 7. COMMON STOCK, PREFERRED STOCK, WARRANTS, AND OPTIONS (CONTINUED) prior to November 5, 1996. The options were issued pursuant to the Company's 1986 Non-Qualified Stock Option Plan, which provides for an aggregate of 50,000 shares of common stock to be issued under the Plan. In connection with the 1992 public offering, the Company sold a warrant to purchase 10,000 shares of Class A common stock at $5.50 per share for $100 to one of the underwriters. The warrant is exercisable for a period of five years commencing August 13, 1993. In March 1993, in conjunction with a debt restructuring, the Company was advanced $650,000 from stockholders, treated as junior subordinated notes. In consideration for the advances, these stockholders received warrants to purchase 130,000 shares of Class A common stock at $7.90 per share. The warrants are exercisable for a period of five years commencing March 12, 1993. The warrants' fair value of $55,000 at time of issuance, as determined by an independent appraiser, was capitalized as a deferred expense and is being amortized to expense over five years. In November 1993, the Company amended certain of its debt agreements with respect to certain covenants. Under the terms of these amendments, the Company issued warrants to purchase 35,000 shares of the Company's Class B common stock and warrants to purchase 17,500 shares of the Company's Class A common stock. The warrants were exercisable at a price of $6.38 per share and expire on August 29, 2003. The warrants' fair value at time of issuance, as determined by the Company, was $22,000. During 1995, the Company increased the number of warrants to purchase an additional 1,086 shares of its Class B common stock and 542 shares of its Class A common stock and reduced the exercise price to $6.19 per share as a result of antidilutive provisions which were invoked when the Company issued the shares of common stock described below. During the year ended August 31, 1994, the Company exchanged 67,838 shares of its Series A Preferred Stock for the junior subordinated notes and related current interest notes totaling approximately $678,000. The Series A Preferred Stock provides for a cumulative cash dividend of 12% of the aggregate liquidation value, as defined, per annum through August 31, 1995, increasing 1% per annum thereafter to a maximum of 18%. However, all dividends in excess of 12% per annum shall not be paid in cash, but shall be paid by issuing additional shares of Series A Preferred Stock. The Series A Preferred Stock shall be redeemable, in whole or in part, at the option of the Company by F-19 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 7. COMMON STOCK, PREFERRED STOCK, WARRANTS, AND OPTIONS (CONTINUED) resolution of its Board of Directors, at any time and from time to time, at the liquidation value of such shares, plus all dividends payable on such shares up to the date fixed for redemption. In consideration for the exchange, the Company issued warrants to purchase up to 65,000 shares of the Company's Class A common stock, at an exercise price of $3.55 per share. The warrants expire January 29, 2000. The warrants' fair value of $13,000 at time of issuance, as determined by an independent appraiser, was capitalized as a deferred expense and is being amortized to expense over five years. As described in Note 10, in June 1994, the Company received $780,000 from a limited partnership to fund the development of a 500 gallon per day TADOPTR. The partnership received warrants as a part of the transaction to purchase 200,000 shares of Class A common stock at $3.00 per share. The warrants expire March 20, 2000. The warrants' fair value, as determined by an independent appraiser, was $60,000 at the time of issuance. On November 29, 1994, the Company entered into a Purchase Agreement with a group of purchasers which provided for the sale of 800,000 shares of Class A common stock and warrants to purchase 700,000 shares of Class A common stock in the future at an exercise price of $4.00 per share. The aggregate purchase price for the shares and warrants was approximately $2,700,000. The purchase was completed in two closings, on December 20, 1994 and January 30, 1995, from which the Company realized net proceeds of approximately $2,300,000. Warrants for 507,503 and 192,497 shares are exercisable for a period of five years commencing December 20, 1994 and January 30, 1995, respectively. The warrants' fair value, as determined by the Company, was $70,000 at the time of issuance. On May 18, 1995, the Company agreed, among other things, to reduce the exercise price of the warrants referred to in the preceding paragraph to $3.00 per share and the purchasers agreed to exercise a portion of the warrants. On June 8, 1995, the purchasers exercised warrants to purchase 539,900 shares of Class A common stock, from which the Company realized net proceeds of approximately $1,600,000. In connection with the aforementioned Purchase Agreement, the Company also issued warrants to purchase 25,000 shares of Class A common stock at an exercise price of $4.00 per share. The warrants expire December 20, 1999. The warrants' fair value, as determined by the Company, was $2,500 at the time of issuance. F-20 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 7. COMMON STOCK, PREFERRED STOCK, WARRANTS, AND OPTIONS (CONTINUED) The Company's 1992 Employee Incentive and Non-Qualified Stock Option Plan (the 1992 Plan) was adopted effective April 1, 1992. The 1992 Plan provides for up to 187,500 shares of the Company's Class A common stock pursuant to the exercise of stock options which may be granted to employees and directors. Options may be issued at not less than the fair market value on the date of grant. Information for each of the three years in the period ended August 31, 1996, with respect to activity of the 1992 Plan, is as follows:
NUMBER OF EXERCISE OPTIONS PRICE ----------------------------- Options outstanding at August 31, 1993 26,000 $4.00 - 6.75 Granted in 1994 19,500 $3.00 - 6.38 -------------- Options outstanding at August 31, 1994 45,500 $3.00 - 6.75 Granted in 1995 58,000 $5.38 Forfeited in 1995 (17,500) $4.00 - 6.38 -------------- Options outstanding at August 31, 1995 86,000 $3.00 - 6.75 Granted in 1996 96,500 $4.50 Forfeited in 1996 (52,000) $4.50 - 6.38 ============== Options outstanding at August 31, 1996 130,500 $3.00 - 6.75 ==============
The Company's 1995 Incentive and Non-Qualified Stock Option Plan (the 1995 Plan) was adopted effective November 16, 1995. The 1995 Plan provides for up to 300,000 shares of the Company's Class A common stock pursuant to the exercise of stock options which may be granted to employees and directors. Options may be issued at not less than the fair market value on the date of grant. No options have been granted under the 1995 Plan at August 31, 1996. The Company adopted the 1993 Non-Employee Director Stock Option Program (the Program) effective September 1, 1993, whereby each director who is not an officer or employee of the Company is entitled to receive options to purchase 500 shares of the Company's Class A common stock for each fiscal quarter served as a director, commencing with the quarter ending November 30, 1993. Eligible directors are limited to a total of 20,000 shares under the Program. The purchase price is determined based on the fair market value of outstanding shares as of the last business day of the applicable fiscal quarter (the Award Date). Options are exercisable for a period of ten years subsequent to the Award Date. In connection with the Program, the Company has F-21 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 7. COMMON STOCK, PREFERRED STOCK, WARRANTS, AND OPTIONS (CONTINUED) reserved 40,000 authorized and unissued shares of Class A common stock for issuance and delivery upon exercise of the options. Information for each of the three years in the period ended August 31, 1996, with respect to activity of the Program, is as follows:
NUMBER OF EXERCISE OPTIONS PRICE ----------------------------- Options outstanding at August 31, 1993 - Granted in 1994 3,000 $2.50 - 6.13 -------------- Options outstanding at August 31, 1994 3,000 $2.50 - 6.13 Granted in 1995 4,000 $3.75 - 4.25 -------------- Options outstanding at August 31, 1995 7,000 $2.50 - 6.13 Granted in 1996 4,000 $3.50 - 4.75 -------------- Options outstanding at August 31, 1996 11,000 $2.50 - 6.13 ==============
8. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts F-22 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 8. INCOME TAXES (CONTINUED) used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets at August 31 are as follows:
1996 1995 ----------------------------- (In Thousands) Deferred tax liabilities: Prepaid expenses $ 9 $ 35 ----------------------------- Deferred tax assets: Inventory obsolescence 56 37 Warranty 52 75 Inventory capitalization 23 25 Accrued liabilities 64 50 Tax basis of assets in excess of book basis 35 87 Other 4 6 ----------------------------- Total deferred tax assets 234 280 Valuation allowance for deferred tax assets (225) (245) ----------------------------- Net deferred tax assets 9 35 ----------------------------- $ - $ - =============================
Components of income tax expense (benefit) are as follows:
CURRENT DEFERRED TOTAL ---------------------------------------- (In Thousands) 1996 Federal $ 389 $(26) $ 363 State - - - ---------------------------------------- $ 389 $(26) $ 363 ======================================== 1995 Federal $ 194 $ - $ 194 State - - - ---------------------------------------- $ 194 $ - $ 194 ========================================
F-23 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 8. INCOME TAXES (CONTINUED)
CURRENT DEFERRED TOTAL ---------------------------------------- (In Thousands) 1994 Federal $(403) $ - $(403) State - - - ---------------------------------------- $(403) $ - $(403) ========================================
A reconciliation between the actual income tax expense (benefit) and income taxes computed by applying the statutory tax rates is as follows:
1996 1995 1994 ---------------------------------------- (In Thousands) Computed "expected" tax expense (benefit) $334 $189 $(442) Goodwill and other permanent differences 99 86 - Other (70) (81) 39 ---------------------------------------- Actual tax expense (benefit) $363 $194 $(403) ========================================
The Company has net operating loss carryforwards for state income tax purposes of approximately $2,668,000 which expire in various amounts from 2008 to 2009. Net operating loss carryforwards of approximately $1,048,000 and $977,000 were used for state income tax purposes in 1996 and 1995, respectively. 9. EMPLOYEE BENEFIT PLAN The Company's 401(k) savings plan provides for both employee and employer contributions. Employees who have reached the age of 21 years and who have completed one year of service are eligible to participate in the Plan. Employees may contribute up to 15% of their annual compensation limited to the maximum contribution allowable under Internal Revenue Service guidelines. The employer matches 25% of each employee's contribution, up to $1,000. Employee contributions vest immediately, while amounts contributed by the employer vest based upon the employee's term of service. Contributions for the years ended August 31, 1996, 1995 and 1994 were $68,000, $52,000 and $41,000, respectively. F-24 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 10. RELATED PARTY TRANSACTIONS In June 1994, the Company entered into an arrangement with a limited partnership in which the partnership would contribute $780,000 to the Company for the development of a 500 gallon per day TADOPTR. A director of the Company is a general partner of the limited partnership. In exchange for this funding, the Company issued warrants to purchase 200,000 shares of Class A common stock at $3.00 per share, and entered into a Royalty Rights and Technology Development Agreement with the partnership pursuant to which royalties of between 1% and 5% of net revenues from the sale of TADOPTRs will be paid to the partnership until the partnership receives an aggregate of $1,600,000, after which the royalties decrease to between 0.6% and 0.75% of net revenues. The royalties are payable for a period of 20 years from the execution of the agreement. In addition, the partnership was given a security interest in the Company's rights in the TADOPTR to secure the royalty payments. The Company was obligated to spend funds provided by the partnership for the development of a 500 gallon per day TADOPTR over a period of 12 to 18 months. For the years ended August 31, 1996 and 1995, the Company incurred approximately $455,000 and $325,000, respectively, in costs for this development, for which it has been fully reimbursed under this agreement. In fiscal year 1992, the Company entered into an agreement with an affiliate of several of the Company's principal stockholders pursuant to which such entity provides a variety of management advisory services to the Company. The agreement, which terminates on August 30, 1997, provides for monthly payments of approximately $10,000 by the Company. At August 31, 1996 and 1995, the Company has accrued management advisory fees of approximately $324,000 related to the agreement. In connection with the Purchase Agreement described in Note 7, the Company issued warrants to purchase 700,000 and 25,000 shares of Class A common stock to two entities within the purchaser group in which two directors of the Company have a financial interest. In June 1995, a limited liability company agreement was signed between Cryenex, Inc. (Cryenex), a wholly owned subsidiary of the Company, and an affiliate of Jack B. Kelley, Inc. for the establishment of a limited liability company, Applied LNG Technologies USA, LLC (ALT), to develop turnkey projects utilizing liquefied natural gas. Cryenex is a 49% owner of ALT, and accounts for its investment using the equity method, under which Cryenex's share of income and losses of ALT is reflected in income as earned and distributions will be credited against the investment when received. As of August 31, 1995, Cryenex's investment of $49,000 was reduced to zero. Under terms of the F-25 Cryenco Sciences, Inc. Notes to Consolidated Financial Statements (continued) 10. RELATED PARTY TRANSACTIONS (CONTINUED) agreement, Cryenex agreed to provide certain services to ALT, reimbursable to Cryenex, in an amount up to $490,000. During the fiscal years ended August 31, 1996 and 1995, Cryenex has provided services to ALT in the amount of $189,000 and $83,000, respectively. In addition, during the fiscal year ended August 31, 1996, revenue resulting from sales to ALT amounted to approximately $1,344,000. At August 31, 1996 and 1995, receivables from ALT represented $1,423,000 and $83,000, respectively. 11. FAIR VALUES OF FINANCIAL INSTRUMENTS FASB No. 107, Disclosures about Fair Value of Financial Instruments, requires the disclosure of the fair value of all financial instruments, both on and off balance sheet, for which it is practicable to estimate their value. Financial instruments are generally defined as cash, equity instruments or investments and contractual obligations to pay or receive cash or another financial instrument. In defining fair value, the Statement indicates quoted market prices are the preferred means of estimating the value of a specific instrument, but in cases where market quotes are not available, fair values should be determined using various valuation techniques such as discounted cash flow calculations. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FASB No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company. F-26 Report of Independent Auditors The Board of Directors and Stockholders Cryenco Sciences, Inc. We have audited the consolidated financial statements of Cryenco Sciences, Inc. as of August 31, 1996 and 1995, and for each of the three years in the period ended August 31, 1996, and have issued our report thereon dated October 5, 1996 (included elsewhere in this Form 10-K). Our audits also included the financial statement schedule of Cryenco Sciences, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Denver, Colorado October 5, 1996 S-1 Cryenco Sciences, Inc. Schedule II - Valuation and Qualifying Accounts
BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ----------------------------------------------------------------------------------------------- YEAR ENDED AUGUST 31, 1996 Deducted from asset accounts: Allowance for excess and obsolete inventory $100,000 $268,726 $218,726(1) $150,000 Allowance for doubtful accounts 14,240 11,900 14,240 11,900 --------------------------------------------------------------------- $114,240 $280,626 $232,966 $161,900 ===================================================================== Accrued warranty reserve $200,000 $379,259 $438,713(2) $140,546 ===================================================================== YEAR ENDED AUGUST 31, 1995 Deducted from asset accounts: Allowance for excess and obsolete inventory $ 52,226 $ 55,309 $ 7,535(1) $100,000 Allowance for doubtful accounts 22,070 14,240 22,070 14,240 --------------------------------------------------------------------- $ 74,296 $ 69,549 $ 29,605 $114,240 ===================================================================== Accrued warranty reserve $143,697 $662,988 $606,685(2) $200,000 ===================================================================== YEAR ENDED AUGUST 31, 1994 Deducted from asset accounts: Allowance for excess and obsolete inventory $105,801 $142,319 $195,894(1) $ 52,226 Allowance for doubtful accounts 1,791 20,279 - 22,070 --------------------------------------------------------------------- $107,592 $162,598 $195,894 $ 74,296 ===================================================================== Accrued warranty reserve $327,791 $287,955 $472,049(2) $143,697 =====================================================================
(1) Obsolete and excess inventories written off, net of recoveries (2) Warranty claims honored during the year S-2 INDEX TO EXHIBITS
Exhibit Description of Exhibit Page ------- ---------------------- ---- 3.1 - Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-2, File No. 33-48738, filed on June 19, 1992 (the "S-2 Registration Statement"). 3.2 - By-laws of the Registrant, incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, File No. 33-7532, filed on July 25, 1986 (the "S-1 Registration Statement"). 3.3 - Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1995 (the "1995 Annual Report"). 3.4 - Certificate of Designation, Preferences and Rights of the Series A Preferred Stock of the Registrant, incorporated by reference to Exhibit 3.4 to the 1995 Annual Report. 3.5 - Corrected Certificate of Amendment of Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.5 to the 1995 Annual Report. 4.1 - See Article Fourth of the Restated Certificate of Incorporation, as amended and corrected, of the Registrant (Exhibit 3.5 hereof) , incorporated by reference to Exhibit 4.1 to the 1995 Annual Report. 4.2 - Forms of Common Stock and Class B Common Stock certificates of the Registrant, incorporated by reference to Exhibit 4.3 of the Registrant's Registration Statement on Form S-4, File No. 33-43782, filed on December 19, 1991 (the "S-4 Registration Statement").
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Exhibit Description of Exhibit Page ------- ---------------------- ---- 4.3 - Registration Rights Agreement dated as of August 30, 1991 among CHI, CIT, Chemical Bank and the Investors named therein, incorporated by reference to Exhibit 4.3 to the 1995 Annual Report. 4.4 - Warrant Agreement dated as of August 30, 1991 between Chemical Bank, CHI and the Registrant, incorporated by reference to Exhibit 4.4 to the 1995 Annual Report. 4.5 - Letter Agreement dated April 15, 1992 among the Registrant, CIT and Chemical Bank relating to the Warrants referred to herein at Exhibits 4.8 and 4.9, incorporated by reference to Exhibit 4.9 to the S-2 Registration Statement. 4.6 - Letter Agreement dated August 12, 1992 between the Registrant and Chemical Bank relating to the Warrants referred to herein at Exhibit 4.8, incorporated by reference to Exhibit 4.6 to the 1995 Annual Report. 4.7 - Letter Agreement dated August 12, 1992 between the Registrant and CIT relating to the Warrants referred to herein at Exhibit 4.9, incorporated by reference to Exhibit 4.7 to the 1995 Annual Report. 4.8 - Warrants issued to Chemical Bank each dated April 27, 1992, incorporated by reference to Exhibit 4.8 to the 1995 Annual Report. 4.9 - Warrants issued to CIT each dated April 27, 1992, incorporated by reference to Exhibit 4.9 to the 1995 Annual Report. 4.10 - Warrant issued to Dain Bosworth Incorporated dated August 20, 1992, incorporated by reference to Exhibit 4.12 to the S-2 Registration Statement. 4.11 - Warrant Agreement dated as of March 12, 1993 between the Registrant and Alfred Schechter, incorporated by reference to Exhibit 4.11 to the 1995 Annual Report.
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Exhibit Description of Exhibit Page ------- ---------------------- ---- 4.12 - Warrant Agreement dated as of March 12, 1993 between the Registrant and Don M. Harwell, incorporated by reference to Exhibit 4.12 to the 1995 Annual Report. 4.13 - Warrant Agreement dated as of March 12, 1993 between the Registrant and MCC, incorporated by reference to Exhibit 4.13 to the 1995 Annual Report. 4.14 - Warrant issued to Alfred Schechter dated March 12, 1993, incorporated by reference to Exhibit 4.14 to the 1995 Annual Report. 4.15 - Warrant issued to Don M. Harwell dated March 12, 1993, incorporated by reference to Exhibit 4.15 to the 1995 Annual Report. 4.16 - Warrant issued to MCC dated March 12, 1993, incorporated by reference to Exhibit 4.16 to the 1995 Annual Report. 4.17 - Letter Agreement dated as of June 9, 1993 between the Registrant and Alfred Schechter with respect to the Exercise Price for the Warrant referred to herein at Exhibit 4.14, incorporated by reference to Exhibit 4.17 to the 1995 Annual Report. 4.18 - Letter Agreement dated as of June 9, 1993 between the Registrant and Don M. Harwell with respect to the Exercise Price for the Warrant referred to herein at Exhibit 4.15, incorporated by reference to Exhibit 4.18 to the 1995 Annual Report. 4.19 - Letter Agreement dated as of June 9, 1993 between the Registrant and MCC with respect to the Warrant referred to herein at Exhibit 4.16, incorporated by reference to Exhibit 4.19 to the 1995 Annual Report. 4.20 - Warrant issued to Chemical Bank dated November 24, 1993, incorporated by reference to Exhibit 4.20 to the 1995 Annual Report. 4.21 - Warrant issued to CIT dated November 24, 1993, incorporated by reference to Exhibit 4.21 to the 1995 Annual Report.
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Exhibit Description of Exhibit Page ------- ---------------------- ---- 4.22 - Warrant Agreement dated as of January 26, 1995 between the Company and Alfred Schechter, incorporated by reference to Exhibit 4.22 to the 1995 Annual Report. 4.23 - Warrant Agreement dated as of January 26, 1995 between the Company and Don M. Harwell, incorporated by reference to Exhibit 4.23 to the 1995 Annual Report. 4.24 - Warrant Agreement dated as of January 26, 1995 between the Company and MCC, incorporated by reference to Exhibit 4.24 to the 1995 Annual Report. 4.25 - Warrant issued to Alfred Schechter dated January 26, 1995, incorporated by reference to Exhibit 4.25 to the 1995 Annual Report. 4.26 - Warrant issued to Don M. Harwell dated January 26, 1995, incorporated by reference to Exhibit 4.26 to the 1995 Annual Report. 4.27 - Warrant issued to MCC dated January 26, 1995, incorporated by reference to Exhibit 4.27 to the 1995 Annual Report. 4.28 - See the Certificate of Designation, Preferences and Rights of the Series A Preferred Stock of the Registrant (Exhibit 3.4 hereof) , incorporated by reference to Exhibit 4.28 to the 1995 Annual Report. 4.29 - Warrant Agreement dated as of June 8, 1994 between the Registrant and Cryogenic TADOPTR Company, L.P. and the Form of Warrant Certificate issued pursuant thereto, incorporated by reference to Exhibit 4.29 to the 1995 Annual Report. 4.30 - Warrant Agreement dated as of December 20, 1994 between the Registrant and The Edgehill Corporation, incorporated by reference to Exhibit 4.30 to the 1995 Annual Report.
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Exhibit Description of Exhibit Page ------- ---------------------- ---- 4.31 - Warrant issued to The Edgehill Corporation dated as of December 20, 1994, incorporated by reference to Exhibit 4.31 to the 1995 Annual Report. 4.32 - Registration Rights Agreement dated as of December 20, 1994 among the Registrant, certain parties named therein and International Capital Partners, Inc., incorporated by reference to Exhibit 4.32 to the 1995 Annual Report. 4.33 - Form of Warrant issued to each of International Capital Partners, Inc. and the parties named in the Registration Rights Agreement dated as of December 20, 1994 (Exhibit 4.32 hereof), incorporated by reference to Exhibit 4.33 to the 1995 Annual Report. 10.1 - 1986 Non-Qualified Stock Option Agreement, incorporated by reference to Exhibit 10.1 to the 1995 Annual Report. 10.2 - Stockholders Agreement dated as of August 30, 1991 among the Registrant, CHI and other stockholders of CHI, incorporated by reference to Exhibit 10.2 to the 1995 Annual Report. 10.3 - Securities Purchase Agreement dated as of August 30, 1991 among CIT, CHI, the Registrant, CEC Acquisition Corp. and Cryogenic Energy Company, incorporated by reference to Exhibit 10.3 to the 1995 Annual Report. 10.4 - Credit Agreement dated as of August 30, 1991 among Cryenco, Inc., the Lenders named therein, and Chemical Bank, as Agent, incorporated by reference to Exhibit 10.7 to the S-4 Registration Statement. 10.5 - Form of Amended and Restated Pledge Agreement dated February 11, 1992 relating to the capital stock of Cryenco, Inc. executed by CSCI Corporation in favor of Chemical Bank, incorporated by reference to Exhibit 10.6 to the S-4 Registration Statement.
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Exhibit Description of Exhibit Page ------- ---------------------- ---- 10.6 - Employment Agreement dated as of September 1, 1991 between Cryenco, Inc. and Alfred Schechter, incorporated by reference to Exhibit 10.8 of the S-4 Registration Statement. 10.7 - 1992 Employee Incentive and Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, File No. 33-65864, filed on July 12, 1993 (the "S-8 Registration Statement"). 10.8 - Form of Option Agreement under the 1992 Employee Incentive and Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 4.2 to the S-8 Registration Statement. 10.9 - 1993 Non-Employee Director Stock Option Program, incorporated by reference to Exhibit 4.3 to the S-8 Registration Statement. 10.10 - Form of Option Agreement under the 1993 Non-Employee Director Stock Option Program (contained in the 1993 Non-Employee Director Stock Option Program referred to herein at Exhibit 10.9), incorporated by reference to Exhibit 4.4 to the S-8 Registration Statement. 10.11 - 1991 Incentive Compensation Plan of Cryenco, Inc., as amended, incorporated by reference to Exhibit 10.9 to the S-2 Registration Statement. 10.12 - Lease, as amended, dated August 22, 1989 concerning the property leased by the Registrant located at 5995 North Washington Street, Denver, Colorado, incorporated by reference to Exhibit 10.10 to the S-2 Registration Statement. *10.13 - Lease, as amended, dated June 19, 1996 concerning the property leased by the Registrant located at 3811 Joliet Street, Denver, Colorado.
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Exhibit Description of Exhibit Page ------- ---------------------- ---- 10.14 - Consulting Agreement dated August 30, 1991 between the Registrant and Charterhouse, incorporated by reference to Exhibit 10.12 to the S-2 Registration Statement. 10.15 - Waiver and Amendment Agreement dated as of February 28, 1993 among Cryenco, Inc., the Lenders named therein and Chemical Bank, amending the Credit Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 10.15 to the 1995 Annual Report. 10.16 - Waiver and Amendment Agreement dated as of February 28, 1993 among Cryenco, Inc., the Registrant and CIT, amending the Securities Purchase Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 3.4 to the 1995 Annual Report, incorporated by reference to Exhibit 10.16 to the 1995 Annual Report. 10.17 - Funding Agreement dated March 12, 1993 among Alfred Schechter, Don M. Harwell, MCC and the Registrant, incorporated by reference to Exhibit 10.17 to the 1995 Annual Report. 10.18 - Intentionally left blank. 10.19 - Form of Indemnification Agreement entered into between the Registrant and certain of its officers and directors dated March 16, 1993, incorporated by reference to Exhibit 10.19 to the 1995 Annual Report. 10.20 - Second Waiver and Amendment Agreement dated as of August 31, 1993 among Cryenco, Inc., the Lenders named therein and Chemical Bank, amending the Credit Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 10.20 to the 1995 Annual Report.
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Exhibit Description of Exhibit Page ------- ---------------------- ---- 10.21 - Second Waiver and Amendment Agreement dated as of October 31, 1993 among Cryenco, Inc., the Registrant and CIT, amending the Securities Purchase Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 10.21 to the 1995 Annual Report. 10.22 - Letter Agreement dated April 13, 1994 among the Registrant, Cryenco, Inc., Chemical Bank and CIT, incorporated by reference to Exhibit 10.22 to the 1995 Annual Report. 10.23 - Exchange Agreement dated April 13, 1994 among Alfred Schechter, Don M. Harwell, MCC and the Registrant, incorporated by reference to Exhibit 10.23 to the 1995 Annual Report. 10.24 - Royalty Rights and Technology Development Agreement dated June 8, 1994 between the Registrant and Cryogenic TADOPTR Company, L.P., incorporated by reference to Exhibit 10.24 to the 1995 Annual Report. 10.25 - Third Waiver and Amendment Agreement dated as of November 29, 1994 among Cryenco, Inc., the Lenders named therein and Chemical Bank, as Agent, amending the Credit Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 10.25 to the 1995 Annual Report. 10.26 - Third Waiver and Amendment Agreement dated as of November 29, 1994 among Cryenco, Inc., the Registrant and CIT, amending the Securities Purchase Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 10.26 to the 1995 Annual Report. 10.27 - Purchase Agreement dated as of November 29, 1994 among the Registrant, International Capital Partners, Inc. and the Purchasers named therein, incorporated by reference to Exhibit 10.27 to the 1995 Annual Report.
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Exhibit Description of Exhibit Page ------- ---------------------- ---- 10.28 - Fourth Waiver and Amendment Agreement dated as of December 20, 1994 among the Registrant, Cryenco, Inc., the Lenders named therein and Chemical Bank, as Agent, amending the Credit Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 10.28 to the 1995 Annual Report. 10.29 - Fourth Waiver and Amendment Agreement dated as of December 20, 1994 among Cryenco, Inc., the Registrant and CIT, amending the Securities Purchase Agreement dated as of August 30, 1991, as amended, incorporated by reference to Exhibit 10.29 to the 1995 Annual Report. 10.30 - First Amendment to the Purchase Agreement dated as of December 20, 1994 among the Registrant, International Capital Partners, Inc. and the Purchasers named therein, amending the Purchase Agreement dated as of November 29, 1994, incorporated by reference to Exhibit 10.30 to the 1995 Annual Report. 10.31 - Second Amendment to the Purchase Agreement dated as of January 30, 1994 among the Registrant, International Capital Partners, Inc. and the Purchasers named therein, amending the Purchase Agreement dated as of November 29, 1994, as amended, incorporated by reference to Exhibit 10.31 to the 1995 Annual Report. 10.32 - Amended and Restated Employment Agreement dated January 18, 1995 between Cryenco, Inc. and Dale A. Brubaker, incorporated by reference to Exhibit 10.32 to the 1995 Annual Report. 10.33 - Letter Agreement dated May 18, 1995 among the Registrant, International Capital Partners, Inc. and the Purchasers named therein, incorporated by reference to Exhibit 10.33 to the 1995 Annual Report.
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Exhibit Description of Exhibit Page ------- ---------------------- ---- 10.34 - Fifth Waiver and Amendment Agreement dated as of May 30, 1995 among Cryenco, Inc., the Lenders named therein and Chemical Bank, as Agent, amending the Credit Agreement dated as of August 30, 1995, as amended, incorporated by reference to Exhibit 10.34 to the 1995 Annual Report. 10.35 - Credit and Security Agreement dated as of December 19, 1995 and Supplement A thereto between Cryenco, Inc., the Company and FBS Business Finance Corporation, incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 1995. 10.36 - First Amendment dated as of January 16, 1996 between FBS Business Finance Corporation, Cryenco, Inc., the Company and Cryenex, Inc., amending the Credit and Security Agreement dated as of December 19, 1995, incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 1996 (the "February 29, 1996 Quarterly Report"). 10.37 - Letter Agreement dated January 12, 1996 between CIT and FBS Business Finance Corporation, incorporated by reference to Exhibit 10.2 to the February 29, 1996 Quarterly Report. *21 - Subsidiaries of the Registrant *23.1 - Consent of Ernst & Young LLP *27 - Financial Data Schedule pursuant to Article 5 of Regulation S-X filed with EDGAR filing only.
- ------------------------- * Filed herewith E-10 STATEMENT OF DIFFERENCES The trademark symbol shall be expressed as........... (R) The section symbol shall be expressed as............. 'SS' EX-10 2 EXHIBIT 10.13 FIRST AMENDMENT TO COMMERCIAL SINGLE-TENANT LEASE THIS FIRST AMENDMENT TO SINGLE-TENANT LEASE (this "Amendment") is entered into for reference purposes only as of October __, 1996, by and between 3811 PARTNERS, LLLP, a Colorado limited liability limited partnership, JEROME A. LEWIS AND MARTHA DELL LEWIS AND PACIFICA JOLIET INDUSTRIAL, LLC, a Colorado limited liability company, as tenants in common, d/b/a/ PRL Joliet ("landlord"), and CRYENCO SCIENCES, INC. a Colorado corporation ("Tenant"). WITNESSETH: A. Landlord and Tenant entered into that certain Commercial Single-Tenant Lease, dated June 19, 1996 (the "Lease"). B. Landlord and Tenant desire to amend the Lease in the manner and form hereinafter set forth. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. The reference in Lease to "3811 Partners, LLLP" shall be changed to read as "3811 Joliet, L.L.L.P." 2. Miscellaneous. a. The Lease as modified herein remains in full force and effect and is ratified by Landlord and Tenant. In the event of any conflict between the Lease and this Amendment, the terms and conditions of this Amendment shall control. Capitalized terms not defined herein shall have the same meaning as set forth in the Lease. b. This Amendment is binding upon and inures to the benefit of the parties hereto and their heirs, personal representatives, successors and assigns. c. This Amendment shall be governed by an construed in accordance with the laws of the State of Colorado. IN WITNESS WHEREOF, THE PARTIES HAVE EXECUTED THIS Amendment. This Amendment is effective upon delivery of a fully executed copy to Tenant ("Effective Date"); the day and year first above written is for reference purposes only. 3811 JOLIET, L.L.L.P., a Colorado limited liability limited partnership By: ___________________________________ Robert A. Russell, General Partner JEROME A. LEWIS AND MARTHA DELL LEWIS __________________________________________ Jerome A. Lewis __________________________________________ Martha Dell Lewis PACIFICA JOLIET INDUSTRIAL, LLC, a Colorado limited liability company By: ___________________________________ Steve Leonard, Manager "Landlord" CRYENCO SCIENCES, INC., a Colorado corporation By: _______________________________ Print Name: _______________________ Its: ______________________________ Date: _____________________________ "Tenant" 2 ** Upon purchase of this property by Lessor from current owner, approximately October 1, 1996. *** Lessee is currently in possession under existing lease with current owner, which lease shall terminate effective with Lessor's purchase of the property from current owner and commencement of the Lease. AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET (Do not use this form for Multi-Tenant Property) 1. Basic Provisions ("Basic Provisions") 1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only, June 19, 1996, is made by and between 3811 Partners, LLLP, a Colorado limited liability limited partnership, Jerome A. Lewis and Martha Dell Lewis, and Pacifica Joliet Industrial, LLC, a Colorado limited liability company, as Tenants-in-Common dba PRL Joliet ("LESSOR") AND Cryenco Sciences, Inc. ("LESSEE"), (collectively the "PARTIES", or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 3811 Joliet Street located in the County of Denver, State of Colorado and generally described as (describe briefly the nature of the property) 124,290 square foot manufacturing and warehouse facility on 14.3 acres of land. ("PREMISES"). (See Paragraph 2 for further provisions.) 1.3 TERM: Ten (10) years and 0 months ("ORIGINAL TERM") commencing ** ("COMMENCEMENT DATE") and ending ten (10) years from commencement date ("EXPIRATION DATE"). However, this original Term may be modified pursuant to Addendum A, Paragraph 11(b) attached hereto. (SEE ADDENDUM A, ADDITIONAL PROVISIONS, PARA. 11 (2)) (See Paragraph 2 for further provisions.) 1.4 EARLY POSSESSION: *** ("Early Possession Date"). (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 BASE RENT: $38,840.63 per month ("BASE RENT"), payable on the first day of each month commencing (See Paragraph 4 for further provisions.) If this box is checked, there are provisions in this lease for the Base Rent to be adjusted. 1.6 BASE RENT PAID UPON EXECUTION: $38,840.63 as Base Rent for the period. 1.7 SECURITY DEPOSIT: $116,521.89 (3 months' rent) * ("SECURITY DEPOSIT"). (See Paragraph 5 for further provisions.) 1.8 PERMITTED USE: Manufacturing and warehousing of vehicles for cryogenically cooled liquids (See Paragraph 6 for further provisions.) 1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise stated herein. (See Paragraph 8 for further provisions.)* 1.10 REAL ESTATE BROKERS: The following real estate brokers (collectively, the "BROKERS") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): Pacifica Holding Company represents [ ] Lessor exclusively ("LESSOR'S BROKER"); [ ] both Lessor and Lessee, and CB Commercial represents [ ] Lessee exclusively "LESSEE'S BROKER"); [ ] both Lessee and Lessor. (See Paragraph 15 for further provisions). 1.11 1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of Paragraphs I through VII.1 and Exhibits A - Colorado Statutes - Substitution Bonds; B- List of Chemicals and * all of which constitute a part of this Lease. *Option(s) to Extend 2. Premises. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility installations (as defined in Paragraph 7.3(a) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use , (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 3. Term. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term.. 3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, as its option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. 4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. * See Addendum A, Additional Provisions Initials _________ NET _________ 1 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. (SEE ADDENDUM A, ADDITIONAL PROVISIONS, PARAGRAPH V) 6. Use. 6.1 USE. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. 6.2 Hazardous Substances. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, ether by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent tot he use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements), and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (SEE ADDENDUM A, ADDITIONAL PROVISIONS, PARAGRAPH VII (1)). (b) (c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE LAW," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the reasonable recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. (SEE ADDENDUM A, ADDITION PROVISIONS, PARAGRAPH VII (3)). 7. Maintenance; Repairs; Utility Installations; Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation,) Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, structural and non-structural (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of, the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good See Addendum A, Additional Provisions, Paragraph VII(2) Initials __________ NET 2 (b) order, condition and state of repair. If Lessee occupies the Premises for seven (7) years or more, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years, AND REPAINTING SHALL OCCUR ON CURRENTLY PAINTED PORTIONS OF THE BUILDING ONLY. * (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of Lessor contained in Paragraph 2.2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of, any needed repairs. 7.3 Utility Installations; Trade Fixtures; Alterations. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all carpeting, window coverings air lines, power panels, electrical distribution, security, fir protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this lease as extended does not exceed $25,000. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner with good and sufficient materials and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that cost $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surely bond satisfactory to Lessor in an amount equal to one and on-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. (SEE ADDENDUM A, ADDITIONAL PROVISIONS, PARAGRAPH VIII) 7.4 Ownership; Removal; Surrender; and Restoration. (a) OWNERSHIP. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) REMOVAL. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations by removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. 8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 Liability Insurance. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy, or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis or a claim made basis with a "tail" acceptable to Lessor providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this lease. The limits of said insurance required by this lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance - Building, Improvements and Rental Value. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("LENDER(S)"), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by Initials______________ 3 reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c). (b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be for replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least BI,V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insured and loss payable clauses as required by this Lease. No such policy shall be cancelable or subject to modification except after (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage except for damage caused by Lessor's gross negligence or willful misconduct and to the extent such loss is not covered by insurance provided for in this lease * to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water, or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction. 9.1 Definitions. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of , or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and , in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease * and/or such loss has not been waived pursuant to Section 8.6 of this lease. Initials _______ NET shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate sixty(60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 4 13). Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost for repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of damage described in Paragraph 9.2 (Partial Damage - Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, Insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "COMMENCE" as used in this paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed twelve months. 9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. Real Property Taxes. 10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option and only if required by Lessor's lender to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be inter-mingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. Initials___________ NET 5 10.2 DEFINITION OF "REAL PROPERTY TAXES". As used herein, the term "REAL PROPERTY TAXES" shall include any form of real estate tax assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvement included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alternatives, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.l(b). 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of the execution by Lessor of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a noncurable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to a fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and market value adjustment, (1) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto after reasonable attempts to notify Lessee or anyone else liable on the lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the current monthly Base Rent, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurrence of a transaction described in Paragraph 12.1(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased to an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the amount required to establish such Security Deposit a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment structure of the rent payable under this Lease be adjusted to what is then the market value and/.or adjustment structure for property similar to the Premises as then constituted. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's Obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, be reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. NET Initials_________ 6 (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and the Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said Default. A "DEFAULT" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with applicable law per Paragraph 6.3(ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. 'SS' 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days; (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a guarantor's breach of its guaranty obligation on a n anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of emergency, without notice),Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to Possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award. Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. NET Initials____________ 7 13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS", shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiate the operation of this Paragraph shall not be deemed a waiver by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for there (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "CONDEMNATION"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10 percent (10%) of the floor area of the Premises, or more than twenty-five (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. BROKER'S FEE. 15.1 15.2 15.3 15.4 15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation of charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealing or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 15.6 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 16. TENANCY STATEMENT. 16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party ( the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past there (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligation and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as herein above defined. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessor under the terms of this Lease are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. NET Initials_________ 8 23. NOTICES. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage paid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee in may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof of Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor or (iii) be bound by prepayment of more than one month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. ATTORNEY'S FEES. Notwithstanding any other terms or provisions of this Lease, if any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, not permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Lessor consents to Lessee's existing sign. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. NET Initials_________ 9 (b) Subject to Paragraph 12.1(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (c) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. GUARANTOR. 38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. OPTIONS. 39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three or more notices of Default under Paragraph 13.1 during any twelve month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. MULTIPLE BUILDINGS. If the Premises are part of a group of building controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONALE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIALTION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES ASA TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELEATS; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT 10 PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at __________________________ Executed at ___________________________ on ___________________________________ on ____________________________________ by LESSOR: By LESSEE: 3811 Partners, LLLP, a Colorado CRYENCO SCIENCES, INC. limited liability, limited partnership, Jerome A. Lewis and Martha Dell Lewis, and Pacifica Joliet Industrial, LLC, a Colorado limited liability company, as Tenants-in-Common, dba PRL Joliet By ___________________________________ By ____________________________________ Name Printed: Name Printed: Title: Title: By By Name Printed: Name Printed: Title: Title: Address: Address: Tel. No. ( ) Fax No. ( ) Tel. No. ( ) Fax No. ( ) NET NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 354 South Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687-6777. Fax No. (213) 687-8616. 11 ADDENDUM "A" TO LEASE AGREEMENT ADDITIONAL PROVISIONS To that certain Lease dated June 19, 1996, between 3811 Partners, LLLP, a Colorado limited liability limited partnership, Jerome A. Lewis and Martha Dell Lewis; and Pacifica Joliet Industrial, LLC, a Colorado limited liability company, as Tenants In Common, dba PRL Joliet, as Lessor, and Cryenco Sciences, Inc., as Lessee, covering the property located at 3811 Joliet Street, Denver, Colorado. To the extent that this Addendum conflicts with, modifies or supplements other portions of the Lease, the provisions contained in this Addendum shall govern and control the rights and obligations of the parties. I. RENT ADJUSTMENTS. (1) The Base Rent shall be adjusted every two (2) years on the anniversary date of the lease commencement (an "Adjustment Date"). The Base Rent shall be adjusted by the increase, if any, in the Consumer Price Index of the Bureau of Labor Statistics of the Department of Labor for All Urban Consumers, "All Items", for the City and County of Denver, herein referred to as "CPI". The CPI increase on each Adjustment Date shall not be, on a cumulative basis, less than 3% compounded annually nor more than 5% compounded annually. (2) The adjusted Monthly Base Rent shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the CPI of the calendar month 2 (two) months prior to the month(s) specified in paragraph I(1) above during which the adjustment is to take effect, and the denominator of which shall be the CPI of the calendar month which is two (2) months prior to the first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month"). The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the date for rent adjustment. (3) In the event the compilation and/or publication of the CPI shall be discontinued, then the index most similar to the CPI shall be used to make such calculations. In the even that Lessor and Lessee cannot agree on such alternate index, then the matter shall be submitted for decision to the American Arbitration association in the County in which the Premises are located, in accordance with the then rules of said Association, and the decision of the Arbitrators shall be binding upon the parties, notwithstanding any party failing to appear after the notice of proceeding. The cost of said Arbitrators shall be paid equally by Lessor and Lessee. (4) In the event of a dispute as to the selected substitute CPI in accordance with Section I(3) above, Lessee shall continue to pay Base Rent at the rate in effect for the month immediately preceding the Adjustment Date, until the increased Base Rent, if any, is determined. Within five (5) days following the date on which the increase is determined, Lessee shall make a payment to Lessor equal to the increased Base Rent plus an amount equal to the difference between the Base Rent in effect for the month immediately preceding the Adjustment Date and the increased Base Rent for each month that has passed without payment of the increase since the Adjustment Date. Thereafter, the rent shall be paid at the increase rate. II. ROOF REPAIRS. (1) Lessee shall be responsible for any and all repair, maintenance and replacement of both the upper and lower roofs pursuant to Paragraph 7.1 of this Lease. Lessee and Lessor acknowledge that a portion of the roof is currently in a state of disrepair. Lessee agrees, within sixty (60) days after execution of this Lease, to perform necessary maintenance and repairs that will bring the roof into a good operating condition. Those repairs shall exclude a re-roofing of the asphalt built-up roof (lower roof). However, Lessor agrees, one time only, to replace the asphalt built-up roof (lower roof) only, consisting of approximately 120,000 square feet, when needed, as determined by Lessor in its sole discretion, after consideration to normal maintenance and repair performed by Lessee as provided above. The cost to Lessor for such roof replacement shall not exceed $220,000. If the cost to replace the same shall exceed $220,000, any such excess will be paid by Lessee. (2) Lessee agrees that on the date of completion of the lower roof replacement (the "Roof Completion Date"), the Lease shall automatically be extended by ten (10) years to the date that is ten (10) years after the Roof Completion Date, however, the term of this Lease in the aggregate shall not exceed a total of fifteen (15) years, (i.e. if the roof is replaced in the second year of this Lease, then the Lease term will be twelve (12) years, however, if the roof is replaced in the sixth year of the Lease or any time thereafter, then the total lease term will be fifteen (15) years. III. ASPHALT AND CONCRETE REPAIRS. LESSEE AND LESSOR ACKNOWLEDGE THAT THE ASPHALT IS CURRENTLY IN NEED OF CERTAIN REPAIRS AND MAINTENANCE. LESSEE AGREES TO PERFORM REASONABLY REQUIRED REPAIRS IN A GOOD WORKMAN-LIKE MANNER IN ACCORDANCE WITH PARAGRAPH 7.3 OF THIS LEASE WITHIN 100 DAYS AFTER THE DATE OF THIS LEASE. IV. LNG. Landlord gives its approval for Tenant to install an LNG fueling station on the south portion of the land, subject to all appropriate governmental and environmental regulations. The installation and maintenance of the LNG fueling station shall be the sole responsibility of the Tenant. In addition, Lessor hereby consents to Lessee's handling and storage of LNG on the Premises, subject to applicable governmental and environmental regulations with no additional security deposit. V. SECURITY DEPOSIT. The following language shall be added to the end of paragraph 1.7 of the Lease, "Security Deposit shall be held as follows: one-third ($38,840.63) in cash with Landlord and two-thirds ($77,681.26) in the form of a Letter of Credit. The Letter of Credit must be from an institution and in a form approved by the Lessor. Such approval shall not be unreasonably withheld. If after thirty-six (36) months after the commencement of this Lease, Lessee is not nor has not been in default under the terms of this Lease, then the Security Deposit will be reduced by one month's initial rent ($38,840.63), and if after sixty (60) months after the commencement of this Lease, Lessee is not nor has not been in default under the terms of this lease, then the Security Deposit shall be reduced by an additional one month's initial rent ($38,840.63), leaving ($38,840.63) held as a security deposit in the form of cash." VI. INSURING PARTY. The following language shall be added to the end of paragraph 1.9 of the Lease, "If Lessee can provide Lessor with a written estimate which shows that Lessee can obtain the insurance coverage required under paragraph 8 of this Lease at a cost which is less than the cost incurred by Lessor for such insurance coverage, Lessee shall be the Insuring Party and will remain the Insuring Party for so long as the cost of such required insurance coverage remains less than the cost to Lessor to provide such insurance coverage, and for such time as Lessee is the Insuring Party, Lessee will be obligated to promptly notify Lessor of the annual renewal cost of such insurance within thirty (30) days of such renewal date." VII. HAZARDOUS SUBSTANCES 1. Consent to Use of LNG and other Hazardous Substances by Lessee on the Premises. The following language shall be added to the end of paragraph 6.2(a) of the Lease, "Lessor hereby acknowledges that Lessee uses the following Hazardous Substances, as detailed in Exhibit B, in connection with its normal business operation on, in and about the Premises and Lessor consents to the permitted Use of the Premises, including the use by Lessee, of such Hazardous Substances in the conduct of Lessee's Normal business operations in accordance with this Section 6.2(a), subject to the terms and conditions imposed by this Article 6. Lessee shall, on the anniversary date of this Lease, provide Lessor with a list of all Hazardous Substances listed above, and Lessor shall have the right to reasonably request further information from Lessee regarding the same. The use by Lessee in the Premises of Hazardous Substances other than those Hazardous Substances specifically mentioned above shall require Lessee to obtain the consent of Lessor in accordance with Section 6.2(a)." 2. Duty to Inform Lessor Paragraph 6.2(b) of the Lease shall be replaced with the following language, "If Lessee knows, or has reasonable cause to believe, that a Hazardous Substances other than minimum quantities of the same used by Tenant in the ordinary course of the conduct of its business as permitted hereunder or other than as previously consented to by Lessor in accordance with the terms of Section 6.2, or a condition involving or resulting from such Hazardous Substances has come to be located in, on, under or about the premises, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any initial statement, report, notice or documentation sent by any governmental authority or private party or persons entering or occupying the Premises, with regards to the same, 12 and shall provide Lessor and its lender with access, during regular business hours and upon reasonable notice to Lessee, to Lessee's files containing any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to or received from any governmental authority or private party, or person entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in on, or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises for review by Lessor or its lender or mortgagee during regular business hours and upon reasonable notice to Lessee." 3. Inspections; Compliance The following language shall be added to the end of paragraph 6.4 of the Lease, "In the event that Lessor, and/or Lessor's Lender reasonably determine that an environmental inspection is necessary due to the nature of Lessee's business and the use of the property, then a Phase I Environmental Study shall be ordered at Lessee's cost at a cost not to exceed the competitive market cost. If the results of the Phase I study require that a Phase II Environmental Study is necessary, then this study shall be ordered at Lessee's cost, again at a cost not to exceed the competitive market cost. Lessor must approve any environmental testing company to be used for this purpose." VIII. MECHANIC'S LIENS The following language shall be added to the end of paragraph 7.3(c) of the Lease, "Notwithstanding the foregoing if, within a reasonable time after any mechanic's lien is filed against the Premises, Lessee: (1) procures a substitution bond pursuant to C.R.S. Section 38-22-131 approved by a judge of the District Court with which such bond or undertaking is filed in an amount equal to one and one-half times the amount of the lien plus costs allowed to date, and (2) in accordance with C.R.S. Section 38-22-132, the lien against the Premises is discharged and released in full and the subject bond is substituted therefor by the Court, then Lessor shall not (under such circumstances) require Lessee to pay Lessor's attorneys' fees and costs in participating in such action if Lessor shall decide to do so. Copies of the above-referenced Colorado statues are attached hereto as Exhibit A." 13 EXHIBIT "A" 38-22-131. SUBSTITUTION OF BOND ALLOWED. (1) Whenever a mechanic's lien has been filed in accordance with this article, the owner, whether legal or beneficial, of any interest in the property subject to the lien may, at any time, file with the clerk of the district court of the county wherein the property is situated a corporate surety bond or any other undertaking which has been approved by a judge of said district court. (2) Such bond or undertaking plus costs allowed to date shall be in an amount equal to one and one-half times the amount of the lien plus costs allowed to date and shall be approved by a judge of the district court with which such bond or undertaking is filed. (3) The bond or undertaking shall be conditioned that, if the lien claimant shall be finally adjudged to be entitled to recover upon the claim upon which his lien is based, the principal or his sureties shall pay to such claimant the amount of his judgment, together with any interest, costs, and other sums which such claimant would be entitled to recover upon the foreclosure of the lien. Source: L. 75, p.1425, 'SS' 5. 38-22-132. LIEN TO BE DISCHARGED. Notwithstanding the provisions of section 38-22-119, upon the filing of a bond or undertaking as provided in section 38-22-131, the lien against the property shall be forthwith discharged and released in full, and the real property described in such bond or undertaking shall be released from the lien and from any action brought to foreclose such lien, and the bond or undertaking shall be substituted. The clerk of the district court with which such bond or undertaking has been filed shall issue a certificate of release which shall be recorded in the office of the clerk and recorder of the county wherein the original mechanic's lien was filed, and the certificate of release shall show that the property has been released from the lien and from any action brought to foreclose such lien. 14 OPTION(S) TO EXTEND ADDENDUM TO STANDARD LEASE DATED June 19, 1996 BY AND BETWEEN (LESSOR) 3811 Partners, LLLP, a Colorado limited liability limited partnership, Jerome A. Lewis and Martha Dell Lewis, and Pacifica Joliet Industrial, LLC, a Colorado limited liability company, as Tenants-in-Common, dba PRL Joliet (LESSEE) Cryenco Sciences, Inc. PROPERTY ADDRESS: 3811 Joliet Street, Denver, Colorado Paragraph ________ A. OPTION(S) TO EXTEND: Lessor hereby grants lessee the option to extend the term of this Lease for 2 additional 60 month period(s) commencing when the prior term expires upon each and all of the following terms and conditions: (i) Lessee gives to Lessor, and Lessor actually receives on a date which is prior to the date that the option period would commence (if exercised) by at least 6 and not more than 9 months, a written notice of the exercise of the option(s) to extend this Lease for said additional term(s), time being of essence. If said notification of the exercise of said option(s) is (are) not so given and received, the option(s) shall automatically expire; said option(s) may (if more than one) only be exercised consecutively; (ii) The provisions of paragraph 39, including the provision relating to default of Lessee set forth in paragraph 39.4 of this Lease and conditions of this Option; (iii) All of the terms and conditions of this Lease except where specifically modified by this option shall apply; (iv) The monthly rent for each month of the option period shall be calculated as follows, using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately) [X] 1. COST OF LIVING ADJUSTMENT(S) (COL) (a) On (Fill in COL Adjustment Date(s): the commencement date of the first option period and every two (2) years thereafter, monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): CPI W (Urban Wage Earners and Clerical Workers) or |X| CPI U (All Urban , Consumers), for (Fill in Urban Area): the City and County of Denver, Colorado, All Items (1982-1984 = 100), herein referred to as "C.P.I." The same minimum and maximum parameters for calculation of the CPI increases provided for in the original term, Addendum A, Paragraph I(1) shall be applicable for all option periods. (b) The monthly rent payable in accordance with paragraph A1(a) above of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month 2 (two) months prior to the month(s) specified in paragraph A1(a) above during which the adjustment is to take effect, and the denominator of which shall be the C.P.I. of the calendar month which is two (2) months prior to (select one): [X] the first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month") or (Fill in other "Base Month"): ______________________. The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the date for rent adjustment. (c) In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitrators shall be paid equally by Lessor and Lessee. B. NOTICE: Unless specified otherwise herein, notice of any escalation's other than Fixed Rental Adjustments shall be made as specified in paragraph 23 of the attached Lease. C. BROKER'S FEE: 15 The Real Estate Brokers specified in paragraph 1.10 of the attached Lease shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the attached Lease. Initials: ________________ Initials: _________________ ________________ _________________ OPTION(S) TO EXTEND PAGE 2 OF 2 NOTICE: These forms are often modified to meet changing requirements of law and Industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 345 South Figueroa Street, Suite M-1 Los Angeles, CA 90071. (213) 687-8777. Fax No. (213) 687-8616. 16 EXHIBIT "B"
- --------------------------------------------------------------------------------------------------------------- NFPA RATINGS -------------------------------------------------------------- PRODUCT CAS # TYPE HEALTH FLAMMABILITY REACTIVITY OTHER - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Nitric Acid 7697-37-2 ACID 3 0 0 CORR - --------------------------------------------------------------------------------------------------------------- Ethylene Glycol 107-21-1 COOLENT 2 0 0 - --------------------------------------------------------------------------------------------------------------- LNG 8006-14-2 CRYOGENIC 1 4 0 - --------------------------------------------------------------------------------------------------------------- Nitrogen, Liquid 7727-37-9 CRYOGENIC 3 0 0 - --------------------------------------------------------------------------------------------------------------- SKC-NF Cleaner DYE 0 0 0 - --------------------------------------------------------------------------------------------------------------- SKD-NF Developer DYE 0 0 0 - --------------------------------------------------------------------------------------------------------------- SKL-HF/S Penetrant DYE 0 0 0 - --------------------------------------------------------------------------------------------------------------- Steel Blue, DX-100 DYE 0 0 0 - --------------------------------------------------------------------------------------------------------------- Steel Blue, SP-100 DYE 0 0 0 - --------------------------------------------------------------------------------------------------------------- Fuel Oil 000126-00-0 FUEL 2 2 0 - --------------------------------------------------------------------------------------------------------------- Fuel Oil, #2-D 000169-00-0 FUEL 2 2 0 - --------------------------------------------------------------------------------------------------------------- Gas/Oil Blend 64741-44-2 FUEL 2 2 0 - --------------------------------------------------------------------------------------------------------------- Gasoline 8006-61-9 FUEL 1 3 0 - --------------------------------------------------------------------------------------------------------------- Kerosene 8008-20-6 FUEL 1 2 0 - --------------------------------------------------------------------------------------------------------------- Acetylene GAS 0 0 0 - --------------------------------------------------------------------------------------------------------------- Air, Compressed 000016-00-0 GAS 0 0 0 - --------------------------------------------------------------------------------------------------------------- Ar+1 Gas Mix GAS 0 0 0 - --------------------------------------------------------------------------------------------------------------- Ar+2 Gas Mix GAS 0 0 0 - --------------------------------------------------------------------------------------------------------------- Argon 7440-37-1 GAS 0 0 0 - --------------------------------------------------------------------------------------------------------------- Blueshield #1 GAS 0 0 0 #3, (Ari in HE) - --------------------------------------------------------------------------------------------------------------- Blueshield #4, GAS 0 0 0 #5 (02 in AR) - --------------------------------------------------------------------------------------------------------------- Carbon Dioxed 124-38-9 GAS 1 0 0 - --------------------------------------------------------------------------------------------------------------- Carbon Monoxide 630-08-0 GAS 3 3 0 - --------------------------------------------------------------------------------------------------------------- Helium GAS 0 0 0 - --------------------------------------------------------------------------------------------------------------- Nitrogen 7727-37-9 GAS 0 0 0 - --------------------------------------------------------------------------------------------------------------- O2 +1 Gas Mix GAS 0 0 0 - --------------------------------------------------------------------------------------------------------------- Oxygen 7782-44-7 GAS 0 0 0 OXY - --------------------------------------------------------------------------------------------------------------- Propane 115-07-1 GAS 0 4 1 - --------------------------------------------------------------------------------------------------------------- Dicaperl INSULATION 0 0 0 - --------------------------------------------------------------------------------------------------------------- Persolite INSULATION 0 0 0 - --------------------------------------------------------------------------------------------------------------- ATF LUBRICANT 0 0 0 - --------------------------------------------------------------------------------------------------------------- Bel-Ray FC-1245 LUBRICANT 0 0 0 Grease - --------------------------------------------------------------------------------------------------------------- Cutting Fluid LUBRICANT 0 0 0 - --------------------------------------------------------------------------------------------------------------- High Vacuum LUBRICANT 0 0 0 Grease - --------------------------------------------------------------------------------------------------------------- Hydraulic Oil LUBRICANT 0 0 0 - --------------------------------------------------------------------------------------------------------------- Kyrotox, 240 LUBRICANT 1 0 0 series Grease - --------------------------------------------------------------------------------------------------------------- Lubriplate 1200-2 LUBRICANT 0 0 0 Grease - --------------------------------------------------------------------------------------------------------------- Lubriplate 630-2 LUBRICANT 0 0 0 Grease - --------------------------------------------------------------------------------------------------------------- Motor Oil 000034-00-0 LUBRICANT 2 1 0 - --------------------------------------------------------------------------------------------------------------- Trim Sol LUBRICANT 0 0 0 - --------------------------------------------------------------------------------------------------------------- WD-40 LUBRICANT 2 2 0 - --------------------------------------------------------------------------------------------------------------- Paint PAINT 0 0 0 - --------------------------------------------------------------------------------------------------------------- Paint Related PAINT 0 0 0 Products - --------------------------------------------------------------------------------------------------------------- Epoxy Thinner SOLVENT 0 0 0 - --------------------------------------------------------------------------------------------------------------- Isopropyl 67-63-0 SOLVENT 2 3 0 Alcohol 99% - --------------------------------------------------------------------------------------------------------------- MEK 78-93-3 SOLVENT 2 3 0 - --------------------------------------------------------------------------------------------------------------- Trichloroethylene79-01-6 SOLVENT 3 3 0 - ---------------------------------------------------------------------------------------------------------------
17 EX-21 3 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Jurisdiction Subsidiary of Incorporation or Organization - ---------- ---------------------------------- Cryenco Inc., a wholly owned subsidiary of the Registrant Colorado Cryomex S.A. de C.V. 50% owned by the Registrant Mexico Cryenex, Inc., a wholly owned subsidiary of the Registrant Delaware Applied LNG Technologies USA by Cryenex, Inc. Delaware EX-23 4 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. -33-65864) pertaining to the 1992 Employee Incentive and Non-Qualified Stock Option Plan and 1993 Non-Employee Director Stock Option Program of Cryenco Sciences, Inc., and the Registration Statement (Form S-8 No. -333-1379) pertaining to the 1995 Incentive and Non-Qualified Stock Option Plan of Cryenco Sciences, Inc., of our report dated October 5, 1996, with respect to the consolidated financial statements and schedule of Cryenco Sciences, Inc. included in the Annual Report (Form 10-K) for the year ended August 31, 1996. ERNST & YOUNG LLP Denver, Colorado November 25, 1996 EX-27 5 EXHIBIT 27
5 THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED AUGUST 31, 1996 1,000 YEAR Aug-31-1996 Aug-31-1996 111 0 6,787 12 4,333 15,220 7,325 3,099 25,704 5,397 0 70 0 1 11,602 25,704 31,259 31,259 24,898 24,898 4,426 0 944 983 363 620 0 93 0 527 .06 .06
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