-----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, GSO27/sgTRtm1TNcgL9lBzkx1jXy9j5WblYb7ON85YZj8+FwYn0kuqspi4l7nRXy /iVL9LtTp+GHMzf0M5pjXg== 0000897101-97-001268.txt : 19971216 0000897101-97-001268.hdr.sgml : 19971216 ACCESSION NUMBER: 0000897101-97-001268 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19971215 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ULTRA PAC INC CENTRAL INDEX KEY: 0000813134 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 411581031 STATE OF INCORPORATION: MN FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18252 FILM NUMBER: 97738344 BUSINESS ADDRESS: STREET 1: 21925 INDUSTRIAL BLVD CITY: ROGERS STATE: MN ZIP: 55374 BUSINESS PHONE: 6124288340 MAIL ADDRESS: STREET 1: 21925 INDUSTRIAL BLVD CITY: ROGERS STATE: MN ZIP: 55374 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q _X_ Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended: October 31, 1997 ___ Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Transition Period From _______________to _______________ Commission File Number: 0-18252 ULTRA PAC, INC. (Exact name of Registrant as specified in its Charter) Minnesota 41-1581031 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification number) 21925 Industrial Boulevard, Rogers, Minnesota 55374 (Address of principal executive offices) Zip Code (612) 428-8340 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. _X_ Yes ___ No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock No Par Value 3,878,165 Class of Common Stock Shares outstanding as of November 19, 1997 ULTRA PAC, INC. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets as of October 31, 1997 and January 31, 1997 3 Statements of Operations for the three and nine months ended October 31, 1997 and 1996 5 Statements of Cash Flows for the nine months ended October 31, 1997 and 1996 6 Notes to Interim Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 17 Ultra Pac, Inc. BALANCE SHEETS ASSETS October 31, January 31, 1997 1997 ----------- ----------- (unaudited) CURRENT ASSETS Cash $ 399,726 $ 663,072 Accounts receivable Trade, less allowance for doubtful receivables and sales discounts of $318,439 and $312,854 at October 31 and January 31, 1997, respectively 4,285,792 3,422,970 Refundable sales taxes 25,603 22,335 Inventories Raw materials 1,792,434 1,783,640 Work in process 1,550,012 1,379,856 Finished goods 4,263,117 3,708,934 Deferred income taxes 1,637,000 1,822,000 Other current assets 211,569 216,086 ----------- ----------- Total current assets 14,165,253 13,018,893 PROPERTY, EQUIPMENT AND IMPROVEMENTS Building and improvements 3,492,768 3,492,768 Manufacturing equipment and tooling 22,969,052 21,957,017 Extrusion equipment 12,376,870 12,355,550 Other equipment and furnishings 1,213,429 1,029,281 Leasehold improvements 987,896 957,738 ----------- ----------- 41,040,015 39,792,354 Less accumulated depreciation and amortization 15,896,755 12,851,061 ----------- ----------- 25,143,260 26,941,293 Deposits on manufacturing equipment 535,692 -- Land 737,317 737,317 ----------- ----------- 26,416,269 27,678,610 OTHER Security deposits 509,562 499,186 Leasehold costs less accumulated amortization of $66,917 and $48,667 at October 31 and January 31, 1997, respectively 298,083 316,333 Investments in affiliates 166,115 232,350 Other 183,142 283,215 ----------- ----------- 1,156,902 1,331,084 ----------- ----------- $41,738,424 $42,028,587 =========== =========== See accompanying notes to interim financial statements. Ultra Pac, Inc. BALANCE SHEETS - CONTINUED LIABILITIES AND SHAREHOLDERS' EQUITY October 31, January 31, 1997 1997 ----------- ----------- (unaudited) CURRENT LIABILITIES Current maturities of long-term obligations $ 5,129,668 $ 4,819,961 Accounts payable - principally trade 3,907,558 5,838,416 Accrued liabilities Compensation 1,320,872 1,140,975 Interest and other 1,038,310 883,638 Income taxes payable 199,645 65,465 ----------- ----------- Total current liabilities 11,596,053 12,748,455 LONG-TERM OBLIGATIONS, less current maturities 12,604,583 15,977,599 DEFERRED INCOME TAXES 2,360,000 1,775,000 SHAREHOLDERS' EQUITY Common stock - authorized, 10,000,000 shares of no par value; issued and outstanding, 3,877,165 and 3,814,015 at October 31 and January 31, 1997, respectively 8,011,208 7,784,972 Additional contributed capital 1,445,057 1,360,334 Retained earnings 5,721,523 2,382,227 ----------- ----------- 15,177,788 11,527,533 ----------- ----------- $41,738,424 $42,028,587 =========== =========== See accompanying notes to interim financial statements. Ultra Pac, Inc. STATEMENTS OF OPERATIONS (unaudited)
Three months ended Nine months ended October 31, October 31, ---------------------------- ---------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Net sales $ 15,142,835 $ 14,305,170 $ 47,499,141 $ 49,035,997 Cost of goods sold 9,334,147 9,147,884 28,674,116 34,283,065 ------------ ------------ ------------ ------------ Gross profit 5,808,688 5,157,286 18,825,025 14,752,932 Operating expenses Marketing and sales 3,308,483 2,488,893 9,723,744 8,085,185 Administrative 814,395 752,399 2,386,802 2,073,649 ------------ ------------ ------------ ------------ 4,122,878 3,241,292 12,110,546 10,158,834 ------------ ------------ ------------ ------------ Operating profit 1,685,810 1,915,994 6,714,479 4,594,098 Other income (expense) Interest expense (379,369) (613,611) (1,336,452) (1,888,331) Write down of recycling equipment -- (50,000) -- (509,638) Equity in net loss of affiliate -- (42,635) (66,235) (69,635) Other (12,548) (109,675) 42,504 (334,920) ------------ ------------ ------------ ------------ (391,917) (815,921) (1,360,183) (2,802,524) ------------ ------------ ------------ ------------ Earnings before income taxes 1,293,893 1,100,073 5,354,296 1,791,574 Income tax provision 470,000 423,000 2,015,000 716,000 ------------ ------------ ------------ ------------ NET EARNINGS $ 823,893 $ 677,073 $ 3,339,296 $ 1,075,574 ============ ============ ============ ============ Earnings per common share $ 0.20 $ 0.18 $ 0.83 $ 0.28 ============ ============ ============ ============ Weighted average number of shares outstanding 4,086,532 3,795,364 4,031,140 3,784,700 ============ ============ ============ ============
See accompanying notes to interim financial statements. Ultra Pac, Inc. STATEMENTS OF CASH FLOWS (unaudited)
Nine months ended October 31, -------------------------- 1997 1996 ----------- ----------- Increase (Decrease) in Cash Cash flows provided by operating activities Net earnings $ 3,339,296 $ 1,075,574 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 3,125,194 3,148,328 Amortization of warrants 43,589 48,430 Non cash compensation to employees 28,125 54,325 Write down of equipment -- 509,638 Gain on sale of equipment, net (250) (31,540) Equity in net loss of affiliates 66,235 69,635 Net deferred income taxes 770,000 644,000 Change in operating assets and liabilities: Accounts receivable (866,090) 2,591,541 Inventories (733,133) 2,454,247 Other current assets 4,517 15,248 Accounts payable (1,930,858) (3,981,990) Accrued liabilities 385,825 (73,245) Income taxes payable 134,180 32,465 ----------- ----------- Net cash provided by operating activities 4,366,630 6,556,656 Cash flows from investing activities Capital expenditures (1,846,353) (236,014) Proceeds from sale of assets 2,000 215,000 Security deposits and other 46,108 (15,104) ----------- ----------- Net cash used in investing activities (1,798,245) (36,118) Cash flows from financing activities Bank overdraft -- 216,403 Proceeds from long-term obligations -- 2,600,000 Principal payments under long term obligations (3,063,309) (9,694,147) Exercise of stock options 231,578 11,800 ----------- ----------- Net cash used in financing activities (2,831,731) (6,865,944) Net change in cash (263,346) (345,406) Cash at beginning of period 663,072 345,906 ----------- ----------- Cash at end of period $ 399,726 $ 500 =========== ===========
See accompanying notes to interim financial statements. Ultra Pac, Inc. NOTES TO INTERIM FINANCIAL STATEMENTS October 31, 1997 (unaudited) (1) Basis of Presentation The interim financial statements presented herein are unaudited, but in the opinion of management reflect all adjustments necessary for a fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. Information as of January 31, 1997, was taken from the Company's Annual Report on Form 10-K for the year ended January 31, 1997. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended January 31, 1997. (2) Shareholders' Equity The following table summarizes stock option activity for the nine months ended October 31, 1997:
Outside Grant Expiration Exercise Total 1996 1991 Directors Recipient Date Date Price Shares Plan Plan Plan Other -------------- ---------- --------------- --------- ---------- --------- -------- ---------- --------- OPTIONS OUSTANDING AS OF JANUARY 31, 1997 361,500 145,500 66,500 14,500 135,000 GRANTED COO March 1997 March 2002 $ 5.63 25,000 (1) - 25,000 - - Directors June 1997 June 2002 6.88 3,000 - - 3,000 - CEO July 1997 July 2002 9.25 20,000 20,000 - - - CFO July 1997 July 2002 9.25 10,000 10,000 - - - EXPIRED OR FORFEITED CFO - - - (2,000) - (2,000) Employees - - - (4,000) - (4,000) - - EXERCISED Employees - - 2.75-7.50 (44,350) (43,350) (1,000) - - -------- -------- ------- ------- ------- OPTIONS OUTSTANDING AS OF OCTOBER 31, 1997 369,150 132,150 84,500 17,500 135,000 ======== ======== ======= ======= ======= OPTIONS EXERCISABLE AS OF OCTOBER 31, 1997 284,150 122,150 84,500 17,500 60,000 ======== ======== ======= ======= ======
(1) Incentive stock option. At the time of employment, the Company's new Chief Operating Officer was issued compensation in the form of 5,000 shares of the Company's common stock. Ultra Pac, Inc. NOTES TO INTERIM FINANCIAL STATEMENTS October 31, 1997 (unaudited) (3) Recently Issued Accounting Standard During February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share." This pronouncement provides a different method of calculating earnings per share than is currently used in accordance with APB No. 15, "Earnings per Share." SFAS 128 provides for the calculation of basic and dilutive earnings per share. Basic earnings per share include no dilution and are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Dilutive earnings per share reflect the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share. SFAS 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997, and early adoption is not permitted. When adopted, the statement will require restatement of prior years' earnings per share. The Company will adopt this statement for its fourth quarter and year ending January 31, 1998. Assuming that SFAS 128 had been implemented, basic earnings per share would have been $.21 per share for the three months ended October 31, 1997, versus primary earnings per share of $.20 per share, as reported, and $.87 per share for the nine months ended October 31, 1997, versus primary earnings per share of $.83, as reported. Dilutive earnings per share would have been the same as reported primary earnings per share for the three and nine months ended October 31, 1997 and 1996. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Information THE FOLLOWING DISCUSSION CONTAINS CERTAIN STATEMENTS WHICH REFLECT THE COMPANY'S CURRENT EXPECTATIONS REGARDING FUTURE RESULTS OF OPERATIONS AND PERFORMANCE. WHEN USED IN THIS REPORT, THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS" AND OTHER SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER SIGNIFICANTLY FROM THOSE SET FORTH IN SUCH STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AS WELL AS ELSEWHERE IN THIS DOCUMENT AND IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY IS NOT OBLIGATED TO UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT NEW EVENTS OR CIRCUMSTANCES. Background Ultra Pac, Inc. designs, manufactures, markets and sells plastic containers and packaging to the food industry, including supermarkets, distributors of food packaging, wholesale bakery companies, fruit and vegetable growers, delicatessens, processors and retailers of prepared foods, and foodservice providers. The Company's packaging is primarily made from virgin and recycled polyethylene terephthalate ("PET") which the Company extrudes into plastic sheet and thermoforms into various shapes. Management believes that future sales and earnings could be affected by various factors. These include: supply and demand for PET raw material (including both virgin and recycled material) and the resulting impact on the Company's raw material costs; competitive pressures in the marketplace for the Company's products both from existing competitors and new entrants into the market place and from competitors who use lower-cost non-PET resins such as OPS (oriented polystyrene); weather conditions during the growing season of fresh produce and the resulting impact on the demand for plastic packaging, principally during the Company's first, second and third quarters; the Company's ability to estimate future sales and react to any significant unforeseen increases or decreases in sales and the impact on its fixed overhead cost structure including the possible need for significant capital expenditures; the cost and availability of suitably skilled employees; and the cost, availability and amount of debt financing. Results of Operations The following table sets forth, for the periods indicated, information derived from the Statements of Operations of the Company expressed as a percentage of net sales. Three Months Ended Nine Months Ended October 31, October 31, ------------- ------------- 1997 1996 1997 1996 ----- ----- ----- ----- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 61.7 64.0 60.4 69.9 ----- ----- ----- ----- Gross profit 38.3 36.0 39.6 30.1 Operating expenses Marketing and sales 21.8 17.4 20.5 16.5 Administrative 5.4 5.3 5.0 4.2 ----- ----- ----- ----- 27.2 22.7 25.5 20.7 ----- ----- ----- ----- Operating Profit 11.1 13.3 14.1 9.4 Other income (expense) Interest expense and other 2.6 5.4 2.9 4.7 Write down of recycling equipment -- 0.1 -- 1.0 ----- ----- ----- ----- 2.6 5.5 2.9 5.7 ----- ----- ----- ----- Earnings before taxes 8.5 7.8 11.2 3.7 Income tax provision 3.1 3.0 4.2 1.5 ----- ----- ----- ----- NET EARNINGS 5.4% 4.8% 7.0% 2.2% ===== ===== ===== ===== Net Sales: Net sales increased 5.9% from $14,305,170 to $15,142,835 for the three months ended October 31, 1997, as compared to the three months ended October 31, 1996, and decreased 3.1% from $49,035,997 to $47,499,141 for the nine months ended October 31, 1997, as compared to the nine months ended October 31, 1996. The increase in net sales for the third quarter was primarily due to strong sales of the Company's line of bakery containers, and to a lesser degree, food service products as well as the sale of plastic sheet to others. The above were offset in part by a decline in the sale of produce containers, and to a lesser degree, the sale of deli containers. The decrease in net sales during the nine months ended October 31, 1997, was primarily due to a decline in sales of the Company's produce containers, and to a lesser degree, its line of deli containers. While produce container sales in the first quarter were negatively impacted by the publicity surrounding the hepatitis alert related to frozen strawberries, sales of these containers have remained soft through the second and third quarters due to the Company's pricing and marketing strategies and market conditions. To be more competitive in the produce marketplace and to better serve its existing customers, the Company is establishing local warehousing and labeling facilities for its produce products in the growing regions of Florida and California during the fourth quarter of fiscal 1998 and the first quarter of fiscal 1999, respectively. In addition, the Company's sales were impacted by lower selling prices for its products, resulting from lower material costs throughout the industry. The above sales declines were offset in part by an increase in unit volume sales of the Company's line of bakery containers, and to a lesser degree, sales of food service containers and the sale of plastic sheet to others. The Company expects sales to increase slightly in the fourth quarter of fiscal 1998, as compared to the prior year, primarily as a result of continued strong sales of its bakery containers. In addition, the Company expects its sales to increase in fiscal 1999, as compared to fiscal 1998, as a result of strong bakery container sales and improved sales to the produce markets due to the establishment of its warehousing and labeling facilities in those markets. Gross Profit: Gross profit margins improved from 36.0% to 38.3% for the three months ended October 31, 1997, as compared to the three months ended October 31, 1996, and from 30.1% to 39.6% for the nine months ended October 31, 1997, as compared to the nine months ended October 31, 1996. The improvement in gross profit margins can be primarily attributed to lower prices of raw materials and, to a lesser extent, the sale of plastic sheet to others. Prices for virgin PET resin and recycled material declined dramatically during the second, third and fourth quarters of fiscal 1997, due in part, to increased capacity of refiners and lower market prices for paraxylene, a major component of PET resins. While these prices have increased slightly in fiscal 1998, material prices continue to remain near historic lows for the Company. The Company has a resin supply agreement through December 31, 1997, which provides for pricing to float with market conditions, subject to limits on the amount by which prices may increase, with no limit on price decreases. Under the current agreement, the Company is required to purchase minimum resin quantities which represent a major portion of its virgin PET resin needs. The Company is currently paying the maximum price allowable under this agreement. The Company is currently negotiating an agreement with this supplier for 1998. Since the installation of its fifth and sixth extrusion lines in fiscal 1996, the Company has been able to supply all its PET sheet needs. The cost of plastic sheet extruded by the Company has been significantly lower than the cost of plastic sheet purchased from outside sources. At various times, the Company's production requirements for plastic sheet have been less than its full production capacity. As a result of this excess capacity, the Company has also been extruding plastic sheet for other manufacturing firms. The Company expects that the above factors will continue to have a favorable impact on its gross margins as compared to the prior year. However, because sales for the last half of the year are expected to be lower than the first half of the year, and because its fixed overhead costs are relatively constant, the Company expects its gross margin percentage to decline slightly from the first half level. Gross margins have increased significantly in fiscal 1998 as compared to the same periods of fiscal 1997. The Company does not anticipate significant changes to gross margins during fiscal 1999 as compared to fiscal 1998. Operating Expenses: Marketing and sales expense increased from $2,488,893, or 17.4% of net sales, to $3,308,483, or 21.8% of net sales, during the three months ended October 31, 1997, as compared to the three months ended October 31, 1996, and increased from $8,085,185, or 16.5% of net sales, to $9,723,744, or 20.5% of net sales, during the nine months ended October 31, 1997, as compared to the nine months ended October 31, 1996. The increase was primarily attributable to increased freight costs and commissions, expressed in terms of both dollars and as a percentage of sales. The increase in commission expense resulted from an increase in commission rates, effective February 1997. Marketing and sales expense also increased as a result of the hiring of a Director of Sales and additional sales and marketing personnel primarily during the fourth quarter of fiscal 1997. The Company anticipates increases in marketing and sales expense during fiscal 1999 as compared to fiscal 1998, primarily due to operating costs related to the establishment of warehousing facilities in California and Florida. In October 1997, the Company signed a 10 year lease agreement for a 110,000 square foot warehouse facility in California. The minimum annual payments under this lease are $543,168 during years one through five and $602,784 during years six through ten. However, with the anticipation of increased sales in fiscal 1999, the Company expects sales and marketing expense, as a percentage of sales, to decline. Administrative expense increased from $752,399, or 5.3% of net sales, to $814,395, or 5.4% of net sales, during the three months ended October 31, 1997, as compared to the three months ended October 31, 1996, and increased from $2,073,649, or 4.2% of net sales, to $2,386,802, or 5.0% of net sales, during the nine months ended October 31, 1997, as compared to the nine months ended October 31, 1996. The increase was due primarily to an increase in depreciation expense resulting from a reduction in the estimated useful lives of the Company's computer hardware and software. The Company is currently implementing a new information system, which it expects to be completed during the first quarter of fiscal 1999. In addition, administrative salaries increased, as a result of the hiring of a Director of Management Information Systems and other administrative support personnel, primarily during the last half of fiscal 1997. Employee benefit costs also increased resulting from the reinstatement of the Company's practice of partially matching employee contributions to its 401(k) plan. Interest Expense and Other: Interest expense decreased from $613,611, or 4.3% of net sales, to $379,369, or 2.5% of net sales, for the three months ended October 31, 1997, as compared to the three months ended October 31, 1996, and decreased from $1,888,331, or 3.9% of net sales, to $1,336,452, or 2.8% of net sales, for the nine months ended October 31, 1997, as compared to the nine months ended October 31, 1996. The decrease was principally due to lower debt levels as well as lower interest rates. The Company anticipates a decrease in interest expense, expressed in terms of both dollars and as a percentage of sales, for the remainder of fiscal 1998, as compared to fiscal 1997, for the same reasons. In the second and third quarters of fiscal 1997, the Company recorded other expense of $509,638, resulting from the writedown of its recycling equipment to its net realizable value. Inflation: The Company believes inflation has not significantly affected its results of operations. Liquidity and Capital Resources Because the Company's business is highly capital intensive, it has traditionally relied heavily on bank and other debt financing to fund its capital requirements. While the Company expects to continue to rely on bank and other debt financing, it anticipates that its debt levels will continue to decrease slightly during fiscal 1998 due to its improved operating performance. As of October 31, 1997, the Company had borrowed $3,751,514 under its $8,000,000 revolving credit facility, leaving $4,248,486 potentially available. Pursuant to the Company's borrowing base formula, $3,870,714 of the $4,248,486 was available at October 31, 1997. In February 1997, the Company amended its credit facility and term note with its principal lender to reduce the interest rate differentials on its revolving credit facility and term note by one percentage point, to extend the maturity dates of both to May 31, 1999, and to reduce the amount available under the revolving credit facility by $1,500,000 to $8,000,000, reflecting the Company's decreased credit needs. During the nine months ended October 31, 1997, the Company has repaid $415,600 of deferred principal payments required under an April 1996 amended equipment note with one of its equipment lenders. The Company may be required to make additional payments, up to an aggregate maximum of $600,000, in advance of scheduled maturities on this note, dependent upon availability under the Company's revolving credit facility as determined on January 31 and April 30, 1998. The Company believes its existing revolving credit facility is adequate to support its operations through the term of such facility. Working capital increased from $270,438 on January 31, 1997, to $2,569,200 on October 31, 1997. This increase is primarily due to a decrease in accounts payable and increases in accounts receivable, inventories and deferred taxes, partially offset by increases in current maturities of long-term obligations and accrued liabilities. Accounts payable decreased from $5,838,416 on January 31, 1997, to $3,907,558 on October 31, 1997. Accounts receivable increased from $3,422,970 on January 31, 1997, to $4,285,792 on October 31, 1997. Inventories increased from $6,872,430 on January 31, 1997, to $7,605,563 on October 31, 1997. For the nine months ended October 31, 1997, $4,366,630 of cash was provided by operating activities as compared to $6,556,656 for the nine months ended October 31, 1996. The decrease was primarily due to increases in accounts receivable and inventories, and a decrease in accounts payable, partially offset by improved earnings. As of October 31, 1997, the Company had outstanding capital commitments of $2,988,000 for thermoforming equipment, molds, computer hardware and software and other equipment, and was reviewing $390,000 of additional capital expenditures. The Company anticipates that capital expenditures for fiscal 1998 will be approximately $3,000,000, as compared to $570,000 incurred in fiscal 1997. The Company believes the current level of production equipment and facilities, including its planned distribution facilities in California and Florida, plus the committed capital expenditures, should be sufficient to meet anticipated fiscal 1998 and 1999 requirements. The fiscal 1998 and 1999 expenditures will be financed from funds available through the Company's credit facility, capital expenditure term note facility and funds generated from operations. Seasonality of Sales and Operating Profits Historically, the Company's sales were highest during the third quarter and declined in the fourth quarter. Since the introduction of its line of produce containers during 1992, the percentage of the Company's sales occurring during the first two quarters has progressively increased and the Company expects this trend to continue. Because the Company's sales have historically declined during the fourth quarter while its fixed overhead costs have remained relatively constant, the Company's gross margins and operating profit have generally been lowest during the fourth quarter. The introduction of the Company's line of produce containers in 1992 has also impacted the third quarter gross margins and operating profit. Prices for virgin PET resin and recycled material increased significantly during fiscal 1996 and declined significantly in fiscal 1997, however the Company believes that as refiners have continued to expand capacity, the supply of PET has exceeded the increase in demand and there is a more stable pricing environment. As a result, the relationship of gross margins from quarter to quarter should be more consistent with historical results. PART II OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits: 10.1 Lease Agreement with The Centurion Corporation, dated October 20, 1997 for Lot 26, Bert Drive, Hollister Business Park, Hollister, California 27 Financial Data Schedule (b) Reports on Form 8-K: None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATED: December 15, 1997 ULTRA PAC, INC. By: /s/ Calvin Krupa Calvin Krupa Its: President and Chief Executive Officer /s/ Bradley Yopp Bradley Yopp Chief Financial Officer EX-10.1 2 LEASE AGREEMENT ARTICLE ONE: BASIC TERMS. This Article One contains the Basic Terms of this Lease between the Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the Lease referred to in this Article One explain and define the Basic Terms and are to be read in conjunction with the Basic Terms. Section 1.01. Date of Lease Execution: 10/20/97 Section 1.02. Landlord (include legal entity): The Centurion Corporation and Oceanic Corporation Address of Landlord: 8413 Jackson Road, Suite C, Sacramento, CA 95826 Section 1.03. Tenant (include legal entity): Ultra Pac, Inc. Address of Tenant: 21925 Industrial Blvd. Rogers, MN 55374-9575 Section 1.04. Property (include street address, approximate square footage and description): See Attached Exhibit "A" for a description of that portion of Lot 26 on Bert Drive in the Hollister Business Park, Hollister, California and Attached Exhibit "B" for the Building Specifications. Section 1.05. Lease Term: 10 years 0 months beginning on March 1, 1998 or Tenant's occupancy, whichever is later. Section 1.06. Permitted Uses (See Article Five): Storage and manufacture of Tenant's Products including raw materials. Section 1.07. Tenant's Guarantor (if none, so state): None Section 1.08. Brokers (See Article fourteen) (if none, so state): Landlord's Broker: None Tenant's Broker: None Section 1.09. Commission Payable to Landlord's Broker (See Article Fourteen): $ N/A Section 1.10. Initial Security Deposit (See Section 3.03): $41,000.00 Section 1.11. Vehicle Parking Spaces Allocated to Tenant: N/A Section 1.12. Rent and Other Charges Payable by Tenant: (a) BASE RENT: See Addendum. (b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.02); (ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section 4.04); (iv) Impounds for Insurance Premiums and Property Taxes (See Section 4.07); (v) Management Fees (see Section 4.08); (vi) Maintenance, Repairs and Alterations (See Article Six). Section 1.13. Landlord's Share of Profit on Assignment or Sublease (See Section 9.05): Fifty percent (50%) of the profit (the "Landlord's Share"). Section 1.14. Riders: The following Riders are attached to and made a part of this Lease (if none, so state): Addendum ARTICLE TWO. LEASE TERM. Section 2.01. Lease of Property for Lease Term. Landlord leases the Property to Tenant and Tenant leases the Property from Landlord for the Lease Term. The Lease Term is for the period stated in Section 1.05 above and shall begin and end on the dates specified in Section 1.05 above, unless the beginning or end of the Lease Term is changed under any provision of this Lease. The "Commencement Date" shall be the date specified in Section 1.05 above for the beginning of the Lease Term, unless advanced or delayed under any provision of this Lease. Section 2.02. Delay in Commencement. Landlord shall not be liable to Tenant if Landlord does not deliver possession of the Property to Tenant on the Commencement Date. Landlord's non-delivery of the Property to Tenant on that date shall not affect this Lease or the obligations of Tenant under this Lease except that the Commencement Date shall be delayed until Landlord delivers possession of the Property to Tenant and the Lease Term shall be extended for a period equal to the delay in delivery of possession of the Property to Tenant, plus the number of days necessary to end the Lease Term on the last day of a month. If delivery of possession of the Property to Tenant is delayed, Landlord and Tenant shall, upon such delivery, execute an amendment to this Lease setting forth the actual Commencement Date and expiration date of the Lease. Failure to execute such amendment shall not affect the actual Commencement Date and expiration date of the Lease. Section 2.03. Early Occupancy. If Tenant occupies the Property prior to the Commencement Date, Tenant's occupancy of the Property shall be subject to all of the provisions of this Lease. Early occupancy of the Property shall not advance the expiration date of this Lease. Tenant shall pay Base Rent and all other charges specified in this Lease for the early occupancy period. Section 2.04. Holding Over. Tenant shall vacate the Property upon the expiration or earlier termination of this Lease. Tenant shall reimburse Landlord for and indemnify Landlord against all damages which Landlord incurs from Tenant's delay in vacating the Property. If Tenant does not vacate the Property upon the expiration or earlier termination of the Lease and Landlord thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall be a "month-to-month" tenancy, subject to all of the terms of this Lease applicable to a month-to-month tenancy, except that the Base Rent then in effect shall be increased by twenty-five percent (25%). ARTICLE THREE: BASE RENT. Section 3.01. Time and Manner of Payment. Upon execution of this Lease, Tenant shall pay Landlord the Base Rent in the amount stated in paragraph 1.12(a) above for the first month of the Lease Term. On the first day of the second month of the Lease Term and each month thereafter, Tenant shall pay Landlord the Base Rent, in advance, without offset, deduction or prior demand. The Base Rent shall be payable at Landlord's address or at such other place as Landlord may designate in writing Section 3.03. Security Deposit; Increases. (a) Upon the execution of this Lease, Tenant shall deposit with Landlord a cash Security Deposit in the amount set forth in Section 1.10 above. Landlord may apply all or part of the Security Deposit to any unpaid rent or other charges due from Tenant or to cure any other defaults of Tenant. If Landlord uses any part of the Security Deposit, Tenant shall restore the Security Deposit to its full amount within ten (10) days after Landlord's written request. Tenant's failure to do so shall be a material default under this Lease. No interest shall be paid on the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its other accounts and no trust relationship is created with respect to the Security Deposit. Section 3.04. Termination; Advance Payments. Upon termination of this Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation) or any other termination not resulting from Tenant's default, and after Tenant has vacated the Property in the manner required by this Lease, Landlord shall refund or credit to Tenant (or Tenant's successor) the unused portion of the Security Deposit, any advance rent or other advance payments made by Tenant to Landlord, and any amounts paid for real property taxes and other reserves which apply to any time periods after termination of the Lease. ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT. Section 4.01. Additional Rent. All charges payable by Tenant other than Base Rent are called "Additional Rent." Unless this Lease provides otherwise, Tenant shall pay all Additional Rent then due with the next monthly installment of Base Rent. The term "rent" shall mean Base Rent and Additional Rent. Section 4.02. Property Taxes. (a) Real Property Taxes. Tenant shall pay all real property taxes on the Property (including any fees, taxes or assessments against, or as a result of, any tenant improvements installed on the Property by or for the benefit of Tenant) during the Lease Term. Subject to Paragraph 4.02(c) and Section 4.07 below, such payment shall be made at least ten (10) days prior to the delinquency date of the taxes. Within such ten (10) day period, Tenant shall furnish Landlord with satisfactory evidence that the real property taxes have been paid. Landlord shall reimburse Tenant for any real property taxes paid by Tenant covering any period of time prior to or after the lease Term. If Tenant fails to pay the real property taxes when due, Landlord may pay the taxes and Tenant shall reimburse Landlord for the amount of such tax payment as Additional Rent. (b) Definition of "Real Property Tax." "Real Property Tax" means: (i) any fee, license fee, license tax, business license fee, commercial rental tax, levy charge, assessment, penalty or tax imposed by any taxing authority against the Property; (ii) any tax on the Landlord's right to receive, or the receipt of, rent or income from the Property or against Landlord's business of leasing the Property; (iii) any tax or charge for fire protection, streets, sidewalks, road maintenance, refuse or other services provided to the Property by any governmental agency; (iv) any tax imposed upon this transaction or based upon a re-assessment of the Property due to a change of ownership, as defined by applicable law, or other transfer of all or part of Landlord's interest in the Property; and (v) any charge or fee replacing any tax previously included within the definition of real property tax. "Real property tax" does not, however, include Landlord's federal or state income, franchise, inheritance or estate taxes. Any special assessments which Landlord may incur by reason of development of the property are excluded. (c) Joint Assessment. If the Property is not separately assessed, Landlord shall reasonably determine Tenant's share of the real property tax payable by Tenant under Paragraph 4.02(a) from the assessor's worksheets or other reasonably available information. Tenant shall pay such share to Landlord within fifteen (15) days after receipt of Landlord's written statement. (d) Personal Property Taxes. (i) Tenant shall pay all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant. Tenant shall try to have personal property taxed separately from the Property. (ii) If any of Tenant's personal property is taxed with the Property, Tenant shall pay Landlord the taxes for the personal property within fifteen (15) days after Tenant receives a written statement from Landlord for such personal property taxes. (e) Tenant's Right to Contest Taxes. Tenant may attempt to have the assessed valuation of the Property reduced or may initiate proceedings to contest the real property taxes. If required by law, Landlord shall join in the proceedings brought by Tenant. However, Tenant shall pay all costs of the proceedings, including any costs or fees incurred by Landlord. Upon the final determination of any proceedings or contest, Tenant shall immediately pay the real property taxes due, together with all costs, charges, interest and penalties incidental to the proceedings. If Tenant does not pay the real property taxes when due and contests such taxes, Tenant shall not be in default under this Lease for nonpayment of such taxes if Tenant deposits funds with Landlord or opens an interest-bearing account reasonably acceptable to Landlord in the joint names of Landlord and Tenant. The amount of such deposit shall be sufficient to pay the real property taxes plus a reasonable estimate of the interest, costs, charges and penalties which may accrue if Tenant's action is unsuccessful, less any applicable tax impounds previously paid by Tenant to Landlord. The deposit shall be applied to the real property taxes due, as determined at such proceedings. The real property taxes shall be paid under protest from such deposit if such payment under protest is necessary to prevent the Property from being sold under a "tax sale" or similar enforcement proceeding. Section 4.03. Utilities. This building and property will be separately metered for all utility services. Tenant shall pay, directly to the appropriate supplier, the cost of all natural gas, heat, light, power, sewer service, telephone, water, refuse disposal and other utilities and services supplied to the Property. Section 4.04. Insurance Policies. (a) Liability Insurance. During the Lease Term, Tenant shall maintain a policy of commercial general liability insurance (sometimes known as broad form comprehensive general liability insurance) insuring Tenant against liability for bodily injury, property damage (including loss of use of property) and personal injury arising out of the operation, use or occupancy of the Property. Tenant shall name Landlord as an additional insured under such policy. The initial amount of such insurance shall be TWO MILLION DOLLARS ($2,000,000.00) per occurrence and shall be subject to periodic increase based upon inflation, increased liability awards, recommendation of Landlord's professional insurance advisers and other relevant factors. The liability insurance obtained by Tenant under this Paragraph 4.04(a) shall (i) be primary and non-contributing; (ii) contain cross-liability endorsements; and (iii) insure Landlord against Tenant's performance under Section 5.05, if the matters giving rise to the indemnity under Section 5.05 result from the negligence of Tenant. The amount and coverage of such insurance shall not limit Tenant's liability nor relieve Tenant of any other obligations under this Lease. Landlord may also obtain comprehensive public liability insurance in an amount and with coverage determined by Landlord insuring Landlord against liability arising out of ownership, operation, use or occupancy of the Property. The policy obtained by Landlord shall not be contributory and shall not provide primary insurance and shall be at Landlord's expense. (b) Property and Rental Income Insurance. During the Lease Term, Landlord shall maintain policies of insurance covering loss of or damage to the Property in the full amount of its replacement value. Such policy shall contain an inflation Guard Endorsement and shall provide protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (all risk), sprinkler leakage and any other perils which Landlord deems reasonably necessary. Landlord shall have the right to obtain flood insurance for Tenant's fixtures or equipment or building improvements installed by Tenant on the Property. During the Lease Term, Landlord shall also maintain a rental income insurance policy, with loss payable to Landlord, in an amount equal to one (1) year's Base Rent, plus estimated real property taxes and insurance premiums. Tenant shall be liable for the payment of any deductible amount under Landlord's or Tenant's insurance policies maintained pursuant to this section 4.04, in an amount not to exceed TWENTY-FIVE THOUSAND DOLLARS ($25,000.00). Tenant shall not do or permit anything to be done which invalidates any such insurance policies. (c) Payment of Premiums. Subject to Section 4.07, Tenant shall pay all premiums for the insurance policies described in Paragraphs 4.04(a) and (b) (whether obtained by Landlord or Tenant) within fifteen (15) days after Tenant's receipt of a copy of the premium statement or other evidence of the amount due, except Landlord shall pay all premiums for non-primary comprehensive public liability insurance which Landlord elects to obtain as provided in Paragraph 4.04(a). If insurance policies maintained by Landlord cover improvements on real property other than the Property, Landlord shall deliver to Tenant a statement of the premium applicable to the Property showing in reasonable detail how Tenant's share of the premium was computed. If the Lease Term expires before the expiration of an insurance policy maintained by Landlord, Tenant shall be liable for Tenant's prorated share of the insurance premiums. Before the Commencement Date, Tenant shall deliver to Landlord a copy of any policy of insurance which Tenant is required to maintain under this Section 4.04. At least thirty (30) days prior to the expiration of any such policy, Tenant shall deliver to Landlord a renewal of such policy as an alternative to providing a policy of insurance. Tenant shall have the right to provide Landlord a certificate of insurance, executed by an authorized officer of the insurance company, showing that the insurance which Tenant is required to maintain under this Section 4.04 is in full force and effect and containing such other information which Landlord reasonably requires. (d) General Insurance Provision. (i) Any insurance which Tenant is required to maintain under this Lease shall include a provision which requires the insurance carrier to give Landlord not less than thirty (30) days' written notice prior to any cancellation or modification of such coverage. (ii) If Tenant fails to deliver a policy, certificate or renewal to Landlord required under this Lease within the prescribed time period or if any such policy is cancelled or modified during the Lease Term without Landlord's consent, Landlord may obtain such insurance, in which case Tenant shall reimburse Landlord for the cost of such insurance within fifteen (15) days after receipt of a statement that indicates the cost of such insurance. (iii)Tenant shall maintain all insurance required under this Lease with companies holding a "General Policy Rating" of A-12 or better, as set forth in the most current issue of "Best Key Rating Guide." Landlord and Tenant acknowledge the insurance markets are rapidly changing and that insurance in the form and amounts described in this Section 4.04 may not be available in the future. Tenant acknowledges that the insurance described in this Section 4.04 is for the primary benefit of Landlord. If at any time during the Lease Term, Tenant is unable to maintain the insurance required under the Lease, Tenant shall nevertheless maintain insurance coverage which is customary and commercially reasonable in the insurance industry for Tenant's type of business, as that coverage may change from time to time. Landlord makes no representation as to the adequacy of such insurance to protect Landlord's or Tenant's interests. Therefore, Tenant shall obtain any such additional property or liability insurance which Tenant deems necessary to protect Landlord and Tenant. (iv) Unless prohibited under any applicable insurance policies maintained, Landlord and Tenant each hereby waive any and all rights of recovery against the other, or against the officers, employees, agents or representatives of the other, for loss of or damage to its property or the property of others under its control, if such loss or damage is covered by any insurance policy in force (whether or not described in this Lease) at the time of such loss or damage. Upon obtaining the required policies of insurance, Landlord and Tenant shall give notice to the insurance carriers of this mutual waiver of subrogation. Section 4.05. Late Charges. Tenant's failure to pay rent promptly may cause Landlord to incur unanticipated costs. The exact amount of such costs are impractical or extremely difficult to ascertain. Such costs may include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by any ground lease, mortgage or trust deed encumbering the Property. Therefore, if Landlord does not receive any rent payment within ten (10) days after it becomes due, Tenant shall pay to Landlord a late charge equal to ten percent (10%) of the overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of such late payment. Section 4.06. Interest on Past Due Obligations. Any amount owed by Tenant to Landlord which is not paid when due shall bear interest at the rate of fifteen percent (15%) per annum from the due date of such amount. However, interest shall not be payable on late charges to be paid by Tenant under this Lease. The payment of interest on such amounts shall not excuse or cure any default by Tenant under this Lease. If the interest rate specified in this Lease is higher than the rate permitted by law, the interest rate is hereby decreased to the maximum legal interest rate permitted by law. Section 4.07. Impounds for Insurance Premiums and Real Property Taxes. If requested by any ground lessor or lender to whom Landlord has granted a security interest in the Property, or if Tenant is more than ten (10) days' late in the payment of rent more than once in any consecutive twelve (12) month period, Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the annual real property taxes and insurance premiums payable by Tenant under this Lease, together with each payment of Base Rent. Landlord shall hold such payments in a non-interest bearing impound account. If unknown, Landlord shall reasonably estimate the amount of real property taxes and insurance premiums when due. Tenant shall pay any deficiency of funds in the impound account to any obligation then due under this Lease. ARTICLE FIVE: USE OF PROPERTY. Section 5.01. Permitted Uses. Tenant may use the Property only for the Permitted Uses set forth in Section 1.06 above. Section 5.02. Manner of Use. Tenant shall not cause or permit the Property to be used in any way which constitutes a violation of any law, ordinance, or governmental regulation or order, which annoys or interferes with the rights of other tenants of Landlord, or which constitutes a nuisance or waste. Landlord shall obtain and pay for all permits, including a Certificate of Occupancy, required for Tenant's occupancy of the Property and shall promptly take all actions necessary to comply with all applicable statutes, ordinances, rules, regulations, orders and requirements regulating the use by Tenant of the Property, including the Occupational Safety and Health Act. Section 5.03. Hazardous Materials. As used in this Lease, the term "Hazardous Material" means any flammable items, explosives, radioactive materials, hazardous or toxic substances, material or waste or related materials, including any substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials" or "toxic substances" now or subsequently regulated under any applicable federal, state or local laws or regulations, including, without limitation petroleum-based products, paints, solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonia compounds and other chemical products, asbestos, PCBs and similar compounds, and including any different products and materials which are subsequently found to have adverse effects on the environment or the health and safety of persons. Tenant shall not cause or permit any Hazardous Material to be generated, produced, brought upon, used, stored, treated or disposed of in or about the Property by Tenant, its agents, employees, contractors, or sublessees without the prior written consent of Landlord. Landlord shall be entitled to take into account such other factors or facts as Landlord may reasonably determine to be relevant in determining whether to grant or withhold consent to Tenant's proposed activity with respect to Hazardous Material. In no event, however, shall Landlord be required to consent to the installation or use of any storage tanks on the Property except for tanks used for the storage of resin used in the extrusion process. Section 5.04. Signs and Auctions. Tenant shall not place any signs on the Property without Landlord's reasonable prior written consent. Tenant shall not conduct or permit any auctions or sheriff's sales at the Property. Section 5.05. Indemnity. Tenant shall indemnify Landlord against and hold Landlord harmless from any and all costs, claims or liability arising from: (a) Tenant's use of the Property; (b) the conduct of Tenant's business or anything else done or permitted by Tenant to be done in or about the Property, including any contamination of the Property or any other property resulting from the presence or use of Hazardous Material caused or permitted by Tenant; (c) any breach or default in the performance of Tenant's obligations under this Lease; (d) any misrepresentation or breach of warranty by Tenant under this Lease; or (e) other acts or omissions of Tenant. Tenant shall defend Landlord against any such cost, claim or liability at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs incurred by Landlord in connection with any such claim. As a material part of the consideration to Landlord, Tenant assumes all risk of damage to property or injury to persons in or about the Property arising from any cause, and Tenant hereby waives all claims in respect thereof against Landlord, except for any claim arising out of Landlord's gross negligence or willful misconduct. As used in this Section, the term "Tenant" shall include Tenant's employees, agents, contractors and invitees, if applicable. Section 5.06. Landlord's Access. Landlord or its agents may enter the Property at all reasonable times and with 24 hours' notice to show the Property to potential buyers, investors or tenants or other parties; to do any other act or to inspect and conduct tests in order to monitor Tenant's compliance with all applicable environmental laws and all laws governing the presence and use of Hazardous Material; or for any other purpose Landlord deems necessary. Landlord shall give Tenant prior notice of such entry, except in the case of an emergency. Landlord may place customary "For Sale" or "For Lease" signs on the Property. Section 5.07. Quiet Possession. If Tenant pays the rent and complies with all other terms of this Lease, Tenant may occupy and enjoy the Property for the full Lease Term, subject to the provisions of this Lease. ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS. Section 6.01. Existing Conditions. Tenant accepts the Property in its condition as of the execution of the Lease, subject to all recorded matters, laws, ordinances, and governmental regulations and orders. Except as provided herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation as to the condition of the Property or the suitability of the Property for Tenant's intended use. Tenant represents and warrants that Tenant has made its own inspection of and inquiry regarding the condition of the Property and is not relying on any representations of Landlord or any Broker with respect thereto. If Landlord or Landlord's Broker has provided a Property Information Sheet or other Disclosure Statement regarding the Property, a copy is attached as an exhibit to the Lease. Section 6.02. Exemption of Landlord from Liability. Landlord shall not be liable for any damage or injury to the person, business (or any loss of income therefrom), goods, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers or any other person in or about the Property, whether such damage or injury is caused by or results from: (a) fire, steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures or any other cause; (c) conditions arising in or about the Property or upon other portions of the Project, or from other sources or places; or (d) any act or omission of any other tenant of the Project. Landlord shall not be liable for any such damage or injury even though the cause of or the means of repairing such damage or injury are not accessible to Tenant. The provisions of this Section 6.02 shall not, however, exempt Landlord from liability for Landlord's gross negligence or willful misconduct. Section 6.03. Landlord's Obligations. Subject to the provisions of Article Seven (Damage or Destruction) and Article Eight (Condemnation), Landlord shall have absolutely no responsibility to repair, maintain or replace any portion of the Property at any time. Tenant waives the benefit of any present or future law which might give Tenant the right to repair the Property at Landlord's expense or to terminate the Lease due to the condition of the Property. Landlord is responsible for maintaining and repairing structural components including exterior walls and foundation, except damages caused by Tenant's use. Section 6.04. Tenant's Obligations. (a) Except as provided in Article Seven (Damage Destruction) and Article Eight (Condemnation), Tenant shall keep all portions of the Property (including structural, nonstructural, interior, exterior, and landscaped areas, portions, systems and equipment) in good order, condition and repair (including interior repainting and refinishing, as needed). If any portion of the Property or any system or equipment in the Property which Tenant is obligated to repair cannot be fully repaired or restored, Tenant shall promptly replace such portion of the Property or system or equipment or equipment in the Property, regardless of whether the benefit of such replacement extends beyond the Lease Term; but if the benefit or useful life of such replacement extends beyond the Lease Term (as such term may be extended by exercise of any options), the useful life of such replacement shall be prorated over the remaining portion of the Lease Term (as extended), and Tenant shall be liable only for that portion of the cost which is applicable to the Lease Term (as extended). Tenant shall maintain a preventive maintenance contract providing for the regular inspection and maintenance of the heating and air conditioning system by a licensed heating and air conditioning contractor. If any part of the Property is damaged by any act or omission of Tenant, Tenant shall pay Landlord the cost of repairing or replacing such damaged property, whether or not Landlord would otherwise be obligated to pay the cost of maintaining or repairing such property. It is the intention of Landlord and Tenant that at all times Tenant shall maintain the portions of the Property which Tenant is obligated to maintain in an attractive, first-class and fully operative condition. (b) Tenant shall fulfill all of Tenant's obligations under this Section 6.04, at Tenant's sole expense. If Tenant fails to maintain, repair or replace the Property as required by this Section 6.04, Landlord may, upon thirty (30) days' prior notice to Tenant (except that no notice shall be required in the case of an emergency), enter the Property and perform such maintenance or repair (including replacement, as needed) on behalf of Tenant. In such case, Tenant shall reimburse Landlord for all costs incurred in performing such maintenance or repair immediately upon demand. Section 6.05. Alterations, Additions, and Improvements. (a) Tenant shall not make any alterations, additions, or improvements to the Property without Landlord's prior written consent, except for non-structural alterations which do not exceed Ten Thousand Dollars ($10,000.00) in cost per annum over the Lease Term and which are not visible from the outside of any building of which the Property is part. Landlord may require Tenant to provide demolition and/or lien and completion bonds in form and amount satisfactory to Landlord. Tenant shall promptly remove any alterations, additions, or improvements constructed in violation of this Paragraph 6.05(a) upon Landlord's written request. All alterations, additions, and improvements shall be done in a good and workmanlike manner, in conformity with all applicable laws and regulations, and by a contractor approved by Landlord. Upon completion of any such work, Tenant shall provide Landlord with "as built" plans, copies of all construction contracts, and proof of payment for all labor and materials. (b) Tenant shall pay when due all claims for labor and material furnished to the Property. Tenant shall give Landlord at least twenty (20) days' prior written notice of the commencement of any work on the Property, regardless of whether Landlord's consent to such work is required. Landlord may elect to record and post notices of non-responsibility on the Property. Section 6.06. Condition upon Termination. Upon the termination of the Lease, Tenant shall surrender the Property to Landlord, broom clean and in the same condition as received except for ordinary wear and tear which Tenant was not otherwise obligated to remedy under any provision of this Lease. However, Tenant shall not be obligated to repair any damage which Landlord is required to repair under Article Seven (Damage or Destruction). In addition, Landlord may require Tenant to remove any alterations, additions or improvements (whether or not made with Landlord's consent) prior to the expiration of the Lease and to restore the Property to its prior condition, all at Tenant's expense. All alterations, excluding initial alterations made and approved prior to the commencement date, additions and improvements which Landlord has not required Tenant to remove shall become Landlord's property and shall be surrendered to Landlord upon the expiration or earlier termination of the Lease, except that Tenant may remove any of Tenant's machinery or equipment and racking or similar warehouse fixtures and equipment which can be removed without material damage to the Property. Tenant shall repair, at Tenant's expense, any damage to the Property caused by the removal of any such machinery or equipment. In no event, however, shall Tenant remove any of the following materials or equipment (which shall be deemed Landlord's property) without Landlord's prior written consent; any power wiring or power panels; lighting or lighting fixtures; wall coverings; drapes, blinds or other window coverings; carpets or other floor coverings; heaters, air conditioners or any other heating or air conditioning equipment; fencing or security gates; or other similar building operating equipment and decorations. ARTICLE SEVEN: DAMAGE OR DESTRUCTION. Section 7.01. Partial Damage to Property. (a) Tenant shall notify Landlord in writing immediately upon the occurrence of any damage to the Property. If the Property is only partially damaged (i.e., less than fifty percent (50%) of the Property is untenantable as a result of such damage or less than fifty percent (50%) of Tenant's operations are materially impaired) and if the proceeds received by Landlord from the insurance policies described in Paragraph 4.04(b) are sufficient to pay for the necessary repairs, this Lease shall remain in effect and Landlord shall repair the damage as soon as reasonably possible. Landlord may elect (but is not required) to repair any damage to Tenant's fixtures, equipment, or improvements. (b) If the insurance proceeds received by Landlord are not sufficient to pay the entire cost of repair, or if the cause of the damage is not covered by the insurance policies which Landlord maintains under Paragraph 4.04(b), Landlord may elect either to (i) repair the damage as soon as reasonably possible, in which case this Lease shall remain in full force and effect, or (ii) terminate this Lease as of the date the damage occurred. Landlord shall notify Tenant within thirty (30) days after receipt of notice of the occurrence of the damage whether Landlord elects to repair the damage or terminate the Lease. If Landlord elects to repair the damage, Tenant shall pay Landlord the "deductible amount" (if any) under Landlord's insurance policies and, if the damage was due to an act or omission of Tenant, or Tenant's employees, agents, contractors or invitees, the difference between the actual cost of repair and any insurance proceeds received by Landlord. If Landlord elects to terminate the Lease, Tenant may elect to continue this Lease in full force and effect, in which case Tenant shall repair any damage to the Property and any building in which the Property is located. Tenant shall pay the cost of such repairs. except that upon satisfactory completion of such repairs, Landlord shall deliver to Tenant any insurance proceeds received by Landlord for the damage repaired by Tenant. Tenant shall give Landlord written notice of such election within ten (10) days after receiving Landlord's termination notice. (c) If the damage to the Property occurs during the last six (6) months of the Lease Term and such damage will require more than thirty (30) days to repair, either Landlord or Tenant may erect to terminate this Lease as of the date the damage occurred, regardless of the sufficiency of any insurance proceeds. The parry electing to terminate this Lease shall give written notification to the other party of such election within thirty (30) days after Tenant's notice to Landlord of the occurrence of the damage. Section 7.02. Substantial or Total Destruction. If the Property is substantially or totally destroyed by any cause whatsoever (i.e., the damage to the Property is greater than partial damage as described in Section 7.01), and regardless of whether Landlord receives any insurance proceeds, this Lease shall terminate as of the date the destruction occurred. Notwithstanding the preceding sentence, if the Property can be rebuilt within six (6) months after the date of destruction, Landlord may elect to rebuild the Property at Landlord's own expense, in which case this Lease shall remain in full force and effect. Landlord shall notify Tenant of such election within thirty (30) days after Tenant's notice of the occurrence of total or substantial destruction. If Landlord so elects, Landlord shall rebuild the Property at Landlord's sole expense, except that if the destruction was caused by an act or omission of Tenant, Tenant shall pay Landlord the difference between the actual cost of rebuilding and any insurance proceeds received by Landlord. Section 7.03. Temporary Reduction of Rent. If the Property is destroyed or damaged and Landlord or Tenant repairs or restores the Property pursuant to the provisions of this Article Seven, any rent payable during the period of such damage, repair and/or restoration shall be reduced according to the degree, if any, to which Tenant's use of the Property is impaired. Except for such possible reduction in Base Rent, insurance premiums and real property taxes, Tenant shall not be entitled to any compensation, reduction, or reimbursement from Landlord as a result of any damage, destruction, repair, or restoration of or to the Property. Section 7.04. Waiver. Tenant waives the protection of any statute, code or judicial decision which grants a tenant the right to terminate a lease in the event of the substantial or total destruction of the leased property. Tenant agrees that the provisions of Section 7.02 above shall govern the rights and obligations of Landlord and Tenant in the event of any substantial or total destruction to the Property. ARTICLE EIGHT: CONDEMNATION. If all or any portion of the Property is taken under the power of eminent domain or sold under the threat of that power (all of which are called "Condemnation"), this Lease shall terminate as to the part taken or sold on the date the condemning authority takes title or possession, whichever occurs first. If more than twenty percent (20%) of the floor area of the building in which the Property is located, or which is located on the Property, is taken, either Landlord or Tenant may terminate this Lease as of the date the condemning authority takes title or possession, by delivering written notice to the other within ten (10) days after receipt of written notice of such taking (or in the absence of such notice within ten (10) days after the condemning authority takes title or possession). If neither Landlord nor Tenant terminates this Lease, this Lease shall remain in effect as to the portion of the Property not taken, except that the Base Rent and Additional Rent shall be reduced in proportion to the reduction in the floor area of the Property. Any Condemnation award or payment shall be distributed in the following order: (a) first, to any ground lessor, mortgagee or beneficiary under a deed of trust encumbering the Property, the amount of its interest in the Property; (b) second, to Tenant, only the amount of any award specifically designated for loss of or damage to Tenant's trade fixtures or removable personal property; and (c) third, to Landlord, the remainder of such award, whether as compensation for reduction in the value of the leasehold, the taking of the fee, or otherwise. If this Lease is not terminated, Landlord shall repair any damage to the Property caused by the Condemnation, except that Landlord shall not be obligated to repair any damage for which Tenant has been reimbursed by the condemning authority. If the severance damages received by Landlord are not sufficient to pay for such repair, Landlord shall have the right to either terminate this Lease or make such repair at Landlord's expense. ARTICLE NINE: ASSIGNMENT AND SUBLETTING. Section 9.01. Landlord's Consent Required. No portion of the Property or of Tenant's interest in this Lease may be acquired by any other person or entity, whether by sale, assignment, mortgage, sublease, transfer, operation of law, or act of Tenant, without Landlord's prior written consent, except as provided in Section 9.02 below. Landlord has the right to grant or withhold its consent as provided in Section 9.05 below. Any attempted transfer without consent shall be void and shall constitute a non-curable breach of this Lease. If Tenant is a partnership, any cumulative transfer of more than twenty percent (20%) of the partnership interests shall require Landlord's consent. Section 9.02. Tenant Affiliate. Tenant may assign this Lease or sublease the Property, without Landlord's consent, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from the merger of or consolidation with Tenant ("Tenant's Affiliate"). In such case, any Tenant's Affiliate shall assume writing all of Tenant's obligations under this Lease. Tenant may assign this lease to any purchaser of all or substantially all of the Tenant's assets without the Landlord's consent. Section 9.03. No Release of Tenant. No transfer permitted by this Article Nine, whether with or without Landlord's consent, shall release Tenant or change Tenant's primary liability to pay the rent and to perform all other obligations of Tenant under this Lease. Landlord's acceptance of rent from any other person is not a waiver of any provision of this Article Nine. Consent to one transfer is not a consent to any subsequent transfer. If Tenant's transferee defaults under this Lease, Landlord may proceed directly against Tenant without pursuing remedies against the transferee. Landlord may consent to subsequent assignments or modifications of this Lease by Tenant's transferee, without notifying Tenant or obtaining its consent. Such action shall not relieve Tenant's liability under this. Lease. Section 9.04. Offer to Terminate. If Tenant desires to assign the Lease or sublease the Property, Tenant shall have the right to offer, in writing, to terminate the Lease as of a date specified in the offer. If Landlord elects in writing to accept the offer to terminate within twenty (20) days after notice of the offer, the Lease shall terminate as of the date specified and all the terms and provisions of the Lease governing termination shall apply. If Landlord does not so elect, the Lease shall continue in effect until otherwise terminated and the provisions of Section 9.05 with respect to any proposed transfer shall continue to apply. Section 9.05. Landlord's Consent. (a) Tenant's request for consent to any transfer described in Section 9.01 except as it relates to Section 9.02 shall set forth in writing the details of the proposed transfer, including the name, business and financial condition of the prospective transferee, financial details of the proposed transfer (e.g., the term of and the rent and security deposit payable under any proposed assignment or sublease), and any other information Landlord deems relevant. Landlord shall have the right to withhold consent, if reasonable, or to grant consent, based on the following factors: (i) the business of the proposed assignee or subtenant and the proposed use of the Property; (ii) the net worth and financial reputation of the proposed assignee or subtenant; (iii) Tenant's compliance with all of its obligations under the Lease; and (iv) such other factors as Landlord may reasonably deem relevant. If landlord objects to a proposed assignment solely because of the net worth and/or financial reputation of the proposed assignee, Tenant may nonetheless sublease (but not assign), all or a portion of the Property to the proposed transferee, but only on the other terms of the proposed transfer. (b) If Tenant assigns or subleases, the following shall apply: (i) Tenant shall pay to Landlord as Additional Rent under the Lease the Landlord's Share (stated in Section 1.13) of the Profit (defined below) on such transaction as and when received by Tenant, unless Landlord gives written notice to Tenant and the assignee or subtenant that Landlord's Share shall be paid by the assignee or subtenant to Landlord directly. The "Profit" means (A) all amounts paid to Tenant for such assignment or sublease, including "key" money, monthly rent in excess of the monthly rent payable under the Lease, and all fees and other consideration paid for the assignment or sublease, including fees under any collateral agreements, less (B) costs and expenses directly incurred by Tenant in connection with the execution and performance of such assignment or sublease for real estate broker's commissions and costs of renovation or construction of tenant improvements required under such assignment of sublease. Tenant is entitled to recover such cost and expenses before Tenant is obligated to pay the Landlord's Share to Landlord. The Profit in the case of a sublease of less than all the Property is the rent allocable to the subleased space as a percentage on a square footage basis. (ii) Tenant shall provide Landlord a written statement certifying all amounts to be paid from any assignment or sublease of the Property within thirty (30) days after the transaction documentation is signed, and Landlord may inspect Tenant's books and records to verify the accuracy of such statement. On written request, Tenant shall promptly furnish to Landlord copies of all the transaction documentation, all of which shall be certified by Tenant to be complete, true and correct. Landlord's receipt of Landlord's Share shall not be consent to any further assignment or subletting. The breach of Tenant's obligation under this Paragraph 9.05(b) shall be a material default of the Lease. Section 9.06. No Merger. No merger shall result from Tenant's sublease of the Property under this Article Nine, Tenant's surrender of this Lease or the termination of this Lease in any other manner. In any such event Landlord may terminate any or all subtenancies or succeed to the interest of Tenant as sublandlord under any or all subtenancies. ARTICLE TEN: DEFAULTS; REMEDIES. Section 10.01. Covenants and Conditions. Tenant's performance of each of Tenant's obligations under this Lease is a condition as well as a covenant. Tenant's right to continue in possession of the Property is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions. Section 10.02. Defaults. Tenant shall be in material default under this Lease: (a) If Tenant abandons the Property or if Tenant's vacation of the Property results in the cancellation of any insurance described in Section 4.04; (b) If Tenant fails to pay rent or any other charge within 5 days after due date; (c) If Tenant fails to perform any of Tenant's non-monetary obligations under this Lease for a period of thirty (30) days after written notice from Landlord; provided that if more than thirty (30) days are required to complete such performance, Tenant shall not be in default if Tenant commences such performance within the thirty (30)-day period and thereafter diligently pursues its completion. However, Landlord shall not be required to give such notice if Tenant's failure to perform constitutes a non-curable breach of this Lease. The notice required by this Paragraph is intended to satisfy any and all notice requirements imposed by law on Landlord and is not in addition to any such requirement. (d) (i) if Tenant makes a general assignment or general arrangement for the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or for reorganization or rearrangement is filed by or against Tenant and is not dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed to take possession of substantially all of Tenant's assets located at the Property or of Tenant's interest in this Lease and possession is not restored to Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets located at the Property or of Tenant's interest in this Lease is subjected to attachment, execution or other judicial seizure which is not discharged within thirty (30) days. If a court of competent jurisdiction determines that any of the acts described in this subparagraph (d) is not a default under this Lease, and a trustee is appointed to take possession (or if Tenant remains a debtor in possession) and such trustee or Tenant transfers Tenant's interest hereunder, then Landlord shall receive, as Additional Rent, the excess, if any, of the rent (or any other consideration) paid in connection with such assignment or sublease over the rent payable by Tenant under this Lease. (e) If any guarantor of the Lease revokes or otherwise terminates, or purports to revoke or otherwise terminate, any guaranty of all or any portion of Tenant's obligations under the Lease. Unless otherwise expressly provided, no guaranty of the Lease is revocable. Section 10.03. Remedies. On the occurrence of any material default by Tenant, Landlord may, at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have: (a) Terminate Tenant's right to possession of the Property by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Property to Landlord. In such event, Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including (i) the worth at the time of the award of the unpaid Base Rent, Additional Rent and other charges which Landlord had earned at the time of the termination; (ii) the worth at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which Landlord would have earned after termination until the time of the award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; (iii) the worth at the time of the award of the amount by which the unpaid Base Rent, and other charges which Tenant would have paid for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under the Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses Landlord incurs in maintaining or preserving the Property after such default, the cost of recovering possession of the Property, expenses of reletting, including necessary renovation or alteration of the Property, Landlord's reasonable attorneys' fee incurred in connections therewith, and any real estate commission paid or payable. As used in subparts (i) and (ii) above, the "worth at the time of the award" is computed by allowing interest on unpaid amounts at the rate of ten percent (10%) per annum, or such lesser amount as may then be the maximum lawful rate. As used in subpart (iii) above, the "worth at the time of the award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%). If Tenant has abandoned the Property, Landlord shall have the option of (i) retaking possession of the Property and recovering from Tenant the amount specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph 10.03(b); (b) Maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant has abandoned the Property. In such event, Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the rent as it becomes due; (c) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state in which the Property is located. Section 10.04. Repayment of "Free" Rent. If this Lease provides for a postponement of any monthly rental payments, a period of "free" rent or other rent concession, such postponed rent or "free" rent is called the "Abated Rent." Tenant shall be credited with having paid all of the Abated Rent on the expiration of the Lease Term only if Tenant has fully, faithfully and punctually performed all of Tenant's obligations hereunder, including the payment of all rent (other than the Abated Rent) and all other monetary obligations and the surrender of the Property in the physical condition required by this Lease. Tenant acknowledges that its right to receive credit for the Abated Rent is absolutely conditioned upon Tenant's full, faithful and punctual performance of its obligations under this Lease. If Tenant defaults and does not cure within any applicable grace period, the Abated Rent shall immediately become due and payable in full and this Lease shall be enforced as if there were no such rent abatement or other rent concession. In such case, Abated Rent shall be calculated based on the full initial rent payable under this Lease. Section 10.05. Automatic Termination. Notwithstanding any other term or provision hereof to the contrary, the Lease shall terminate on the occurrence of any act which affirms the Landlord's intention to terminate the Lease as provided in Section 10.03 hereof, including the filing of an unlawful detainer action against Tenant. On such termination, Landlord's damages for default shall include all costs and fees, including reasonable attorneys' fees that Landlord incurs in connection with the filing, commencement, pursuing and/or defending of any action in any bankruptcy court or other court with respect to the Lease, the obtaining of relief from any stay in bankruptcy restraining any action to evict Tenant; or the pursuing of any action with respect to Landlord's right to possession of the Property. All such damages suffered (apart from Base Rent and other rent payable hereunder) shall constitute pecuniary damages which must be reimbursed to Landlord prior to assumption of the Lease by Tenant or any successor to Tenant in any bankruptcy or other proceeding. Section 10.06. Cumulative Remedies. Landlord's exercise of any right or remedy shall not prevent it from exercising any other right or remedy. ARTICLE ELEVEN. PROTECTION OF LENDERS. Section 11.01. Subordination. Landlord shall have the right to subordinate this Lease to any ground lease, deed of trust or mortgage encumbering the Property, any advances made on the security thereof and any renewals, modifications, consolidations, replacements or extensions thereof, whenever made or recorded. Tenant shall cooperate with Landlord and any lender which is acquiring a security interest in the Property or the Lease. Tenant shall execute such further documents and assurances as such lender may require, provided that Tenant's obligations under this Lease shall not be increased in any material way (the performance of ministerial acts shall not be deemed material), and Tenant shall not be deprived of its rights under this Lease. Tenant's right to quiet possession of the Property during the Lease Term shall not be disturbed if Tenant pays the rent and performs all of Tenant's obligations under this Lease and is not otherwise in default. If any ground lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of its ground lease, deed of trust or mortgage and gives written notice thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or mortgage whether this Lease is dated prior or subsequent to the date of said ground lease, deed of trust or mortgage or the date of recording thereof. Section 11.02. Attornment. If Landlord's interest in the Property is acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or purchaser at a foreclosure sale, Tenant shall attorn to the transferee or successor to Landlord's interest in the Property and recognize such transferee or successor as Landlord under this Lease. Tenant waives the protector of any statute or rule of law which gives or purports to give Tenant any right to terminate this Lease or surrender possession of the Property upon the transfer of Landlord's interest. Section 11.03. Signing of Documents. Tenant shall sign and deliver any instrument or documents necessary or appropriate to evidence any such attornment or subordination or agreement to do so. If Tenant fails to do so within ten (10) days after written request, Tenant hereby makes, constitutes and irrevocably appoints Landlord, or any transferee or successor of Landlord, the attorney-in-fact of Tenant to execute and deliver any such instrument or document. Section 11.04. Estoppel Certificates. (a) Upon Landlord's written request, Tenant shall execute, acknowledge and deliver to Landlord a written statement certifying: (i) that none of the terms or provisions of this Lease have been changed (or if they have been changed, stating how they have been changed); (ii) that this Lease has not been cancelled or terminated; (iii) the last date of payment of the Base Rent and other charges and the time period covered by such payment; (iv) that Landlord is not in default under this Lease (or, if Landlord is claimed to be in default, stating why); and (v) such other representations or information with respect to Tenant or the Lease as Landlord may reasonably request or which any prospective purchaser or encumbrancer of the Property may require. Tenant shall deliver such statement to Landlord within ten (10) days after Landlord's request. Landlord may give any such statement by Tenant to any prospective purchaser or encumbrancer of the Property. Such purchaser or encumbrancer may rely conclusively upon such statement as true and correct. (b) If Tenant does not deliver such statement to Landlord within such ten (10) day period, Landlord, and any prospective purchaser or encumbrancer, may conclusively presume and rely upon the following facts: (i) that the terms and provisions of this Lease have not been changed except as otherwise represented by Landlord; (ii) that this Lease has not been cancelled or terminated except as otherwise represented by Landlord; (iii) that not more than one month's Base Rent or other charges have been paid in advance; and (iv) that Landlord is not in default under the Lease. In such event, Tenant shall be estopped from denying the truth of such facts. Section 11.05. Tenant's Financial Condition. Within ten (10) days after written request from Landlord, Tenant shall deliver to Landlord such financial statements which Tenant provides to the SEC to verify the net worth of Tenant or any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall deliver to any lender designated by Landlord any financial statements required by such lender to facilitate the financing or refinancing of the Property. Tenant represents and warrants to Landlord that each such financial statement is a true and accurate statement as of the date of such statement. All financial statements shall be confidential and shall be used only for the purposes set forth in this Lease. ARTICLE TWELVE: LEGAL COSTS. Section 12.01. Legal Proceedings. If Tenant or Landlord shall be in breach or default under this Lease such party (the "Defaulting Party") shall reimburse the other party (the "Nondefaulting Party") upon demand for any costs or expenses that the Nondefaulting Party incurs in connection with any breach or default of the Defaulting Party under this Lease, whether or not suit is commenced or judgment entered. Such costs shall include legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys' fees and costs. The losing party in such action shall pay such attorneys' fees and costs. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands and liability Landlord may incur if Landlord becomes or is made a party to any claim or action (a) instituted by Tenant against any third party, or by any third party against Tenant, or by or against any person holding any interest under or using the Property by license of or agreement with Tenant; (b) for foreclosure of any lien for labor or material furnished to or for Tenant or such other person; (c) otherwise arising out of or resulting from any act or transaction of Tenant or such other person; or (d) necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the United States Code, as amended. Tenant shall defend Landlord against any such claim or action at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse landlord for any legal fees or costs Landlord incurs in any such claim or action. Section 12.02. Landlord's Consent. Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection with Tenant's request for Landlord's consent under Article Nine (Assignment and Subletting), or in connector with any other act which Tenant proposes to do and which requires Landlord's consent. ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS. Section 13.01. Non-Discrimination. Tenant promises, and it is a condition to the continuance of this Lease, that there will be no discrimination against, or segregation of, any person or group of persons on the basis of race, color, sex, creed, national origin or ancestry in the leasing, subleasing, transferring, occupancy, tenure or use of the Property or any portion thereof. Section 13.02. Landlord's Liability; Certain Duties. (a) As used in this Lease, the term "Landlord" means only the current owner or owners of the fee title to the Property or the leasehold estate under a ground lease of the Property at the time in question. Each Landlord is obligated to perform the obligations of Landlord under this Lease only during the time such Landlord owns such interest or title. Any Landlord who transfers its title or interest is relieved of all liability with respect to the obligations of Landlord under this Lease to be performed on or after the date of transfer. However, each Landlord shall deliver to its transferee all funds that Tenant previously paid if such funds have not yet been applied under the terms of this Lease. (b) Tenant shall give written notice of any failure by Landlord to perform any of its obligations under this Lease to Landlord and to any ground lessor, mortgagee or beneficiary under any deed of trust encumbering the Property whose name and address have been furnished to Tenant in writing. Landlord shall not be in default under this Lease unless Landlord (or such ground lessor, mortgagee or beneficiary) fails to cure such non-performance within thirty (30) days after receipt of Tenant's notice. However, if such non-performance reasonably requires more than thirty (30) days to cure, Landlord shall not be in default if such cure is commenced within such thirty (30) day period and thereafter diligently pursued to completion. (c) Notwithstanding any term or provision herein to the contrary, the liability of Landlord for the performance of its duties and obligations under this Lease is limited to Landlord's interest in the Property, and neither the Landlord nor its partners, shareholders, officers or other principals shall have any personal liability under this Lease. Section 13.03. Severability. A determination by a court of competent jurisdiction that any provision of this Lease or any part thereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision or this Lease, which shall remain in full force and effect. Section 13.04. Interpretation. The captions of the Articles or Sections of this Lease are to assist the parties in reading this Lease and are not a part of the terms or provisions of this Lease. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the other. In any provision relating to the conduct, acts or omissions of Tenant, the term "Tenant" shall include Tenant's agents, employees, contractors, invitees, successors or others using the Property with Tenant's expressed or implied permission. Section 13.05. Incorporation of Prior Agreements; Modifications. This Lease is the only agreement between the parties pertaining to the lease of the Property and no other agreements are effective. All amendments to this Lease shall be in writing and signed by all parties. Any other attempted amendment shall be void. Section 13.06. Notices. All notices required or permitted under this Lease shall be in writing and shall be personally delivered or sent by certified mail, return receipt requested, postage prepaid. Notices to Tenant shall be delivered to the address specified in Section 1.03 above, except that upon Tenant's taking possession of the Property, the Property shall be Tenant's address for notice purposes. Notices to Landlord shall be delivered to the address specified in Section 1.02 above. All notices shall be effective upon delivery. Either party may change its notice address upon written notice to the other party. Section 13.07. Waivers. All waivers must be in writing and signed by the waiving party. Landlord's failure to enforce any provision of this Lease or its acceptance of rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this Lease in the future. No statement on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate such check without being bound to the conditions of such statement. Section 13.08. No Recordation. Tenant shall not record this Lease without prior written consent from Landlord. However, either Landlord or Tenant may require that a "Short Form" memorandum of this Lease executed by both parties be recorded. The party requiring such recording shall pay all transfer taxes and recording fees. Section 13.09. Binding Effect; Choice of Law. This Lease binds any party who legally acquires any rights or interest in this Lease from Landlord or Tenant. However, Landlord shall have no obligation to Tenant's successor unless the rights or interests of Tenant's successor are acquired in accordance with the terms of this Lease. The laws of the state in which the Property is located shall govern this Lease. Section 13.10. Corporate Authority; Partnership Authority. If Tenant is a corporation, each person signing this Lease on behalf of Tenant represents and warrants that he has full authority to do so and that this Lease binds the corporation. Within thirty (30) days after this Lease is signed, Tenant shall deliver to Landlord a certified copy of a resolution of Tenant's Board of Directors authorizing the execution of this Lease or other evidence of such authority reasonably acceptable to Landlord. If Tenant is a partnership, each person or entity signing this Lease for Tenant represents and warrants that he or it is a general partner of the partnership, that he or it has full authority to sign for the partnership and that this Lease binds the partnership and all general partners of the partnership. Tenant shall give written notice to Landlord of any general partner's withdrawal or addition. Within thirty (30) days after this Lease is signed, Tenant shall deliver to Landlord a copy of Tenant's recorded statement of partnership or certificate of limited partnership. Section 13.11. Joint and Several Liability. All parties signing this Lease as Tenant shall be jointly and severally liable for all obligations of Tenant. Section 13.12. Force Majeure. If Landlord or Tenant cannot perform any of its obligations due to events beyond Landlord's or Tenant's control, the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events. Events beyond Landlord's control include, but are not limited to, acts of God, war, civil commotion, labor disputes, strikes, fire, flood or other casualty, shortages of labor or material, government regulation or restriction and weather conditions. Section 13.13. Execution of Lease. This Lease may be executed in counterparts and, when all counterpart documents are executed, the counterparts shall constitute a single binding instrument. Landlord's delivery of this Lease to Tenant shall not be deemed to be an offer to lease and shall not be binding upon either party until executed and delivered by both parties. Section 13.14. Survival. All representations and warranties of Landlord and Tenant shall survive the termination of this Lease. ARTICLE FOURTEEN: BROKERS. Section 14.01. Broker's Fee. When this Lease is signed by and delivered to both Landlord and Tenant, Landlord shall pay a real estate commission to Landlord's Broker named in Section 1.08 above, if any, as provided in the written agreement between Landlord and Landlord's Broker, or the sum stated in Section 1.09 above for services rendered to Landlord by Landlord's Broker in this transaction. If a Tenant's Broker is named in Section 1.08 above, Landlord's Broker shall pay an appropriate portion of its commission to Tenant's Broker if so provided in any agreement between Landlord's Broker and Tenant's Broker. Nothing contained in this Lease shall impose any obligation on Landlord to pay a commission or fee to any party other than Landlord's Broker. Section 14.02. Protection of Brokers. If Landlord sells the Property, or assigns Landlord's interest in this Lease, the buyer or assignee shall, by accepting such conveyance of the Property or assignment of the Lease, be conclusively deemed to have agreed to make all payments to Landlord's Broker thereafter required of Landlord under this Article Fourteen. Landlord's Broker shall have the right to bring a legal action to enforce or declare rights under this provision. The prevailing party in such action shall be entitled to reasonable attorneys' fees to be paid by the losing party. Such attorneys' fees shall be fixed by the court in such action. This paragraph is included in this Lease for the benefit of Landlord's Broker. Section 14.03. Agency Disclosure; No Other Brokers. Landlord and Tenant each warrant that they have dealt with no other real estate broker(s) in connection with this transaction except: NONE ARTICLE FIFTEEN: COMPLIANCE. The parties hereto agree to comply with all applicable federal, state and local laws, regulations, codes, ordinances and administrative orders having jurisdiction over the parties, property or the subject matter of this Agreement, including, but not limited to, the 1964 Civil Rights Act and all amendments thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive Environmental Response Compensation and Liability Act, and The Americans With Disabilities Act. ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED HERETO OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED, PLEASE DRAW A LINE THROUGH THE SPACE BELOW. Landlord and Tenant have signed this Lease at the place and on the dates specified adjacent to their signatures below and have initialed all Riders which are attached to or incorporated by reference in this Lease. "LANDLORD" Signed on October 13, 1997 By: /s/Linda A. Stanley --------------------------- -------------------------------- at Sacramento, CA Its: President ----------------------------------- -------------------------------- "TENANT" Signed on October 9, 1997 By: /s/William J. Howard --------------------------- -------------------------------- at Rogers, MN Its: Chief Operating Officer ----------------------------------- -------------------------------- "LANDLORD" -- OCEANIC CORPORATION Signed on October 20, 1997 By: /s/ (signature illegible) --------------------------- -------------------------------- at Hollister, CA Its: President ----------------------------------- -------------------------------- [MAP] [MAP] BUILDING SPECIFICATIONS GENERAL DESCRIPTION Land Area: Approximately 4 Acres Building type: Concrete tilt-up with a panelized wood roof Building dimensions: 230' wide x 480' long Office Area: 2,000 square feet, located inside of building Clear height: Operating clear height of 26' minimum Bay sizes: 30' x 60' Parking lot: 40 car spaces Landscaping: Installed per code, including irrigation over 100 percent of all landscaped areas Expansion Area: The Lease Area may be increased by 60,000 square feet on the expansion area under terms provided in the attached proposal. SITE WORK On-site storm drain system: Engineered to assure rapid collection and disposal into the municipal storm sewer Domestic water and sewer: Connections for office and restrooms located in the building Paving: 3" A.C. and 3" A.B. over 12" lime treated soil in areas of truck traffic lanes Curbs and Striping: Fully striped parking lot to accommodate a minimum of 40 car spaces CONCRETE Walls: Reinforced concrete, erected panels, 8" thick, 4,000 psi Interior: Broom finish with pick points exposed Exterior: Smooth surface finish with accent paint stripes and three 2" reveals. Floor slab: 6" nominal floor slab with reinforced concrete, #4 rebar 24" on center, 3,500 psi, saw cut within two hours of being poured, at perpendicular angles no greater than 16'-8" on center. Slab will be laser screeded, with an average floor flatness of Ff45-50. Construction joints will utilize 24" smooth dowels and will be 18" on center. Truck Docks: Concrete will extend 60' from the building and be 3000 psi, steel reinforced with #4 rebar 24" O.C., 6" thick. DOORS & HARDWARE Exterior: Roll up doors: Ten, 9' x 10' roll up sectional metal doors, 48" above truck well surface, vertically lifted, 24 gauge manually operated, Overhead 424 series or equal, will be provided. Drive in door: One, 12' x 15' sectional metal, vertically lifted drive in door will be provided. Specialties: Mechanical levelers, seals, dock bumpers, and dock lights will be furnished on all doors. Man doors: 3/0 x 7/0 hollow metal man doors with poured in place metal frames, commercial grade hardware, including thumb latch dead bolts, thresholds and eyebrow type drip guards; the number of man doors will be per code. FINISHES Paint: All metal surfaces with the exception of the interior steel will receive one coat of oil-based primer and two coats of oil-based finish paint. Exterior concrete walls and trim will receive one coat of seal primer and one finished coat. All wall striping shall receive two finish coats. The interior, underside surface of the roof will be sheathed in insulation rated at R-11. The interior walls will be painted white. Floor: Floor slab to be sealed with two coats of Sonneborn Lapidolith sealer and hardener, or equal. FIRE SPRINKLERS Warehouse area: An ESFR fire suppression system will be provided Office: Fire protection for the office will be provided in accordance with code. HVAC Warehouse: No heat. Air changes provided to meet code. ELECTRICAL Service: 480V. 2000 AMPS Warehouse Lighting: Warehouse lighting shall be sufficient to average 40 foot-candles at 3' AFF assuming an empty building. Fixtures to be 400 watt metal halide high bay fixtures. Outside Lighting: Outside lighting shall consist of 400 watt metal halide wall packs on all sides of the building at a density of one unit per 100 linear feet. Battery Chargers: None provided for in this proposal. INSULATION Warehouse ceiling: R-11 Warehouse walls: None RESTROOMS Restrooms: One men's and one women's restroom shall be provided in the office area per code. Additionally, one trucker's restroom will be provided near the loading doors. OFFICE Office: 2,000 square feet will be built out to tenant's specifications with a $30 per square foot allowance. ROOF Built-up roof over panelized wood system ADDENDUM TO THAT CERTAIN LEASE DATED 10-20-97, BY AND BETWEEN THE CENTURION CORPORATION AND OCEANIC CORPORATION ("LANDLORD") AND ULTRA PAC, INC. ("TENANT") This addendum shall modify and, to the extent inconsistent with, amend, that certain Lease Agreement Dated 10/20/97 between THE CENTURION CORPORATION, a California Corporation and Oceanic Corporation, a Nevada Corporation (collectively the "Landlord") and ULTRA PAC, INC. (the "Tenant) (the "Lease Agreement"). Section 1.04 Property The real property (the "Land"), which is a portion of Lot 26 per the attached Exhibit "A" and constitutes approximately four and six one hundredths (4.06) acres, which, when improved with the alterations, additions, and improvements to be constructed by the parties under this Lease, shall be of sufficient size that Landlord may lawfully construct a building (the "Original Building") on the Land containing up to approximately 110,400 square feet (the "Original Land") is to be the subject of this Lease. The remainder of Lot 26 per the attached Exhibit "A" which constitutes approximately three and forty nine one thousandths (3.49) acres, shall constitute the Expansion Land, and does not form a part of the real property subject to this Lease Agreement. Landlord hereby grants to Tenant an option ("Option") to expand the Original Building an additional sixty thousand (60,000) square feet (the "Expansion Space"). As consideration for Landlord not developing the Expansion Space until requested by Tenant, Tenant shall make payments to Landlord calculated as (i) zero for the initial year of the Lease Term; (ii) Four Thousand Dollars ($4,000.00) per month for years two (2) through three (3) of the Lease Term; (iii) Six Thousand Dollars ($6,000.00) per month for years four (4) through five (5) of the Lease Term; and (iv) Eight Thousand Dollars ($8,000.00) per month for years six (6) through ten (10) of the Lease Term (collectively the "Option Payments"). The Option shall be exercised by the Tenant in writing ("Option Notice") at any time during the Lease Term, so long as Tenant has continued to make the Option Payments in the amount and manner as previously described. Tenant's failure to make all required Option Payments prior to the Option Notice will result in the termination of the Option. Tenant's obligation to make future Option Payments will cease upon Option Notice. The per square foot rent for the Expansion Space shall be the same per foot rent for the Original Space. Upon Substantial Completion of the Expansion Space, the Term of the Lease for the Original Building and the Expansion Space shall be extended to a full ten (10) year term from the date of such Substantial Completion. Tenant's Option right will terminate if not preserved by the Tenant's ongoing Option Payments. Following the termination of the Option, Landlord may pursue any and all such development opportunities as it sees fit on the Expansion Land, including but not limited to the construction of the Expansion Space. Section 1.12 Rent and Other Charges Payable by Tenant: (a) Base Rent. The initial monthly base rent ("Base Rent") per square foot (measured outside wall to outside wall) shall be calculated at (i) forty one Cents ($0.41) per square foot for years one (1) through five (5) of the Lease Term and (ii) forty five and 5/10 Cents ($.455) per square foot for years six (6) through ten (10) of the Lease Term; and shall be payable monthly as provided in Section 3.01. Section 3.01 Time and Manner of Payment: Commencing on the date which is five (5) months following the Commencement Date (the "Initial Rent Payment Date"), Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph 1.12 (a) in the Addendum. On the first day of the sixth month of the Lease Term and each month thereafter, Tenant shall pay Landlord the Base Rent, in advance, without offset, deduction or prior demand. The Base Rent shall be payable at Landlord's address or at such other place as Landlord may designate in writing. Section 6.05 Alterations, Additions, and Improvements: (c) Landlord shall provide tenant an allowance for improvements in the amount of two hundred thousand Dollars ($200,000.00). Tenant may offset such amount in part or in whole against Base Rent. ARTICLE 16 OPTIONS 16.1 Option to Extend Term. Landlord grants to Tenant two (2) options to extend the Lease Term (Extension Options) for a period of five (5) years each (Option Term), subject to the conditions described in this Section 16. A. Conditions of Option. Each Extension Option is subject to the following conditions: A.1. Each Extension Option may be exercised only by written notice delivered by Tenant to Landlord as provided in this Section 16.1 and only if, as of the date of delivery of such notice, Tenant is not in default under this Lease. A.2. The rights contained in this Section 16 may be exercised by the originally named Tenant or by any assignee of Tenant's Interest in this Lease if the assignment has been approved by Landlord under Article 9.01, or is otherwise permitted under Article 9.05. A.3. If Tenant properly exercises the first Extension Option and is not in default under this Lease at the end of the initial Lease Term, the Lease Term as it applies to the entire Premises then leased by Tenant, shall be extended for the first Option Term. If Tenant properly exercises the second Extension Option and is not in default under this Lease at the end of the first Option Term, the Lease Term as it applies to the entire Premises then leased by Tenant, shall be extended for the second Option Term. B. Option Rent. The Rent payable by Tenant during the respective first Option Term (Option Rent) shall be Fifty and one-half Cents ($.505) per square foot payable monthly in twelve equal installments on or before the first day of each month. The Rent payable by Tenant during the second Option Term (Option Rent) shall be Fifty Six Cents ($.56) per square foot payable monthly in twelve equal installments on or before the first day of each month C. Exercise of Option. Each Extension Option must be exercised by Tenant, if at all only at the time and in the manner provided in this subsection 16.1 C. C.1. Exercise Notice. If Tenant wishes to exercise an Extension Option, Tenant shall deliver written notice (Exercise Notice) to Landlord no less than six (6) months before the expiration of the current term (either the initial Lease Term or the first Option Term). C.4. Failure to Deliver Timely Notice. If Tenant fails to deliver a timely Exercise Notice, Tenant shall be considered to have elected not to exercise the Extension Option. D. Amendment to Lease. If Tenant timely exercises the Extension Option, Landlord and Tenant shall, within fifteen (15) days after Landlord receives Tenant's Exercise Notice, execute an amendment to this Lease extending the Lease Term on the terms and conditions set forth in this Section 16. All other terms and conditions under the Lease shall remain in full force and effect. ARTICLE 17 FIRST RIGHT OF OFFER In the event that Landlord intends to offer the Property for sale and such offer shall be for an ownership interest in excess of fifty percent (50%) ("Ownership Interest"), then Landlord shall, prior to agreeing to sell the Ownership Interest, deliver to Tenant written notice of the purchase price which Landlord intends to accept for said Ownership Interest ("Offer Notice"). Tenant shall have ten (10) business days ("Acceptance Period") to deliver to Landlord a written notice of acceptance of the purchase price and a signed offer containing the purchase price using the standard purchase and sale agreement and/or deposit receipt used by CB Commercial in California ("Acceptance Notice"). All closing costs shall be divided equally. The parties shall agree to cooperate in an Internal Revenue Code, Section 1031, tax deferred exchange, including without limitation the right to assign the purchase and sale agreement to a qualified tax deferred intermediary. The closing date shall be no later than sixty (60) days following the delivery of the Acceptance Notice. The closing shall be for cash in United States dollars in the total amount of the purchase price plus Tenant's share of the closing costs. In the event that Tenant fails to deliver the Acceptance Notice within the Acceptance Period, Tenant shall have no further right to receive notice of any sale or offer to sell for a purchase price equal to or greater than the purchase price set forth in the Offer Notice. Thereafter Tenant shall be deemed to have waived its right to buy the Property for said purchase price, provided that Landlord shall not sell or offer to sell the Property at a purchase price lower than that purchase price contained in the Offer Notice without delivering to Tenant a new Offer Notice. If Tenant fails to accept such purchase price, then Landlord may sell the Ownership Interest to a third party on terms and conditions acceptable to Landlord, provided that the purchase price is the same or greater than the purchase price contained in the Offer Notice. EX-27 3 FINANCIAL DATA SCHEDULE
5 9-MOS JAN-31-1998 OCT-31-1997 399,726 0 4,211,209 318,439 7,605,563 14,165,253 42,313,024 15,896,755 41,738,424 11,596,053 12,604,583 0 0 8,011,208 7,166,580 41,738,424 47,499,141 47,499,141 28,674,116 28,674,116 12,110,546 0 1,336,452 5,354,296 2,015,000 3,339,296 0 0 0 3,339,296 .83 .83
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