-----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, GdRkXLdtyuVoxITC2E8h+1oOdT2B1s/Qhmz1F0JNlOtZPAbQ0HaNJKDBm+pTiqDw JguSY+hKFrhf/rE5DKvJGA== 0000893877-99-000205.txt : 19990402 0000893877-99-000205.hdr.sgml : 19990402 ACCESSION NUMBER: 0000893877-99-000205 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERLINK ELECTRONICS CENTRAL INDEX KEY: 0000828146 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 770056625 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21858 FILM NUMBER: 99579921 BUSINESS ADDRESS: STREET 1: 546 FLYNN RD CITY: CAMARILLO STATE: CA ZIP: 93012 BUSINESS PHONE: 8054848855 MAIL ADDRESS: STREET 1: 546 FLYNN ROAD CITY: CAMARILLO STATE: CA ZIP: 93012 10-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1998 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________. Commission file number: 0-21808 INTERLINK ELECTRONICS, INC. (Exact name of registrant as specified in its charter) Delaware 77-0056625 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 546 Flynn Road, Camarillo, California 93012 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (805) 484-8855 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock (Title of Class) Warrants (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of Common Stock held by nonaffiliates of the Registrant at March 15, 1999 based on the closing price of $5.25 on such date on the NASDAQ NMS: $27,384,877. Number of shares of Common Stock outstanding as of March 15, 1999: 5,216,167 Documents Incorporated by Reference - ----------------------------------- Part of Form 10-K into Document which incorporated -------- ---------------------- Proxy Statement for 1999 Annual Part III Meeting of Stockholders TABLE OF CONTENTS - ----------------- Item of Form 10-K Page - -------------------------------------------------------------------------------- PART I Item 1. Business 1 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 4(a). Executive Officers of the Registrants 13 PART II Item 5. Market for the Registrant's Common 14 Equity and Related Stockholder Matters Item 6. Selected Financial Data 15 Item 7. Management's Discussion and Analysis 15 of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary 15 Data Item 9. Changes in and Disagreements with Accountants 15 on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of 15 the Registrant Item 11. Executive Compensation 16 Item 12. Security Ownership of Certain Beneficial 16 Owners and Management Item 13. Certain Relationships and Related 16 Transactions PART IV Item 14. Exhibits, Financial Statement Schedules 16 and Reports on Form 8-K PART I Forward-Looking Statements From time to time the Company may issue forward-looking statements that involve a number of risks and uncertainties. The following factors are among the factors that could cause actual results to differ materially from the forward-looking statements: business conditions and growth in the electronics industry and general economies, both domestic and international; lower than expected customer orders, delays in receipt of orders or cancellation or orders; competitive factors, including increased competition, new product offerings by competitors and price pressures; the availability of third party parts and supplies at reasonable prices; changes in product mix; significant quarterly performance fluctuations due to the receipt of a significant portion of customer orders and product shipments in the last month of each quarter; and product shipment interruptions due to manufacturing problems. The forward-looking statements contained in this document regarding industry trends, revenue, costs and margin expectations, product development and introductions, operating cost improvements and trends and future business activities should be considered in light of these factors. Item 1. Business Interlink Electronics, Inc. (the "Company" or "Interlink") designs, manufactures and sells input devices for computers and other electronic products based on the Company's portfolio of proprietary technologies, including its Force Sensing Resistor ("FSR") technology. The Company sells a full spectrum of value-added products and components ranging from FSR sensors, to modules incorporating one or more FSR sensors and related electronics mounted on a printed circuit board ("PCB"), to complete products such as remote controls ready for use by an end-user, which Interlink offers on a branded or generic basis. Interlink also designs, manufactures and sells a broad variety of non-computer products ("Custom Products") based on its FSR technology. Interlink's customers include the leading computer, computer peripheral and presentation device manufacturers, such as NEC, Sharp, Toshiba, In Focus Systems, IBM, Sony and Logitech. Input Devices The original IBM personal computer and others built on that model used a text-based operating system in which the user input data to the computer using a keyboard not substantially different from the keyboard found on a typewriter. As computer systems have moved from textbased to graphics-based user interfaces, the keyboard has been supplemented and, in some applications, replaced by alternative input devices such as mice, trackballs, pointing sticks, touchpads, touchscreens and a variety of other single or multipurpose input devices designed to input, alter or transfer data other than text. At the same time, the range and complexity of electronic devices available for both household and business use has increased dramatically, thus increasing the complexity of the choices afforded to the user. This has created a market for input devices, such as television remote controls, that allow the user of the device to select from among 1 the many options available. For example, the traditional television had an on-off switch that often doubled as a volume control, a channel selector and a series of rarely used knobs that adjusted picture quality. The remote control for a modern television set and related electronics such as VCRs, DVD players and the like may be required to select a signal from any of a variety of sources, determine whether the program is to be selected for immediate or deferred viewing, choose from several audio playback options, select the language in which the chosen program will be viewed, determine whether to watch or suppress subtitles, fast forward or rewind the program and enable or disable the audio channel, all in addition to selecting the channel and adjusting volume. The rapid development of internet resources, video games and the convergence of computer and television applications have also added to demand for complex devices that allow the user to select from a menu of choices and/or to control the function of complex electronic devices. In the world of commerce, the pervasive use of electronic communication and the advent of the "paperless office" have led to a need for computer equivalents to traditional hard copy documents. For example, input devices allowing the user to convert handwritten data either to computer text (as with some personal digital assistants "PDA's") or to graphic representations (as with signature input) are rapidly becoming standard elements of business communication and data processing. Electronic systems such as presentation devices, complex telecommunication systems and specialized audiovisual equipment present the same complex range of options as do their consumer counterparts and demand the same complexity in input devices. All of these developments in the computer and communications industries have created a rapidly expanding market for input devices of many different types, from traditional mice or pointing sticks installed in or wired to a computer to remote input devices using infrared signals to control a computer, television, presentation device, videoconferencing system or other electronic product. Not only is the market for such devices expanding in absolute terms but the variety and complexity of the various devices has grown as the devices themselves have become more varied and more complex. It is now common in both the home and the business environment for several different electronic systems to be used at the same time, often causing their control devices to compete with one another. The Company believes that it has developed a portfolio of technologies that is particularly well suited to the input device market. The Company's FSR technology is particularly applicable because of its inherent ability to provide accurate control of both cursor movement and speed without any requirement for movement of the operator other than simple finger or thumb pressure. New computer technologies, such as computerized presentations, multimedia software, and the Internet, also require or support pointing and other non-text-based interface devices. The Company's force sensing technology, featuring a thin sensor profile, zero travel, and broad dynamic range characteristics, allows for the design of miniature joysticks, touchpads and pressure buttons offering a user-friendly, cost-effective pointing solution and data entry method. The Company has developed a number of technologies including its proprietary VersaPoint and Semiconductive touchpad technologies. The VersaPoint technology consists of a 2 four-zone FSR sensor array and proprietary software and firmware that control cursor direction and speed. In November 1996 the Company introduced its Semiconductive touchpad technology, VersaPad. With proprietary software and firmware, the user controls cursor direction and speed by sliding their fingertip or pen across the touchpad surface. Clicking is performed by separate buttons or by tapping the touchpad surface. The Company has received a design patent for the integration of a thumb-activated "mouse" button combined with an index finger activated "Trigger" click button, trade named "ClickTrigger". In addition the Company has filed patent applications for proprietary infrared communication protocols. See "Business - Technology." Input Devices - Products OEM Interactive Remote Controls With the advent of computer driven presentation systems and software, the larger screen size of multimedia computer systems and the greater use of televisions for Internet access and other computer related functions, a need has been created for wireless remote controls with computer mouse functionality. To address this need Interlink has created a line of interactive remote controls ("IRC") to be sold on an OEM basis. All these products use infrared technology, incorporate a VersaPoint pointing button to control the cursor and the Company's patented ClickTrigger design for "clicking". These products range from a simple remote with only VersaPoint and ClickTrigger technology to remotes with 30 function keys to control various functions of the computer and/or presentation projector. Interlink had developed standard case designs that allow for easy customization of the button configuration and function by the OEM customer. Examples of OEM customers purchasing IRC's from Interlink include InFocus Systems, NEC, Sharp and Toshiba. Depending on the OEM's requirement, the Company may sell an accompanying receiver that, by cable, attaches to the OEM's central processing unit (CPU) and receives the signal from the remote control. In most cases however, the receiver electronics are integrated into the CPU. To date the preponderance of Interlink's IRC's have been sold to the presentation projector manufacturer market, however the Company believes a substantial future market opportunity lies with video conferencing, "WebTV" type systems and other systems targeted for home internet access. OEM Keyboard Integration With the proliferation of icon-based computer operating systems such as Microsoft Windows and the Apple Macintosh, computer mouse driven systems have now moved into many environments where a traditional mouse is impractical. Examples include mobile computing and industrial environments. In addition, many keyboard manufacturers see the value of incorporating the mouse functions directly into the keyboard to save the end-user the expense and inconvenience of a separate peripheral. Because of the thin profile of an FSR, the Company's integrated pointing solutions can be built into keyboards easily. In addition the exceptional ruggedness of the FSR technology makes it an ideal solution for harsh environments. 3 The Company offers several solutions to OEM's for keyboard integration: - - The MicroJoystick which is similar to the "eraser head" type pointing device most notably found in IBM's ThinkPad notebook computer. - - The MicroModule that uses a circular rubber button as the actuator and is offered mounted to a PCB assembly. - - The OEM VersaPad which utilizes the Company's patented Semiconductive touchpad technology. Depending on the OEM's expertise, each of these solutions can be sold with just the sensor and a microcontroller with the Company's proprietary firmware or as a full module with the actuator, sensor and microcontroller mounted on a PCB assembly. Historically Interlink's principal OEM integrated pointing product was its MicroJoystick, which it sold primarily to manufacturers of notebook computer keyboards and to a lesser extent manufacturers of aftermarket keyboards. Within the past two years the notebook computer market has transitioned to touchpads as the dominant choice for integrated pointing devices. As a result the Company has developed the OEM VersaPad. The OEM VersaPad differs from competitive touchpad products in that it uses pressure as its method of activation. By contrast, touchpads using capacitive technology (the most widely used touchpad technology) require an electrically conductive object to touch the pad for activation. Since human skin is conductive, the finger is the primary method of using a capacitive touchpad. However, the VersaPad can be used when it detects pressure from any source. Thus a gloved finger will work as will a common pen or stylus. With the advent of reliable handwriting recognition software, Interlink expects to capitalize on the VersaPad's ability to receive pen input to create a competitive advantage. Interlink will market the VersaPad to notebook computer manufacturers, aftermarket keyboard manufacturers and manufacturers of specialty peripherals that require pen input capability as well as standard mouse functions. Historically the Company has been one of the dominant suppliers of integrated pointing devices for the rugged and industrial computing markets. The FSR characteristics of environmental stability and ability to be sealed make it an optimal solution for these markets. These FSR characteristics plus the rubber overlay of the MicroModule make it the Company's most popular products for these markets. To a lesser extent, the Company also sells the MicroJoystick, the VersaPad and an OEM version of its DuraPoint ruggedized pointing device to these markets. Branded Products Approximately 85% of the Company's revenues are generated from OEM sales. However, in order to generate OEM sales, the Company has often found it expedient to develop a complete, functional prototype or sales sample demonstrating the Company's unique technology. In many cases the Company has chosen to further develop these products into stand-alone peripheral products that are available for sale either as branded or generic products. 4 The Company is continuing to develop distribution channels for its branded products. Current distribution consists of mass merchandiser outlets, including Best Buy, Inc., Fry's Corporation, and distributors such as Ingram Micro, catalogs and specialty resellers targeting corporate accounts. Marketing to these channels is accomplished by direct sales through Company employees and a network of independent sales representatives. In Europe the Company uses distributors such as Ingram Micro. The Company's stand-alone peripheral products, referred to below by their branded names, are: VersaPad. In September 1997, the Company shipped VersaPad, a stand-alone touchpad peripheral, incorporating the Company's Semiconductive technology. Similar to touchpads found in most notebook computers today, cursor control is performed by simple finger pressure on the touchpad surface. The VersaPad also includes several function bars adding many productivity enhancing tools. VersaPoint Wireless Keyboard. In June 1997, the Company shipped the VersaPoint Wireless keyboard. With an infrared range of 50 feet, the VersaPoint keyboard has all the functions of a wired keyboard. It also incorporates the Company's touchpad technology and its unique design is especially well suited for use on one's lap. RemotePoint. In order to satisfy the need for a cordless, remote pointing device to control desktop and conference room computer-based presentations, the Company introduced its RemotePoint product in August 1994. The RemotePoint device is a handheld, infrared cordless cursor control device that has an effective range of up to 40 feet. RemotePointPlus. In Fall 1995, Interlink introduced its RemotePoint Plus product, a remote control computer cursor controller. With programmable buttons (enabling it to handle dozens of different user-defined functions) and a range of approximately 40 feet, it is designed to meet the needs of the most sophisticated presenters. ProPoint. To address the presentation and multimedia market, the ProPoint device is a handheld corded pointing device used to control cursor movement and function selection. The ProPoint product comes with 6 feet of cable and, with optional additional connecting cables, its range can be extended to up to 12 feet, making it useful not only as a personal cursor control device, but also as a presentation assistant for conference room size presentations. DeskStick. Interlink's desktop mouse replacement, DeskStick, couples the advanced pointing stick technology previously available only in notebook computers with a very attractive price point, designed to meet the needs both of first time mouse users, and of those looking for a unique replacement mouse. SuperMouse. The Company designed and developed the SuperMouse device as an aftermarket mouse for the commercial and consumer markets. It is targeted primarily at the notebook 5 and other portable computers because of its small size and its versatility (it can be used as a portable, desktop, or handheld mouse). DuraPoint. To address the needs of industrial users, in February 1993, Interlink began shipping its DuraPoint ruggedized pointing device. To the best of the Company's knowledge, its DuraPoint device was the first cursor control device designed to NEMA 4X, 6P, and 13 standards (industry association standards relating to the ability of an electronic device to operate under adverse environmental conditions). The DuraPoint device can withstand a variety of harsh environments, such as direct water spray, debris, cleansers or even prolonged submersion. Sales channels consist primarily of industrial hardware and software distributors and bundling arrangements with industrial and medical equipment manufacturers. FreedomWriterPRO. In December 1998, the Company began shipping FreedomWriterPRO. The product is a remote control that includes both the Company's semiconductive touchpad and RemoteLink Technologies. Using the touchpad's pen input capabilities, a presenter can now draw or annotate on a slide from a computerized presentation. Through software, the product can convert handwriting to digital text; a functionality the company plans to market to the video conference and home internet access markets. Custom Applications The Company's Custom Applications Product Line consists of design, engineering and product development teams that incorporate its proprietary technology into specific custom products for individual OEM customers. Interlink's force sensing technology addresses many applications in this area. Because of the required design and development time, sales cycles typically range from four to 18 months and can be considerably longer. On the other hand, the result of a successful custom sale is usually a product that is regularly reordered by the customer over a considerable period of time. The principal advantages of force sensing technology that apply to the Company's other business areas also apply to its Custom Applications. The ability to produce sensors in a wide variety of shapes and sizes, detection of both the location and the intensity of pressure applied to the sensor, the zero-travel characteristic and the system's resistance to environmental damage are all attractive features for the Company's Custom Applications. In some cases the Company's customers have determined that force sensing technology provides the only currently available solution to their sensor requirements. The Company has identified and is currently working with a variety of Custom Applications customers that are presently concentrated in the industrial and medical device industries: for example, it has developed a fail-safe sensor system for Varian Associates for use in a medical imaging device. As the heavy medical imaging device is lowered into contact with the patient, the FSR sensor functions as a safety bumper to prevent injury from excessive pressure of the device on the patient by halting the movement of the device when the selected level of pressure is reached. FSR sensors developed by Interlink for Baxter Healthcare Corporation are incorporated in an infusion pump where the FSR sensor functions as a safety device to ensure 6 proper placement of the intravenous tube in the pump head. Sales and Marketing Interlink employs a direct sales team of five people in the U.S. and four in Japan. Each sales team is supported by inside sales personnel, product managers and application engineers. For the branded products, the Company also uses manufacturer representatives and distributors, covering the U.S. and Europe. For OEM sales, the Company uses public relations activity, some direct advertising and tradeshow participation to generate product awareness. Promising sales leads and known industry targets are followed up with sales visits. Depending on forecast volume and required lead times, the Company may sell component solutions, ready-to-integrate modules, complete solutions or totally custom products. As necessary, application engineers support and visit customers to promote ease of integration. A successful OEM sale will generally take from six to 18 months from the initial visit to the first shipment. However, once obtained, an OEM customer usually offers the Company a more predictable revenue stream, potential for future sales through follow-on products and lower on-going sales and marketing costs. For branded products, the Company uses public relations, third-party product reviews and limited direct advertising to generate customer awareness. Direct sales calls are made to potential distributors and specialty resellers. Manufacturer representatives call on potential retail accounts. Once a customer relationship is established, the Company supports these customers with co-op advertising, sales "spiffs", end-user rebates, etc. As necessary, branded customers may also negotiate cash discounts, extended billing or right of return privileges. Technology Interlink has developed a diverse portfolio of technologies related to a variety of remote and wired input devices. These technologies include the basic FSR and Semiconductive touchpad technologies and refinements thereon, the ClickTrigger technology and proprietary infrared communication protocols. In general, Interlink seeks to develop new technologies in order to enhance and create competitive advantages for its products rather than to develop entirely new products. FSR Technology. Force sensing technology transforms physical pressure applied to a sensor into a corresponding electronic response. Interlink's FSR sensors can react to pressure when applied by any means - through human touch, a mechanical device, a fluid or a gas. With supporting electronics, an FSR sensor can start, stop, intensify, select, direct, detect or measure a desired response. FSR sensors measure relative pressure and, depending on their configuration and with supporting electronics, can measure the location at which the pressure is applied. A "basic" FSR sensor can detect and accurately measure a force applied to it, thereby enabling precise control of the process applying the force. A more complex sensor, known as a "four zone" sensor, has four 7 sensors arranged in a two-by-two square with an actuator placed directly where the four sensors touch. Toggling the actuator in any direction, an operator can control the direction and speed of a cursor on a computer screen. An FSR sensor can also serve as a touchpad by incorporating a two-dimensional grid capable of measuring the location and intensity of pressure applied at any set of coordinates on the grid. This type of device is useful for functions such as handwriting input or computer cursor control. Because FSR sensors can be as thin as one-hundredth of an inch, they are particularly well suited for use where space is a critical issue, as in laptop and sub-laptop keyboards. FSR sensors have also demonstrated impressive reliability, retaining their performance through tens of millions of actuations, even in adverse environments involving heat, moisture, and chemical contamination. ClickTrigger. In October 1997, the Company received patent protection for its ClickTrigger remote control design. With the ClickTrigger configuration, the user controls the cursor by thumb pressure on the round button on the top of the remote control and operates mouse clicks by squeezing the mouse button underneath the remote control, similar to the trigger on a gun. This configuration allows for one-handed "click and drag" mouse functions. This design is already an industry standard and the Company is actively pursuing license arrangements. RemoteLink Technology. As a result of developing sophisticated remote controls for the presentation projector industry, the Company has become a leader in infrared communication innovation. In 1997 the Company introduced the VersaPoint wireless keyboard - the only wireless keyboard that communicates both keyboard and touchpad mouse protocols effectively. Late in 1997 the Company announced RemoteLink, a new infrared protocol. This unique technology allows for multiple users simultaneously, full two-way communication and high bandwidth. Potential products are wireless simultaneous game controllers, wireless infrared telephones, wireless speakers and wireless handwriting recognition capable PDA's. International Operations In 1994, the Company acquired an 80% ownership interest in Interlink Electronics K.K. ("IEKK"), a Japanese company which distributes and performs value added services regarding the Company's products in Japan. The president of IEKK is a former senior executive with Mitsubishi Petrochemical Company, and has a number of years of experience working with Interlink and its products. In 1998, IEKK's operations accounted for approximately 50% percent of Interlink's consolidated revenues. Licensees International Electronics & Engineering In September 1994, Interlink entered into several agreements with InvestAR, S.a.r.l., pursuant to which Interlink transferred its entire ownership interest in Interlink Electronics, Inc. Europe ("IEE"), a Luxembourg-based joint venture owned by Interlink and InvestAR, to InvestAR in exchange for the 510,775 shares of Interlink common stock then held by InvestAR. These shares, representing approximately 13.3% 8 of the Company's then-outstanding Common Stock, were returned to the Company, and reverted to the status of authorized, but unissued, shares. In addition to the stock transfer, the agreements also provided for continued technological cooperation between the Company and IEE, and for the payments of technology license royalties by IEE to the Company for sales by IEE outside of Europe of certain FSR-based automotive safety related sensors. Royalty revenues from IEE (which changed its name in 1995 to International Electronics & Engineering) were not material in 1996, 1997 or 1998. Toshiba Silicone. In an agreement entered into in 1989, Toshiba Silicone Co., K.K. licensed from the Company the right to use Interlink's Force Sensing Resistor technology in applications for use with musical instruments. Thus far, the royalties from this license have not been material to the Company's revenues. ClickTrigger. In 1998, the Company entered into license agreements for the ClickTrigger remote control design with Panasonic, Seiko Epson, and Sanyo. Each licensee pays a quarterly per-unit license fee. The Company believes additional companies also infringe on its ClickTrigger patents and is actively pursuing these companies to enter into license agreements or to cease use of the proprietary design. Manufacturing Production of FSR sensors is a relatively inexpensive and non-polluting process. The flexibility of the process allows Interlink to take advantage of changing market opportunities. FSR sensors are manufactured using screen printing techniques. All proprietary aspects of the manufacturing process are maintained in-house at Interlink, and at IEE, its European licensee, to maintain quality and protect the force sensing technology. While electronic screen printing is a common process in various technology industries, the quality and precision of printing required to make high-quality FSR sensors greatly exceeds the standards applicable in most other industries. The Company has developed significant expertise in the manufacture of FSR sensors, and believes this experience would be difficult to replicate over the short term. In the FSR manufacturing process, printed sheets of FSR semiconductor material and the corresponding conductor patterns are laminated to form the FSR sandwich structure using inexpensive sheet adhesives. The assembled sheets are die cut and suitable connectors are attached. Readily available materials (substrates, films, polymer thick film, inks) developed for other industries have proved unsuitable for the FSR manufacturing process. Interlink has worked closely with a small group of manufacturers to create new materials optimized for FSR usage; most of these materials are supplied to the Company on an exclusive basis. The raw materials are processed into their final form on site, using proprietary material and methods. The Company maintains agreements with several computer chip manufacturers pursuant to which they provide microcontrollers to it at guaranteed prices for use in or with Interlink's pointing devices. From time to time in the past, there have been unanticipated shortages in the 9 number, and/or delays in the availability, of microcontrollers required in the Company's products. No past shortage has had a material effect upon the Company's ability to supply its products in commercial quantities. While the Company has taken a number of steps, including the development of additional chip suppliers, in order to attempt to reduce its prospective exposure, there can be no guarantee that a future chip shortage will not occur, and that, if one occurs, that it would not have an adverse effect upon the Company's operations. Interlink manufactures FSR sensors in its facility in Camarillo, California. This facility is capable of operating on a single, double, or triple shift basis, as volume dictates. The Company acquires the components of its FSR-based sensors from a number of sources within the United States. Some components for its VersaPoint products as well as the manufacture of some of these products are sourced from manufacturing companies located in the Far East; their cost and availability are dependent upon a number of factors beyond the Company's control, including future currency exchange rates, and future political conditions in the countries in which the vendors are located. Research and Product Development The research group continues to expand the Company's intellectual properties. The Company regularly files patent applications and continuations thereof to cover both new and improved methods of manufacturing FSR sensors and new, non-FSR based technologies developed by the Company. Product development for the Company is focused on developing custom, standard, and modified standard products. Custom and modified standard products are developed very selectively, when they are adequately funded, and when there are obvious long-term strategic benefits to the Company. Custom and modified standard products are primarily developed to meet the requirements specified by OEM customers for their unique applications. Standard or branded product requirements are established using market analysis, evaluation and assessment to determine product differentiation and acceptance. Branded products are funded as defined by the Company's business plan, and developed to contribute to the Company's short and long-term business objectives. The Company's VersaPoint technology is used to develop standard products, primarily for computer pointing devices serving the OEM, consumer and industrial markets. Competition In the computer pointing device market, the Company competes with a number of sellers, including Microsoft, IBM, and Logitech (although Logitech is also a customer of the Company for some components (pointing sticks) of its products). A number of other companies manufacture touchpads, pointing sticks or remote control input devices, for a wide variety of applications. Many of the Company's competitors have greater financial and technological resources than does the Company, and may also have established relationships with customers, and enjoy economies of scale, that afford them a competitive advantage. In a variety of applications incorporating FSR sensors into complete products, the 10 Company may also compete with the in-house capabilities of its larger customers to design and manufacture all or portions of FSR products. In addition, besides the major previously existing computer cursor pointing technologies (pointing sticks, mice and trackballs), touchpad technology has gained increased market acceptance over the last few years; several computer manufacturers which formerly used OEM pointing sticks have switched to OEM touchpads. The Company's FSR sensors compete with comparable sensors produced using a variety of other technologies. For applications that require only "on/off" capability without any force sensing capability, a wide variety of sensors exist, including membrane switches, capacitive sensors and mechanical switches, that compete with the Company's sensors in particular applications. Other kinds of "force sensing" technology include strain gauges, piezo sensors and conductive rubber. Each of these technologies have advantages and disadvantages that make it an attractive solution in certain applications and not in others. Strain gauges are extremely accurate but relatively expensive. Piezo sensors are generally comparable in price and accuracy to FSR sensors but measure instantaneous impact rather than force over a continuing period. Conductive rubber is a widely established technology but deteriorates more rapidly over time than do other force sensing technologies. The Company seeks to identify and pursue applications in which force sensing technology is a particularly attractive solution. Most sensors that compete with the Company's FSR sensors are widely available from a variety of sources. Patents and Proprietary Rights Aspects of Interlink's technology are protected by more than 65 patents issued or pending in the United States and abroad, as well as trade secret and proprietary knowledge. Products incorporating the Company's force sensing technologies are sold under trademarks issued or pending in the United States and various other countries. Of the initial FSR patents granted (those covering the use of an uneven surface to produce variable resistance), the first of these patents expired on February 9, 1999. The Company has continued its efforts to improve the design, formulation, and manufacture of its sensors; some of these improvements are maintained as trade secrets, while U.S. and foreign patents have been applied for with respect to others. Other patents, covering various apparatus, processes and methods related to the force sensing technology will expire between 1999 and 2015. Various corresponding foreign patents will expire between 1999 and 2015. Patents covering various materials and processes used in the Company's current generation of products, as well as new devices for angle and displacement sensing, were granted during 1995 by the U.S. Patent Office. The Company has also filed U.S. and foreign patent applications regarding the design, and several key operating features, of its remote control products. While the Company believes its patents afford it some competitive advantage, such protection is limited by the resources available to the Company to identify potential infringements and to defend its rights against infringement. Furthermore, the extent of the protection offered by any patent is subject to determinations as to its scope and validity that would be made only in litigation. Therefore, there is no assurance that the Company's patents will afford meaningful protection from competition. The Company has also developed certain manufacturing processes and other methods of 11 applying its patented technology that it protects as trade secrets. The Company believes these trade secrets are important for the effective and efficient use of the patented technology and that a competitor with a right to use the patented technology would be required to develop comparable manufacturing and other processes to compete effectively with the Company. The Company requires its employees to sign nondisclosure agreements and seeks to limit access to sensitive information to the greatest practical extent. The Company actively defends its patents. When a potential infringing company is identified, Interlink first seeks to notify the company of Interlink's patent rights. Historically, the Company has been successful in negotiating license arrangements. If an agreement cannot be reached, the Company will pursue legal remedies. In June 1996, the Company brought an action in the United States District Court in the Central District of California against InControl Corporation ("InControl") for infringement of certain FSR patents. The Company seeks a court order enjoining InControl from further infringement. In February 1997, the court granted summary judgment in favor of InControl and dismissed the Company's action. The Company is currently appealing the decision and the Company does not believe the outcome of this action will have a material effect on 1999 results. Employees The Company had ninety-two full-time employees in the United States as of December 31, 1998; eighty-nine at its corporate offices and manufacturing facilities (including five members of management), and three sales managers stationed at regional offices. Its Japan subsidiary had twenty-eight employees. Item 2. Properties The Company's corporate offices and manufacturing facilities are located in a 35,333 square foot leased facility in Camarillo, California. The lease on the Camarillo premises runs until August 2003 and provides for an average monthly rent payment of $20,681. The Company believes that this facility will be adequate to meet its requirements. Two regional sales offices operate out of leased facilities. Its Japan subsidiary, Interlink Electronics, Inc. K.K., leases office space in Tokyo. Item 3. Legal Proceedings In June 1996, the Company brought an action in Federal Court against InControl for infringement of certain FSR patents. The Company seeks a court order enjoining InControl from further infringement. In February 1997, the court granted summary judgment in favor of InControl and dismissed the Company's action. The Company is currently appealing the decision and the Company does not believe the outcome of this action will have a material effect on 1999 results. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 12 Item 4(a). Executive Officers of the Registrant Name Age Position with Company - ---- --- --------------------- E. Michael Thoben, III 45 Chairman of the Board, President, Chief Executive Officer and Director David J. Arthur 50 Senior Vice President, Operations William A. Yates 47 Senior Vice President, Sales Paul D. Meyer 39 Chief Financial Officer and Secretary Roger Moore 38 Vice President, Marketing and Engineering - --------------- E. Michael Thoben, III became Chief Operating Officer and a director of the Company in March 1990 and has been President of the Company since June 1990, Chief Executive Officer since February 1994, and Chairman of its Board of Directors since August 1994. Prior to that time, for 11 years, Mr. Thoben was employed by Polaroid Corporation, most recently as the manager of one of Polaroid's seven strategic business units on a worldwide basis. Mr. Thoben holds a B.S. degree from St. Xavier University and has taken graduate management courses at the Harvard Business School and The Wharton School of Business. David J. Arthur has been Interlink's Senior Vice President--Operations since May 1995; prior to that, he served as the Company's Vice President, Manufacturing and Operations. Before joining the Company in October 1990, he held senior positions in materials, purchasing and manufacturing management with TRW Inc., North American Philips Corporation, and Amdahl Corporation. From 1987 to 1990, he served as Vice President of Manufacturing at Harman Electronics, Inc. William A. Yates became Interlink's Senior Vice President--Sales and Marketing in May 1995. Prior to joining the Company in 1990 as its Vice President, Sales and Marketing, Mr. Yates served for nine years in increasingly senior sales positions with Polaroid Corporation's Industrial Products Division. Mr. Yates has over 23 years of sales and marketing experience with both small companies and large businesses, the latter including Carnation Company and Ortho Pharmaceutical Corporation. Mr. Yates holds a B.A. degree from the University of California at Berkeley. 13 Paul D. Meyer joined Interlink in December 1989 as Controller, became its Vice President--Finance in June 1994, and its Chief Financial Officer in December 1996. From May 1988 to December 1989, he was Controller for Dix-See Sales Company. From September 1985 to May 1988, Mr. Meyer was Corporate Accounting Manager for Bell Industries. Mr. Meyer was employed at Price Waterhouse from 1983 to 1985. Mr. Meyer holds a B.A. degree in economics from the University of California at Los Angeles. Roger P. Moore, II joined Interlink in July 1997. Prior to joining the Company, he held senior management positions in sales and marketing with American Power Conversion Corporation and Anova Technologies LLC. From 1996 to 1997 he served as President of echoMEDIA, Inc. Mr. Moore holds a Master of Management from Yale University, a Master of Science in Aeronautics from Stanford University and a Bachelor of Science in Aerospace Engineering from the University of California at Los Angeles. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Historical Market Information. From its initial public offering on June 7, 1993 until September 14, 1995, the Company's Common Stock and Warrants were listed under the symbols "LINK" and "LINKW," respectively on the Nasdaq Small Cap Market. Since September 14, 1995, the Company's securities have been listed for trading on the Nasdaq National Market System under the same symbols. The following table sets forth, for the periods shown, the high and low Nasdaq sales prices for the Common Stock:
Year Ended December 31, 1998 Low High ---------------------------- --- ---- First Quarter............................. $ 4.438 $ 6.375 Second Quarter............................ $ 4.000 $ 6.375 Third Quarter............................. $ 2.250 $ 5.125 Fourth Quarter............................ $ 1.625 $ 4.750
On March 15, 1999, the last reported sale price of the Common Stock on Nasdaq National Market was $5.25. Number of Stockholders. As of March 15, 1999, the Company had approximately 1,600 holders of record. The Company believes that the number of beneficial owners is substantially greater than the number of record holders because a large portion of the Company's outstanding Common Stock is held of record in broker "street names" for the benefit of individual investors. Dividend Policy. The Company has never paid cash dividends. It is the Company's intention to retain earnings, if any, to finance the operation and expansion of its business and therefore it 14 does not expect to pay cash dividends in the foreseeable future. Payment of dividends, if any, will be at the discretion of the Board of Directors after taking into account various factors, including the Company's financial condition, results of operations, current and anticipated cash needs, plans for expansion and restrictions, if any, under the terms of any debt obligations of the Company or equity securities issued by the Company. Item 6. Selected Financial Data The information required by this item is included on page F-1 of this Report on Form 10-K. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is included at pages F-2 to F-4 of this Report on Form 10-K. Item 8. Financial Statements and Supplementary Data The information required by this item is included at pages F-5 to F-15 of this Report on Form 10-K and as listed in Item 14 of Part IV of this Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant Information with respect to directors of the Company is included under "Election of Directors" in the Company's definitive proxy statement for its 1999 Annual Meeting of Stockholders filed or to be filed not later than 120 days after the end of the fiscal year covered by this Report and is incorporated herein by reference. Information with respect to executive officers of the Company is included under Item 4(a) of Part I of this Report on Form 10-K. Information with respect to compliance with Section 16(a) of the Securities Exchange Act is included under "Section 16(a) beneficial ownership reporting compliance" in the Company's definitive proxy statement for its 1999 Annual Meeting of Stockholders filed or to be filed not later than 120 days after the end of the fiscal year covered by this Report and is incorporated herein by reference. Item 11. Executive Compensation Information with respect to executive compensation is included under "Executive Compensation" in the Company's definitive proxy statement for its 1999 Annual Meeting of Stockholders filed or to be filed not later than 120 days after the end of the fiscal year covered by 15 this Report on Form 10-K and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information with respect to security ownership of certain beneficial owners and management is included under "Security Ownership Of Certain Beneficial Owners And Management" in the Company's definitive proxy statement for its 1999 Annual Meeting of Stockholders filed or to be filed not later than 120 days after the end of the fiscal year covered by this Report on Form 10-K and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Not applicable. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) Financial Statements and Schedules The following documents are included in this Report on Form 10-K at the pages indicated: Page Report of Independent Public Accountants F-5 Page ---- Consolidated Balance Sheets at December 31, 1998 and 1997 F-6 Consolidated Statements of Operations for years ended December 31, 1998, F-7 1997 and 1996 Consolidated Statements of Stockholders' Equity for years ended F-8 December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for years ended December 31, 1998, F-9 1997 and 1996 Notes to Consolidated Financial Statements F-10-15 No other schedules are included because the required information is inapplicable or is presented in the financial statements or related notes thereto. (a)(2) Exhibits 3.1 Certificate of Incorporation of the Company. Incorporated by reference to 16 Exhibit 3.1b of Post-Effective Amendment No. 8 to Registrant's Registration Statement on Form S-1. Registration No. 33-60380 (the "Form S-1 Registration Statement"). 3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2a of the Form S-1 Registration Statement. 10.1 1988 Stock Option Plan, as amended and restated. Incorporated by reference to Exhibit 10.1 of the Form S-1 Registration Statement.** 10.2 1993 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1a of the Form S-1 Registration Statement.** 10.3 1996 Stock Incentive Plan. Incorporated by reference to Exhibit 10.3 of the Registrants' Annual Report on From 10-K for the year ended December 31, 1996.** 10.4 Description of Registrant's Management Compensation Program. Incorporated by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.** 10.5 Form of Promissory Note from Stuart Yaniger dated March 1993. Incorporated by reference to Exhibit 10.7 of the Form S-1 Registration Statement. 10.6 Form of Amendment to Promissory Note from Stuart Yaniger. Incorporated by reference to Exhibit 10.7a of the Form S-1 Registration Statement. 10.7 Technology Transfer Agreement between the Registrant and Franklin Eventoff dated as of December 23, 1987, and amendment thereto. Incorporated by reference to Exhibit 10.9 of the Form S-1 Registration Statement. 10.8 Lease Agreement to lease premises in Camarillo, California dated August 15, 1998. 10.9 License Agreement between the Registrant and Toshiba Silicone Co., Ltd. dated March 10, 1989. Incorporated by reference to Exhibit 10.14 of the Form S-1 Registration Statement. 17 10.10 Joint Venture Agreement among the Registrant, InvestAR s.a.r.l., Interlink Electronics Europe s.a.r.l. and IEE Finance s.a.r.l. dated November 7, 1989. Incorporated by reference to Exhibit 10.15 of the Form S-1 Registration Statement. 10.11 Exclusive License and Distributor Agreement between the Registrant and Interlink Electronics Europe s.a.r.l. dated as of November 7, 1989. Incorporated by reference to Exhibit 10.16 of the Form S-1 Registration Statement. 10.12 Manufacturing and Supply Agreement between the Registrant and Interlink Electronics Europe s.a.r.l. dated as of November 7, 1989. Incorporated by reference to Exhibit 10.17 of the Form S-1 Registration Statement. 10.13 Letter Agreement between the Registrant and InvestAR s.a.r.l. dated November 7, 1989. Incorporated by reference to Exhibit 10.18 of the Form S-1 Registration Statement. 10.14 Agreement between the Government of Luxembourg, Interlink Electronics Europe s.a.r.l., IEE Finance s.a.r.l., the Registrant and InvestAR s.a.r.l. dated December 18, 1989. Incorporated by reference to Exhibit 10.19 of the Form S-1 Registration Statement. 10.15 Agreement with InvestAR s.a.r.l. and ARBED S.A. (undated). Incorporated by reference to Exhibit 10.20 of the Form S-1 Registration Statement. 10.16 Agreement among the Registrant, Interlink Electronics Europe s.a.r.l. and InvestAR s.a.r.l. dated as of December 14, 1990. Incorporated by reference to Exhibit 10.21 of the Form S-1 Registration Statement. 10.17 Ink Technology Transfer Agreement between the Registrant and InvestAR s.a.r.l. dated December 11, 1992. Incorporated by reference to Exhibit 10.23 of the Form S-1 Registration Statement. 10.18 Financing Agreement between the Registrant and InvestAR s.a.r.l. in relation with the Ink Technology Transfer Agreement dated December 11, 1992. Incorporated by reference to Exhibit 10.24 of the Form S-1 Registration Statement. 18 10.19 Form of Confidentiality and Nondisclosure Agreement in relation with the Ink Technology Transfer Agreement (undated). Incorporated by reference to Exhibit 10.25 of the Form S-1 Registration Statement. 10.20 Form of Escrow Agreement for Technology in relation with the Ink Technology Transfer Agreement dated December 11, 1992. Incorporated by reference to Exhibit 10.26 of the Form S-1 Registration Statement. 10.21 Financing Agreement between the Registrant and InvestAR s.a.r.l. dated June 15, 1992. Incorporated by reference to Exhibit 10.27 of the Form S-1 Registration Statement. 10.22 Interlink Europe Financing Agreement between the Registration and InvestAR s.a.r.l. dated April 7, 1993. Incorporated by reference to Exhibit 10.28 of the Form S-1 Registration Statement. 10.23 Agreement between Zilog, Inc. and the Registrant dated November 30, 1993. Incorporated by reference to Exhibit 10.34 of the Form S-1 Registration Statement. 10.24 Employment Agreement between the Registrant and E. Michael Thoben, III effective as of April 1, 1996. Incorporated by reference to Exhibit 10.22 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.** 10.25 Employment Agreement between the Registrant and William A. Yates effective as of April 1, 1996. Incorporated by reference to Exhibit 10.23 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.** 10.26 Employment Agreement between the Registrant and David J. Arthur effective as of April 1, 1996. Incorporated by reference to Exhibit 10.24 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.** 19 21.1 Subsidiaries of the Registrant. 23.1 Consent of Arthur Andersen LLP. 24.1 Power of Attorney. 27.1 Financial Data Schedule. ------------ * Confidential Treatment for portions of this agreement has been granted by the Commission. ** This exhibit constitutes a management contract or compensatory plan or arrangement. (b) Reports on Form 8-K Not applicable. 20 Signatures Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Camarillo, State of California, on the 27th day of March, 1998. INTERLINK ELECTRONICS, INC. By: E. MICHAEL THOBEN, III ----------------------------------------------- E. Michael Thoben, III Chairman, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- Principal Executive Officer: E. MICHAEL THOBEN, III Chairrman of the Board, Chief March 27, 1999 - --------------------------- Executive Officer, President E. Michael Thoben, III Principal Financial Officer: PAUL D. MEYER Chief Financial Officer, March 27, 1999 - ---------------------------- Paul D. Meyer Secretary Directors: GEORGE GU* Director March 27, 1999 - ---------------------------- George Gu EUGENE F. HOVANEC* Director March 27, 1999 - ---------------------------- Eugene F. Hovanec MERRITT M. LUTZ* Director March 27, 1999 - ---------------------------- Merritt M. Lutz CAROLYN MACDOUGALL* Director March 27, 1999 - ---------------------------- Carolyn MacDougall E. MICHAEL THOBEN, III Director March 27, 1999 - ---------------------------- E. Michael Thoben, III * By: E. MICHAEL THOBEN, III --------------------------- E. Michael Thoben, III Attorney in Fact 21 EXHIBIT INDEX Exhibit 3.1 Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1b of Post-Effective Amendment No. 8 to Registrant's Registration Statement on Form S-1. Registration No. 33-60380 (the "Form S-1 Registration Statement"). 3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2a of the Form S-1 Registration Statement. 10.1 1988 Stock Option Plan, as amended and restated. Incorporated by reference to Exhibit 10.1 of the Form S-1 Registration Statement.** 10.2 1993 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1a of the Form S-1 Registration Statement.** 10.3 1996 Stock Incentive Plan. Incorporated by reference to Exhibit 10.3 of the Registrant's Annual Report on From 10-K for the year ended December 31, 1996.** 10.4 Description of Registrant's Management Compensation Program. Incorporated by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.** 10.5 Form of Promissory Note from Stuart Yaniger dated March 1993. Incorporated by reference to Exhibit 10.7 of the Form S-1 Registration Statement. 10.6 Form of Amendment to Promissory Note from Stuart Yaniger. Incorporated by reference to Exhibit 10.7a of the Form S-1 Registration Statement. 10.7 Technology Transfer Agreement between the Registrant and Franklin Eventoff dated as of December 23, 1987, and amendment thereto. Incorporated by reference to Exhibit 10.9 of the Form S-1 Registration Statement. 10.8 Lease Agreement to lease premises in Camarillo, California dated August 15, 1998. 10.9 License Agreement between the Registrant and Toshiba Silicone Co., Ltd. dated March 10, 1989. Incorporated by reference to Exhibit 10.14 of the Form S-1 Registration Statement. 10.10 Joint Venture Agreement among the Registrant, InvestAR s.a.r.l., Interlink Electronics Europe s.a.r.l. and IEE Finance s.a.r.l. dated November 7, 1989. Incorporated by reference to Exhibit 10.15 of the Form S-1 Registration Statement. 10.11 Exclusive License and Distributor Agreement between the Registrant and Interlink Electronics Europe s.a.r.l. dated as of November 7, 1989. Incorporated by reference to Exhibit 10.16 of the Form S-1 Registration Statement. 10.12 Manufacturing and Supply Agreement between the Registrant and Interlink Electronics Europe s.a.r.l. dated as of November 7, 1989. Incorporated by reference to Exhibit 10.17 of the Form S-1 Registration Statement. 10.13 Letter Agreement between the Registrant and InvestAR s.a.r.l. dated November 7, 1989. Incorporated by reference to Exhibit 10.18 of the Form S-1 Registration Statement. 10.14 Agreement between the Government of Luxembourg, Interlink Electronics Europe s.a.r.l., IEE Finance s.a.r.l., the Registrant and InvestAR s.a.r.l. dated December 18, 1989. Incorporated by reference to Exhibit 10.19 of the Form S-1 Registration Statement. 10.15 Agreement with InvestAR s.a.r.l. and ARBED S.A. (undated). Incorporated by reference to Exhibit 10.20 of the Form S-1 Registration Statement. 10.16 Agreement among the Registrant, Interlink Electronics Europe s.a.r.l. and InvestAR s.a.r.l. dated as of December 14, 1990. Incorporated by reference to Exhibit 10.21 of the Form S-1 Registration Statement. 10.17 Ink Technology Transfer Agreement between the Registrant and InvestAR s.a.r.l. dated December 11, 1992. Incorporated by reference to Exhibit 10.23 of the Form S-1 Registration Statement. 10.18 Financing Agreement between the Registrant and InvestAR s.a.r.l. in relation with the Ink Technology Transfer Agreement dated December 11, 1992. Incorporated by reference to Exhibit 10.24 of the Form S-1 Registration Statement. 10.19 Form of Confidentiality and Nondisclosure Agreement in relation with the Ink Technology Transfer Agreement (undated). Incorporated by reference to Exhibit 10.25 of the Form S-1 Registration Statement. 10.20 Form of Escrow Agreement for Technology in relation with the Ink Technology Transfer Agreement dated December 11, 1992. Incorporated by reference to Exhibit 10.26 of the Form S-1 Registration Statement. 10.21 Financing Agreement between the Registrant and InvestAR s.a.r.l. dated June 15, 1992. Incorporated by reference to Exhibit 10.27 of the Form S-1 Registration Statement. 10.22 Interlink Europe Financing Agreement between the Registration and InvestAR s.a.r.l. dated April 7, 1993. Incorporated by reference to Exhibit 10.28 of the Form S-1 Registration Statement. 10.23 Agreement between Zilog, Inc. and the Registrant dated November 30, 1993. Incorporated by reference to Exhibit 10.34 of the Form S-1 Registration Statement. 10.24 Employment Agreement between the Registrant and E. Michael Thoben, III effective as of April 1, 1996. Incorporated by reference to Exhibit 10.22 on the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.** 10.25 Employment Agreement between the Registrant and William A. Yates effective as of April 1, 1996. Incorporated by reference to Exhibit 10.23 on the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.** 10.26 Employment Agreement between the Registrant and David J. Arthur effective as of April 1, 1996. Incorporated by reference to Exhibit 10.24 on the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.** 21.1 Subsidiaries of the Registrant. 23.1 Consent of Arthur Andersen LLP. 24.1 Power of Attorney. 27 Financial Data Schedule. ------------ * Confidential Treatment for portions of this agreement has been granted by the Commission. ** This exhibit constitutes a management contract or compensatory plan or arrangement.
INTERLINK ELECTRONICS, INC. SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- The following selected financial data should be read in conjunction with the financial statements and the related Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein: Year Ended December 31, ------------------------------------------------------ 1998 1997 1996 1995 1994 ------- ------- -------- -------- -------- Statement of Operations Data: Revenues $22,095 $19,153 $ 13,485 $ 10,741 $ 7,797 Cost of revenues 13,954 11,829 7,028 5,252 4,094 ------- ------- -------- -------- -------- Gross profit 8,141 7,324 6,457 5,489 3,703 ------- ------- -------- -------- -------- Operating expenses: Product development and research 1,416 1,600 1,234 897 1,011 Selling, general and administrative 5,837 5,555 4,617 4,524 3,887 ------- ------- -------- -------- -------- Total operating expenses 7,253 7,155 5,851 5,421 4,898 ------- ------- -------- -------- -------- Operating income (loss) 888 169 606 68 (1,195) ------- ------- -------- -------- -------- Other income (expense): Interest expense (127) (152) (118) (60) (37) Minority interest - - - 41 - Other (359) 13 27 101 155 Gain from sale of interest in European Joint Venture - - - - 3,380 ------- ------- -------- -------- -------- Total other income (expense) (486) (139) (91) 82 3,489 ------- ------- -------- -------- -------- Net income $ 402 $ 30 $ 515 $ 150 $ 2,303 ======= ======= ======== ======== ======== Earnings per share - basic $ .08 $ .01 $ .12 $ .04 $ .49 Earnings per share - diluted $ .08 $ .01 $ .11 $ .03 $ .38 December 31, ------------------------------------------------------ 1998 1997 1996 1995 1994 ------- ------- -------- -------- -------- Balance Sheet Data: Working capital $14,139 $ 12,461 $ 8,969 $ 6,353 $ 2,140 Total assets 19,577 17,555 13,185 10,187 5,185 Short term debt 629 514 403 255 251 Long term debt and capital lease obligations 1,423 724 850 672 121 Stockholders' equity 14,665 13,453 9,969 7,589 3,651
F - 1 INTERLINK ELECTRONICS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table presents, as a percentage of total revenues, certain selected consolidated financial data of each of the three years in the period ended December 31, 1998.
================================================================================ 1998 1997 1996 - -------------------------------------------------------------------------------- Revenues: 100% 100% 100% Gross profit 37 38 48 Operating expenses: Product development and research 7 8 9 Selling, general and administrative 26 29 34 Total operating expenses 33 37 43 Operating income 4 1 5 Other expense (2) (1) (1) Net income 2 - 4 ================================================================================
In 1998, revenues grew 15% to $22.1 million as compared to $19.2 million in 1997. Revenues increased 42% in 1997 from $13.5 million in 1996. This revenue growth is a result of the Company's focus on developing and marketing the computer pointing device product line based on the Company's patented technologies, primarily in the computerized presentation projector market. Revenues from this product line grew from $7.9 million in 1995 to $11.6 million in 1996, $16.9 million in 1997 and $19.4 million in 1998. The Company has established relationships with most of the major Original Equipment Manufacturers (OEM's) in the computerized presentation projector market and currently derives approximately two-thirds of its revenue from that market. Many of these OEM's reside in Japan (however the majority of the end-user customer base is in the US) and accordingly approximately 50% of the Company's revenues come from Japanese customers. As a result the Company is subject to foreign currency exchange rate fluctuations, primarily yen/dollar. Because of the Company's focus on pointing device products, the Company expects that the Custom Applications product line will show minimal or negative growth in the future. In 1998, gross profit as a percent of sales was 37% as compared to 38% in 1997 and 48% in 1996. This decline is a result of the growth of the Company's sales to OEM customers, which typically carry a lower gross profit percentage as compared to non-OEM sales. Additionally the computerized presentation projector industry now is experiencing the rapid product development and price competition expectations typically experienced in the computer hardware industry. The drop in gross profit percentage from 1996 to 1997 was also impacted by a one-time manufacturing yield problem. Product development and research expense increased from $1.2 million in 1996, to $1.6 million in 1997 and $1.4 million in 1998. During 1997, development costs increased primarily due to the development costs, both internal and external, relating to the introduction of the Company's VersaPad technology and the development of RemoteLink technology. In 1998 resources were added to support the increased OEM business both in the US and Japan and to develop the new product FreedomWriter (first shipped in December 1998) and a new touchpad peripheral to be introduced in 1999. F - 2 On a percent of sales basis, the Company has achieved a decline in SG&A costs from 34% in 1996, to 29% in 1997 and 26% in 1998. This decline results from the amortization of fixed SG&A costs over a greater base of sales and the shift in product mix towards OEM sales. The Company recorded a profit from operations of $606,000 in 1996, $169,000 in 1997 and $888,000 in 1998. The decline in 1997 as compared to 1996 was caused by a one-time write-off due to yield problems related to the new VersaPad technology that more than offset continued strong revenue growth and cost containment efforts. The improvement in 1998 as compared to 1997 is a result of continued growth from the OEM business which allowed for strong cost containment that offset the lower gross margin percentage. Other expense, relatively minor in prior years, reached $486,000 in 1998 due to a one-time legal settlement expense of $355,000. The revenue growth in the Company's Computer Pointing Device product line, and operating cost control contributed to achieve 1996, 1997, and 1998 net income of $515,000, $30,000 and $402,000. The decline in 1997 as compared to 1996 was caused by a one-time write-off due to yield problems related to the new VersaPad technology that more than offset continued strong revenue growth and cost containment efforts. 1998 results were negatively impacted by a one-time charge related to a legal settlement of $355,000. Liquidity and Capital Resources Working capital at December 31, 1998 was $14.1 million versus $12.5 million at the end of 1997. This $1.6 million increase resulted from positive results from operations and from the proceeds from debt agreements obtained through Japanese banks. In 1998, operations consumed approximately $479,000 in cash due to the growth in accounts receivable and inventory necessitated by revenue growth. As the Company continues to pursue its branded products and Japan-based businesses, both markets known for extended payment policies, operations may continue to be a net user of cash. In 1998 the Company spent approximately $846,000 to purchase additional manufacturing equipment and computer equipment, related to the Company's internal computer network. In 1998, the Company negotiated an increase in the maximum available on its Japanese bank line of credit to $1.1 million ($132,000 was used as of December 31, 1998). Also the Company's US line of credit was unused at December 31, 1998 ($3 million availability). Additionally, the company believes there are a number of sources available for the leasing of equipment. A secondary offering of equity securities or the exercise of outstanding stock options are potential sources of equity capital that may be available to the Company. Management believes that forecasted cash requirements for the next twelve months can be met from existing cash and invested cash balances. However, an unforeseen downturn of results in sufficient magnitude could effect the Company's ability to meet that forecast. Year 2000 Issues The Company has assessed the Year 2000 compliance of each of the products it currently manufactures and sells. The Company believes each of those products and their component parts is Year 2000 compliant. The Company has assessed the sensitivity of its internal manufacturing control, accounting and information management systems and determined that a majority of its systems have no material Year 2000 deficiencies. The Company has developed and is implementing a strategy to identify and eliminate any remaining system deficiencies. The Company believes that the total cost of eliminating such deficiencies will not exceed $100,000. Completion of this program is expected by mid-1999. F - 3 In the fourth quarter of 1998 the Company requested each of its suppliers of critical parts and services to provide information to the Company about the entity's anticipated Year 2000 compliance. Until that information is received, the Company cannot complete that phase of the Company's Year 2000 assessment. In 1999 the Company expects to complete plans for risk management and any contingency plans determined to be necessary. At this time, the Company believes costs incurred in responding to other parties' Year 2000 computer system deficiencies, together with the cost of any required modifications to the Company's ancillary systems, will not have a material impact on the Company's results of operations or financial condition. This analysis may be modified as the Company receives responses from its parts and services suppliers. Deficiencies not cured could severely impact the Company's ability to meet the above cost estimate, timeline and its ability to operate efficiently beyond January 1, 2000. In its analysis, the Company has assumed that basic public utilities such as gas, electric and telephone services will continue to be available for operations of the Company on and after January 1, 2000. If this assumption proves incorrect, the operations of the affected location would be materially adversely affected for the duration of the interruption. Foreign Currency Exchange Risk The Company enters into foreign exchange forward contracts to hedge certain revenue exposures against future movements in foreign exchange rates. Gains and losses on the forward contracts are largely offset by gains and losses on the underlying exposure and consequently a sudden or significant change in foreign exchange rates would not have a material impact on future net income or cash flows. F - 4 Report of Independent Public Accountants To the Board of Directors of Interlink Electronics, Inc.: We have audited the accompanying consolidated balance sheets of Interlink Electronics, Inc. (a Delaware corporation) and its subsidiary as of December 31,1997 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for the three years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Interlink Electronics, Inc. and its subsidiary as of December 31, 1997 and 1998, and the results of their operations and their cash flows for the three years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California February 11, 1999 F - 5
INTERLINK ELECTRONICS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) - ----------------------------------------------------------------------------------------------------- December 31, ---------------------------- 1998 1997 ----------- ----------- Assets Current assets: Cash and cash equivalents $ 3,900 $ 4,176 Accounts receivable, less allowance for doubtful accounts of $462 and $352 in 1998 and 1997, respectively 6,758 5,684 Inventories 6,796 5,461 Prepaid expenses and other current assets 174 518 ----------- ----------- Total current assets 17,628 15,839 ----------- ----------- Property and equipment, net 1,561 1,150 Patents and trademarks, less accumulated amortization of $640 and $542 in 1998 and 1997, respectively 277 375 Other assets 111 191 ----------- ----------- Total assets $ 19,577 $ 17,555 =========== =========== Liabilities And Stockholders' Equity Current liabilities: Bank line of credit $ 132 $ 576 Current maturities of long-term debt and capital lease obligations 498 514 Accounts payable 2,220 1,935 Accrued payroll and expenses 639 353 ----------- ----------- Total current liabilities 3,489 3,378 ----------- ----------- Long-term debt, net of current portion 1,074 337 Capital lease obligations, net of current portion 349 387 Commitments and contingencies - - Stockholders' equity: Common stock (40,000 shares authorized, 5,216 and 5,202 issued and outstanding at December 31, 1998 and 1997, respectively) 24,694 24,629 Accumulated other comprehensive income 216 (529) Accumulated deficit (10,245) (10,647) ----------- ----------- Total stockholders' equity 14,665 13,453 ----------- ----------- Total liabilities and stockholders' equity $ 19,577 $ 17,555 =========== =========== The accompanying notes are an integral part of these consolidated financial statements.
F - 6
INTERLINK ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------------------------------- Year Ended December 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Revenues $ 22,095 $ 19,153 $ 13,485 Cost of revenues 13,954 11,829 7,028 ----------- ----------- ----------- Gross profit 8,141 7,324 6,457 Operating expenses: Product development and research 1,416 1,600 1,234 Selling, general and administrative 5,837 5,555 4,617 ----------- ----------- ----------- Total operating expenses 7,253 7,155 5,851 ----------- ----------- ----------- Operating income 888 169 606 ----------- ----------- ----------- Other income (expense): Interest expense (127) (152) (118) Other income (expense) (359) 13 27 ----------- ----------- ----------- Total other income (expense) (486) (139) (91) ----------- ----------- ----------- Net income $ 402 $ 30 $ 515 =========== =========== =========== Earnings per share - basic $ .08 $ .01 $ .12 Earnings per share - diluted $ .08 $ .01 $ .11 Weighted average shares - basic 5,212 4,764 4,387 Weighted average shares - diluted 5,212 5,020 4,602 The accompanying notes are an integral part of these consolidated financial statements.
F - 7
INTERLINK ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS) - ----------------------------------------------------------------------------------------------------------------------- Accum- ulated Other Total Common Stock Accum- Compre- Stock- Compre- ------------ ulated hensive holders' hensive Shares Amount Deficit Income Equity Income ------ --------- --------- ----------- --------- --------- Balance, December 31, 1995 4,255 $ 18,880 $ (11,192) $ (99) $ 7,589 Issuance of shares upon exercise of employee stock options 36 152 152 Issuance of shares upon exercise of stock warrants 224 1,736 1,736 Cumulative translation adjustment (23) (23) $ (23) Net income 515 515 515 ------ --------- --------- ----------- --------- --------- Balance, December 31, 1996 4,515 20,768 (10,677) (122) 9,969 $ 49 ========= Issuance of shares upon exercise of employee stock options 363 1,711 1,711 Issuance of shares in private placement 324 2,150 2,150 Cumulative translation adjustment (407) (407) $ (407) Net income 30 30 30 ------ --------- --------- ----------- --------- --------- Balance, December 31, 1997 5,202 24,629 (10,647) (529) 13,453 $ 377 ========= Issuance of shares upon exercise of employee stock options 14 65 65 Cumulative translation adjustment 745 745 $745 Net income 402 402 402 ------ --------- --------- ----------- --------- --------- Balance, December 31, 1998 5,216 $ 24,694 $ (10,245) $ 216 $ 14,665 $ 1,147 ====== ========= ========= =========== ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
F - 8
INTERLINK ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) - ---------------------------------------------------------------------------------------------------- Year Ended December 31, ------------------------------------- 1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net income $ 402 $ 30 $ 515 Adjustments to reconcile net income to net cash used in operating activities: Provision for bad debts 110 119 77 Depreciation and amortization 533 712 602 Changes in operating asets and liabilities: Accounts receivable (1,184) (2,154) (1,366) Inventories (1,335) (1,827) (1,450) Prepaid expenses and other current assets 344 (233) (46) Other assets 80 2 37 Accounts payable 285 789 (124) Accrued payroll and expenses 286 (464) 416 --------- --------- --------- Net cash used in operating activities (479) (3,026) (1,339) --------- --------- --------- Cash flows from investing activities: Purchases of property and equipment (846) (555) (432) Costs of patents and trademarks - (25) (149) --------- --------- --------- Net cash used in investing activities (846) (580) (581) --------- --------- --------- Cash flows from financing activities: Borrowings on bank line of credit 548 1,576 - Payments on bank line of credit (992) (1,000) - Borrowings on note payable 880 237 180 Payments on note payable (42) (79) (57) Proceeds from sale/leaseback 332 225 478 Principal payments on capital lease obligations (487) (353) (232) Principal payments on Tech Transfer Agreement - (45) (43) Proceeds from issuance of common stock, net 65 3,861 1,888 --------- --------- --------- Net cash provided by financing activities 304 4,422 2,214 --------- --------- --------- Effect of exchange rate changes on cash 745 (407) (23) --------- --------- --------- Increase (decrease) in cash and cash equivalents (276) 409 271 Cash and cash equivalents: beginning of period 4,176 3,767 3,496 --------- --------- --------- end of period $ 3,900 $ 4,176 $ 3,767 ========= ========= ========= Supplemental disclosures of cash flow information: Interest paid $ 127 $ 152 $ 111 Income taxes paid 1 33 1 The accompanying notes are an integral part of these consolidated financial statements.
F - 9 INTERLINK ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ 1. Summary of Significant Accounting Policies Interlink Electronics, Inc. (the "Company") was incorporated in the State of California on February 27, 1985 and reincorporated in the State of Delaware on July 10, 1996. The Company is engaged in the development and manufacture of products and components incorporating Force Sensing Resistors. Consolidation Policy - The consolidated financial statements include the accounts of the Company and its majority owned Japanese subsidiary. All material intercompany accounts and transactions have been eliminated. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Foreign Currency Transactions - The accounts of the Company's foreign subsidiary have been translated according to the provisions of Statement of Financial Accounting Standards No. 52. Gains and losses resulting from translation of the foreign financial statements are included in consolidated stockholders' equity. Any gain or loss resulting from foreign currency transactions are reflected in the consolidated statement of operations for the period in which they occur. Cash and Cash Equivalents - The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories - Inventories are stated at the lower of cost or market and includes material, labor, and factory overhead. Cost is determined using the average cost method. Property and Equipment - Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is recorded on the straight-line basis over the estimated useful lives of the assets which range from three to ten years. Amortization of leasehold improvements is made based upon the estimated useful lives of the assets or the term of the lease, whichever is shorter. Maintenance and repairs are charged to operations as incurred, while significant improvements are capitalized. Upon retirement or disposition of property, the asset and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is charged to operations. Patents and Trademarks - The costs of acquiring patents and trademarks are amortized on a straight-line basis over their estimated useful lives, ranging from seven to seventeen years. Amortization expense for the years ended December 31, 1998, 1997 and 1996 was $98,000, $90,000 and $78,000, respectively. Income Taxes - The Company accounts for taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under this statement, deferred tax assets and liabilities represent the tax effects, calculated at currently effective rates, of future deductible taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements (see Note 11). Earnings Per Share - Earnings per share-basic is based upon the weighted average number of shares outstanding. Earnings per share-diluted is based on the weighted average shares outstanding including the dilutive effect of common stock equivalents. (See Note 9) Accounts Receivable - Increases to the allowance for doubtful accounts totaled $177,000, $42,000 and $77,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Write-offs against the allowance for doubtful accounts totaled, $67,000, $139,000 and none for the years ended December 31, 1998, 1997 and 1996, respectively. Reclassifications - Certain prior year balances have been reclassified to conform with the 1998 presentation. F - 10 Recent Pronouncements - In June 1998, the AICPA issued Statement of Financial Accounting Standards #133 "Accounting for Derivative Instruments and Hedging Activities." The Company will adopt this standard in the third quarter of 1999. The Company has not yet determined the impact of this new standard. 2. Inventories
Inventories consisted of the following (in thousands): December 31, ------------------------ 1998 1997 --------- --------- Raw material $ 3,130 $ 2,666 Work in process 618 1,107 Finished goods 3,048 1,688 --------- --------- Total inventories $ 6,796 $ 5,461 ========= =========
3. Property And Equipment Property and equipment consisted of the following (in thousands):
December 31, ------------------------- 1998 1997 --------- ---------- Furniture, machinery and equipment $ 3,956 $ 3,139 Leasehold improvements 177 147 --------- ---------- 4,133 3,286 Less accumulated depreciation and amortization (2,572) (2,136) --------- ---------- Property and equipment, net $ 1,561 $ 1,150 ========= ==========
Depreciation and amortization expense charged to operations amounted to $436,000, $534,000 and $449,000 for the years ended 1998, 1997, and 1996, respectively. Property and equipment under capital leases had a net book value of $656,000 and $1,046,000 at December 31, 1998 and 1997 respectively. 4. Acquisition of Japanese Subsidiary On April 1, 1994, the Company acquired an 80% interest in Interlink Electronics KK for $8,000 in cash. Interlink Electronics KK is located in Tokyo, Japan and is a distributor and value-added manufacturer of FSR-based products. The acquisition has been accounted for as a purchase and the results of Interlink Electronics KK have been included in the accompanying consolidated financial statements since the date of acquisition. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets acquired ($428,000) and the liabilities assumed ($476,000). This allocation resulted in goodwill of approximately $58,000 which is being amortized over 15 years. 5. Short-Term Borrowings The Company maintains a domestic revolving line of credit with a maximum amount of $3,000,000, none of which had been drawn as of December 31, 1998. The loan carries an interest rate of the bank's interest rate (7.75% at December 31, 1998) and matures in May 1999. The loan is secured by all of the Company's assets and requires the Company to meet certain financial covenants, all of which were satisfied at December 31, 1998. The Company's Japan subsidiary maintains an unsecured line of credit with a bank with a maximum amount of $1,124,000, of which, $132,000 was drawn at December 31, 1998. This line carries an interest rate of 1.3%. F - 11 Selected information regarding short-term borrowings is as follows:
Year Ended December 31, ------------------------- 1998 1997 --------- ---------- Average daily borrowings (000's) $ 594 $ 743 Maximum daily borrowings (000's) $ 1,124 $ 1,576 Weighted average interest rate during year 1.3% 7.0%
6 . Long-Term Debt and Capital Leases Bank loans - The Company's Japan subsidiary, Interlink Electronics KK, maintains unsecured loans with five banks. The loans carry a weighted average interest rate of 2.7% and are payable in monthly installments through the year 2004. The combined balance outstanding as of December 31, 1998 and 1997 was $1,244,000 and $406,000, respectively. Capital lease obligations - The Company had an equipment financing agreement with a leasing company to provide for the purchase of equipment. As amounts were drawn, the funded amount was converted to a note payable with a standard payment schedule of up to 48 months at an effective interest rate of 8.35%. As of December 31, 1998, the Company had utilized and converted $1,825,000 to notes payable. At December 31, 1998, scheduled maturates of long-term debt and capital lease obligations for the next five years and thereafter are as follows (in thousands):
Debt Leases -------- --------- 1999 $ 195 $ 372 2000 253 207 2001 268 120 2002 252 52 2003 201 - Thereafter 161 - -------- --------- 1,330 751 Less amount representing interest (86) (74) -------- --------- Present value of minimum payments 1,244 677 -------- --------- Current portion (170) (328) Long term portion $ 1,074 $ 349 ======== =========
7. Capitalization Preferred Stock - The Company is authorized to issue up to 10,000,000 shares of Preferred Stock. As of December 31, 1998, none were outstanding. In the future, the Preferred Stock may be issued in one or more series with such rights and preference as may be fixed and determined by the Board of Directors. Common Stock - The Company is authorized to issue 40,000,000 shares of Common Stock. In June 1996, 223,723 warrants, with an exercise price of $8.25, were exercised. The Company received net proceeds of $1.74 million after deducting offering costs. The remaining 1,673,891 warrants from this class expired in accordance with their terms. In September 1997, the Company completed a private placement of 324,348 shares of common stock. The Company received gross proceeds of $2,250,000 prior to fees totaling $100,000. 8. Stock Warrants And Stock Options On June 4, 1998, the Company's remaining outstanding stock warrants (270,000) expired by their terms. Under the terms of the Company's Option Plans, officers and key employees may be granted nonqualified or incentive stock options and outside directors and independent contractors of the Company may be granted nonqualified stock options. The aggregate number of shares which may be issued under the plans is 3,184,150. Outstanding options under the plans vest in various increments through October 2002. Information concerning stock options under the plans is summarized as follows: F - 12
1998 1997 1996 -------------------------- --------------------------- --------------------------- Weighted-Average Weighted-Average Weighted-Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ ---------------- ------ ---------------- ------ ---------------- Outstanding beg year 1,415 $5.50 1,432 $5.25 1,219 $4.63 Granted 2,486 3.21 434 6.50 393 5.76 Exercised (14) 4.63 (363) 4.71 (36) 4.23 Forfeited and expired (1,832) 5.62 (88) 5.62 (144) 5.62 ------ ----- ------ ----- ----- ----- Outstanding end year 2,055 $2.75 1,415 $5.62 1,432 $5.38 ------ ----- ------ ----- ----- ----- Exercisable end year 983 $2.75 884 $5.50 958 $5.25 ------ ----- ------ ----- ----- -----
As of December 31, 1998, the stock options outstanding under the plans had an average exercise price of $2.75 and a weighted average remaining contractual life of five years. The weighted average fair value at date of grant for options granted during 1998, 1997 and 1996 was $3.21, $6.50 and $5.76 per option, respectively. The fair value of options at date of grant was estimated using the Black Scholes model with the following weighted average assumptions:
1998 1997 1996 Expected life (years) 4 4 4 Interest rate 6.0% 6.3% 6.3% Volatility 79% 64% 59% Dividend yield 0% 0% 0%
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for these plans. Had compensation cost for the Company's plans been determined based on the fair value at the grant dates for awards under the plans consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company would have recorded stock-based compensation expense of $1.6 million in 1998, $1.2 million in 1997 and $213,000 in 1996. 9. Earnings Per Share For all periods presented, per share information was computed pursuant to provisions of SFAS 128. The computation of earnings per share - basic is based upon the weighted average number of common shares outstanding during the periods presented. Earnings per share - diluted also includes the effect of common shares contingently issuable from options and warrants (in periods which they have a dilutive effect). Common stock equivalents are calculated using the treasury stock method. Under the treasury stock method, the proceeds from the assumed conversion of options and warrants are used to repurchase outstanding shares, using a yearly average market price. F - 13 The following table contains information necessary to calculate earnings per share:
(In Thousands) ------------------------------- Year Ended December 31, ------------------------------- 1998 1997 1996 ------ ------ ------ Weighted average shares outstanding 5,212 4,764 4,388 Assumed conversion of options and warrants - (1) 1,685 1,702 Assumed repurchase of shares - (1) (1,429) (1,487) ------ ------ ------ Weighted average shares - diluted 5,212 5,020 4,602 ====== ====== ====== (1) The diluted share calculation result was anti-dilutive. Thus, the primary weighted average shares were used.
10. Commitments and Contingencies The Company leases its main facility and certain equipment under operating leases expiring through 2003. Rent payments totaled approximately $239,000, $236,000 and $227,00 for 1998, 1997 and 1996, respectively. Minimum lease commitments at December 31, 1998 are summarized as follows (in thousands): 1999 $ 330 2000 267 2001 273 2002 283 2003 185 ------- $ 1,338 ======= From time to time, the Company is involved in various legal actions which arise in the ordinary course of business. The Company does not believe that losses, if any, incurred will have a significant impact on the Company's financial position or results of operations. 11. Income Taxes As of December 31, 1998, the Company had federal and state income tax net operating loss carryforwards of approximately $11,674,000 expiring through 2017 and $80,000 expiring through 1999, respectively. The Company has research and development tax credit carryforwards of approximately $260,000 and $270,000 at December 31, 1997 and 1998, respectively. The Company has total net deferred tax assets as follows:
(In Thousands) ---------------------------- 1998 1997 --------- --------- Deferred tax assets: Net operating loss carryforward $ 3,976 $ 3,852 Vacation accrual 70 54 Allowance for bad debts 187 105 Other 456 316 Total deferred tax assets 4,689 4,327 Valuation allowance (4,689) (4,327) --------- --------- Total $ - $ - ========= =========
A valuation allowance is recorded if the weight of available evidence suggests it is more likely than not that if some portion or all of the deferred tax asset will not be recognized. There is no assurance that the Company will continue to be profitable in future periods, therefore, a valuation allowance has been recognized for the full amount of the deferred tax asset for 1998 and 1997. F - 14 12. Related Party Transaction The Company had an agreement with its founder to provide consulting services to the Company at $48,000 per year through December 1997. 13. Revenue Information Export Sales - The following table shows the breakdown of the Company's export sales as a percentage of consolidated revenues.
Year Ended December 31, -------------------------------- 1998 1996 1997 -------- -------- -------- Asia 59% 26% 30% Europe and other 11% 13% 20%
Major Customers - In 1998, sales to three customers in the computer industry exceeded 10% of the Company's sales. Their sales constituted over 15%, 14% and 10%. In 1997, sales to one customer in the computer industry constituted 13% of the Company's sales and in 1996, sales to one customer in the computer industry constituted 15% of the Company's sales. F - 15 EX-10.8 2 LEASE LEASE AGREEMENT (NNN) Basic Lease Information Lease Date: August 12, 1998 Landlord: Lincoln Ventura Technology Center I, a California limited partnership Landlord's Address: c/o LPC MS, Inc. 30 Executive Park, Suite 100 Irvine, California 92614 Tenant: Interlink Electronics, Inc., a Delaware corporation Tenant's Address: 546 Flynn Road Camarillo, California 93010 Premises: Approximately 35,333 rentable square feet as shown on Exhibit A Premises Address: 546 Flynn Road (3601 Calle Tecate) Camarillo, California 93010 Park: Approximately 237,866 rentable square feet Term: Sixty (60) months August 15, 1998 ("Commencement Date"), through August 14, 2003 ("Expiration Date") Base Rent (P. 3): Nineteen Thousand Four Hundred Thirty-three and 15/100 Dollars ($19,433.15) per month Adjustments to August 15, 1998 - May 31, 2000 $19,433.15 per month Base Rent: June 1, 2000 - May 31, 2002 $20,846.47 per month June 1, 2002 - August 14, 2003 $22,259.79 per month Security Deposit Twenty Two Thousand Two Hundred Fifty-nine and (P. 4): 79/100 Dollars ($22,259.79) See Paragraph 4 *Tenant's Share of Operating Expenses (P. 6.1): 14.85% of the Park *Tenant's Share of Tax Expenses (P. 6.2): 14.85% of the Park *Tenant's Share of Common Area Utility Costs (P. 7): 14.85% of the Park *Tenant's Share of Utility Expenses (P. 7): 14.85% of the Park *The amount of Tenant's Share of the expenses as referenced above shall be subject to modification as set forth in this Lease. Permitted Uses (P. 9): Design, development, and manufacturing of Force Sensing Resistor Sensors and related technologies, subassemblies, and finished products and general offices related thereto, but only to the extent permitted by the City of Camarillo and all agencies and governmental authorities having jurisdiction thereof Unreserved Ninety-eight (98) non-exclusive and non-designated Parking Spaces: spaces Broker (P. 38): None Exhibits: Exhibit A - Premises, Building, Lot and/or Park Exhibit B - Tenant Improvements Exhibit C - Rules and Regulations Exhibit D - Covenants, Conditions and Restrictions Exhibit E - Hazardous Materials Disclosure Certificate - Example Exhibit F - Change of Commencement Date - Example Exhibit G - Tenant's Initial Hazardous Materials Disclosure Certificate Exhibit H - Sign Criteria Addenda: Addendum I: Option to Extend the Lease 1 TABLE OF CONTENTS SECTION PAGE 1. PREMISES..................................................................3 2. ADJUSTMENT OF COMMENCEMENT DTE; CONDITION OF THE PREMISES.................3 3. RENT......................................................................3 4. SECURITY DEPOSIT..........................................................4 5. TENANT IMPROVEMENTS.......................................................4 6. ADDITIONAL RENT...........................................................4 7. UTILITIES.................................................................6 8. LATE CHARGES..............................................................7 9. USE OF PREMISES...........................................................7 10. ALTERATIONS AND ADDITIONS; AND SURRENDER OF PREMISES......................8 11. REPAIRS AND MAINTENANCE...................................................9 12. INSURANCE................................................................10 13. WAIVER OF SUBROGATION....................................................11 14. LIMITATION OF LIABILITY AND INDEMNITY....................................11 15. ASSIGNMENT AND SUBLEASING................................................11 16. AD VALOREM TAXES.........................................................13 17. SUBORDINATION............................................................13 18. RIGHT OF ENTRY...........................................................13 19. ESTOPPEL CERTIFICATE.....................................................14 20. TENANT'S DEFAULT.........................................................14 21. REMEDIES FOR TENANT'S DEFAULT............................................14 22. HOLDING OVER.............................................................15 23. LANDLORD'S DEFAULT.......................................................16 24. PARKING..................................................................16 25. SALE OF PREMISES.........................................................16 26. WAIVER...................................................................16 27. CASUALTY DAMAGE..........................................................16 28. CONDEMNATION.............................................................17 29. ENVIRONMENTAL MATTERS/HAZARDOUS MATERIALS................................17 30. FINANCIAL STATEMENTS.....................................................19 31. GENERAL PROVISIONS.......................................................19 32. SIGNS....................................................................21 33. MORTGAGEE PROTECTION.....................................................21 34. QUITCLAIM................................................................21 35. MODIFICATIONS FOR LENDER.................................................21 36. WARRANTIES OF TENANT.....................................................21 37. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT..........................21 38. BROKERAGE COMMISSION.....................................................22 39. QUIET ENJOYMENT..........................................................22 40 LANDLORD'S ABILITY TO PERFORM TENANT'S UNPERFORMED OBLIGATIONS...........22 2 LEASE AGREEMENT DATE: This Lease is made and entered into as of the Lease Date set forth on Page 1. The Basic Lease Information set forth on Page 1 and this Lease are and shall be construed as a single instrument. 1. Premises: Landlord hereby leases the Premises to Tenant upon the terms and conditions contained herein. Landlord hereby grants to Tenant a license for the right to use, on a non-exclusive basis, parking areas and ancillary facilities located within the Common Areas of the Park, subject to the terms of this Lease. Landlord and Tenant hereby agree that for purposes of this Lease, as of the Lease Date, the rentable square footage area of the Premises, the Building, the Lot and the Park shall be deemed to be the number of rentable square feet as set forth in the Basic lease Information on Page 1. Tenant hereby acknowledges that the rentable square footage of the Premises may include a proportionate share of certain areas used in common by all occupants of the Building and/or the Park (for example an electrical room, compressor room or telephone room). Tenant further agrees that the number of rentable square feet of the Building, the Lot and the Park may subsequently change after the Lease Date commensurate with any modifications to any of the foregoing by Landlord, and Tenant's Share shall accordingly change. 2. Adjustment of Commencement Date; Condition of the Premises: 2.1 As of the Lease Date, Tenant is in possession of the Premises under a prior Lease. In the event the commencement date and/or the expiration date of this Lease is other than the Commencement Date and/or Expiration Date specified in the Basic Lease Information, as the case may be, Landlord and Tenant shall execute a written amendment to this Lease, substantially in the form of Exhibit F hereto, wherein the parties shall specify the actual commencement date, expiration date and the date on which Tenant is to commence paying Rent. The word "Term" whenever used herein refers to the initial term of this Lease and any extension thereof. By taking possession of the Premises, Tenant shall be deemed to have accepted the Premises in good condition and state of repair. Tenant hereby acknowledges and agrees that neither Landlord nor Landlord's agents or representatives has made any representations or warranties as to the suitability, safety or fitness of the Premises for the conduct of Tenant's business, Tenant's intended use of the Premises or for any other purpose. 2.2 In the event Landlord permits Tenant to occupy the Premises prior to the Commencement Date, such occupancy shall be at Tenant's sole risk and subject to all the provisions of this Lease, including, but not limited to, the requirement to pay Rent and the Security Deposit, and to obtain the insurance required pursuant to this Lease and to deliver insurance certificates as required herein. In addition to the foregoing, Landlord shall have the right to impose such additional conditions on Tenant's early entry as Landlord shall deem appropriate. If, at any time, Tenant is in default of any term, condition or provision of this Lease, any such waiver by Landlord of Tenant's requirement to pay rental payments shall be null and void and Tenant shall immediately pay to Landlord all rental payments so waived by Landlord. 3. Rent: On the date that Tenant executes this Lease, Tenant shall deliver to Landlord the original executed Lease, the Base Rent (which shall be applied against the Rent payable for the first month Tenant is required to pay Base Rent), the Additional Security Deposit as described in Section 4, and all insurance certificates evidencing the insurance required to be obtained by Tenant under Section 12 of this Lease. Tenant agrees to pay Landlord, without prior notice or demand, or abatement, offset, deduction or claim, the Base Rent described in the Basic Lease Information, payable in advance at Landlord's address specified in the Basic Lease Information on the Commencement Date and thereafter on the first (1st) day of each month throughout the balance of the Term of the Lease. In addition to the Base Rent set forth in the Basic Lease Information, Tenant shall pay Landlord in advance on the Commencement Date and thereafter on the first (1st) day of each month throughout the balance of the Term of this Lease, as Additional Rent, Tenant's Share of Operating Expenses. Tax Expenses, Common Area Utility Costs, and Utility Expenses, as well as the Administrative Expenses, Tenant shall also pay to Landlord as Additional Rent hereunder, immediately on Landlord's demand therefor, any and all costs and expenses incurred by Landlord to enforce the provisions of this Lease, including, but not limited to, costs associated with the delivery of notices, delivery and recordation of notice(s) of default, attorneys' fees, expert fees, court costs and filing fees (collectively, the "Enforcement Expenses"). The term "Rent" whenever used herein refers to the aggregate of all these amounts. If Landlord permits Tenant to occupy the Premises without requiring Tenant to pay rental payments for a period of time, the waiver of the requirement to pay rental payments shall only apply to waiver of the Base Rent and Tenant shall otherwise perform all other obligations of Tenant required hereunder. The Rent for any fractional part of a calendar month at the commencement or termination of the Lease term shall be a prorated amount of the Rent for a full calendar month based upon a thirty (30) day month. The prorated Rent shall be paid on the Commencement Date and the first day of the calendar 3 month in which the date of termination occurs, as the case may be. 4. Security Deposit: As of the Lease Date, Tenant has on deposit with Landlord a security deposit in the amount of Fourteen Thousand Six Hundred Thirty-four and 00/100 Dollars ($14,634.00). Upon Tenant's execution of this Lease, Tenant shall deliver to Landlord, as an additional security deposit in the amount of Seven Thousand Six Hundred Twenty-five and 79/100 Dollars ($7,625.79) ("Additional Security Deposit") for a total Security Deposit for the performance by Tenant of its obligations under this Lease, in the amount of Twenty-two Thousand Two Hundred Fifty-nine and 79/100 Dollars ($22,259.79). If Tenant is in default, Landlord may, but without obligation to do so, use the Security Deposit, or any portion thereof, to cure the default or to compensate Landlord for all damages sustained by Landlord resulting from Tenant's default, including, but not limited to the Enforcement Expenses. Tenant shall, immediately on demand, pay to Landlord a sum equal to the portion of the Security Deposit so applied or used so as to replenish the amount of the Security Deposit held to increase such deposit to the amount initially deposited with Landlord. At any time after Tenant has defaulted hereunder, Landlord may require an increase in the amount of the Security Deposit required hereunder for the then balance of the Lease Term and Tenant shall, immediately on demand, pay to Landlord additional sums in the amount of such increase. As soon as practicable after the termination of this Lease, Landlord shall return the Security Deposit to Tenant, less such amounts as are reasonably necessary, as determined solely by Landlord, to remedy Tenant's default(s) hereunder or to otherwise restore the Premises to a clean and safe condition, reasonable wear and tear excepted. If the cost to restore the Premises exceeds the amount of the Security Deposit, Tenant shall promptly deliver to Landlord any and all of such excess sums as reasonably determined by Landlord. Landlord shall not be required to keep the Security Deposit separate from other funds, and, unless otherwise required by law, Tenant shall not be entitled to interest on the Security Deposit. In no event or circumstance shall Tenant have the right to any use of the Security Deposit and, specifically, Tenant may not use the Security Deposit as a credit or to otherwise offset any payments required hereunder, including, but not limited to, Rent or any portion thereof. 5. Tenant Improvements: Tenant hereby accepts the Premises as suitable for Tenant's intended use and as being in good operating order, condition and repair, "AS IS". Tenant acknowledges and agrees that neither Landlord nor any of Landlord's agents, representatives or employees has made any representations as to the suitability, fitness or condition of the Premises for the conduct of Tenant's business or for any other purpose, including without limitation, any storage incidental thereto. Tenant further acknowledges and agrees that neither Landlord nor any of Landlord's agents, representatives or employees has agreed to perform or undertake (i) any alterations to the Premises, or (ii) construct any improvements in or to the Premises (collectively, "Tenant Improvements"). Any exception to the foregoing provisions must be made by express written agreement by both parties. 6. Additional Rent: It is intended by Landlord and Tenant that this Lease be a "triple net lease." The costs and expenses described in this Section 6 and all other sums, charges, costs and expenses specified in this Lease other than Base Rent are to be paid by Tenant to Landlord as additional rent (collectively, "Additional Rent"). 6.1 Operating Expenses: In addition to the Base Rent set forth in Section 3, Tenant shall pay Tenant's Share, which is specified in the Basic Lease Information, of all Operating Expenses as Additional Rent. The term "Operating Expenses" as used herein shall mean the total amounts paid or payable by Landlord in connection with the ownership, maintenance, repair and operation of the Premises, the Building and the Lot, and where applicable, of the Park referred to in the Basic Lease Information. The amount of Tenant's Share of Operating Expenses shall be reviewed from time to time by Landlord and shall be subject to modification by Landlord if there is a change in the rentable square footage of the Premises, the Building and/or the Park. These Operating Expenses may include, but are not limited to: 6.1.1 Landlord's cost of repairs to, and maintenance of, the roof, the roof membrane and the exterior walls of the Building; 6.1.2 Landlord's cost of maintaining the outside paved area, landscaping and other common areas for the Park. The term "Common Areas" shall mean all areas and facilities within the Park exclusive of the Premises and the other portions of the Park leasable exclusively to other tenants. The Common Areas include, but are not limited to, interior lobbies, mezzanines, parking areas, access and perimeter roads, sidewalks, rail spurs, landscaped areas and similar areas and facilities; 6.1.3 Landlord's annual cost of insurance insuring against fire and extended coverage (including, if Landlord elects, "all risk" or "special purpose" coverage) and all other insurance, including, but not limited to, earthquake, flood and/or surface water endorsements for the Building, the Lot and the Park (including the Common Areas), rental value insurance against loss of Rent in an amount equal to the amount of Rent for a period of at least six (6) months commencing on the date of loss, and subject to the provisions of Section 27 below, any deductible; 4 6.1.4 Landlord's cost of: (i) modifications and/or new improvements to the Building, the Common Areas and/or the Park occasioned by any rules, laws or regulations effective subsequent to the date on which the Building was originally constructed; (ii) reasonably necessary replacement improvements to the Building, the Common Areas and the Park after the Lease Date; and (iii) new improvements to the Building, the Common Areas and/or the Park that reduce operating costs or improve life/safety conditions, all as reasonably determined by Landlord, in its sole discretion; 6.1.5 If Landlord elects to so procure, Landlord's cost of preventative maintenance, and repair contracts including, but not limited to, contracts for elevator systems and heating, ventilation and air conditioning systems, lifts for disabled persons, and trash or refuse collection; 6.1.6 Landlord's cost of security and fire protection services for the Building and/or the Park, as the case may be, if in Landlord's sole discretion such services are provided; 6.1.7 Landlord's establishment of reasonable reserves for replacements and/or repairs of Common Area improvements, equipment and supplies; 6.1.8 Landlord's cost for the maintenance and repair of any rail spur and rail crossing, and for the creation and negotiation of, and pursuant to, any rail spur or track agreements, licenses, easements or other similar undertakings; 6.1.9 Landlord's cost of supplies, equipment, rental equipment and other similar items used in the operation and/or maintenance of the Park; and 6.1.10 Landlord's cost for the repairs and maintenance items set forth in Section 11.2 below. 6.2 Tax Expenses: In addition to the Base Rent set forth in Section 3, Tenant shall pay its share, which is specified in the Basic Lease Information, of all real property taxes applicable to the land and improvements included within the Lot on which the Premises are situated and one hundred percent (100%) of all personal property taxes now or hereafter assessed or levied against the Premises or Tenant's personal property. The amount of Tenant's Share of Tax Expenses shall be reviewed from time to time by Landlord and shall be subject to modification by Landlord if there is a change in the rentable square footage of the Premises, the Building and/or the Park. Tenant shall also pay one hundred percent (100%) of any increase in real property taxes attributable, in Landlord's reasonable judgment, to any and all alterations or other improvements of any kind, which are above standard improvements customarily installed for similar buildings located within the Building or the Park (as applicable), whatsoever placed in, on or about the Premises for the benefit of, at the request of, or by Tenant. The term "Tax Expenses" shall mean and include, without limitation, any form of tax and assessment (general, special, supplemental, ordinary or extraordinary), commercial rental tax, payments under any improvement bond or bonds, license fees, license tax, business license fee, rental tax, transaction tax, levy, or penalty imposed by authority having the direct or indirect power of tax (including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement district thereof) as against any legal or equitable interest of Landlord in the Premises, the Building, the Lot or the Park, as against Landlord's right to rent or as against Landlord's business of leasing the Premises or the occupancy of Tenant or any other tax, fee, or excise, however described, including, but not limited to, any value added tax, or any tax imposed in substitution (partially or totally) of any tax previously included within the definition of real property taxes, or any additional tax the nature of which was previously included within the definition of real property taxes. The term "Tax Expenses" shall not include any franchise, estate, inheritance, net income, or excess profits tax imposed upon Landlord. 6.3 Administrative Expenses: The Administrative Expenses set forth in this Section 6.3 are considered part of Additional Rent. In addition to the Base Rent set forth in Section 3 hereof, Tenant shall pay Landlord, without prior notice or demand, commencing on the Commencement Date and continuing thereafter on the first (1st) day of each month throughout the balance of the Term of this Lease, as compensation to Landlord for accounting and management services rendered on behalf of the Building and/or the Park, one-twelfth (1/12th) of an amount equal to ten percent (10%) of the estimated amount of the aggregate of the Tenant's Share of (i) the total Operating Expenses and Tax Expenses as described in Sections 6.1 and 6.2 above, respectively, and (ii) all Common Area Utility Costs for the Park and Utility Expenses for the Premises as described in Section 7 below (collectively, the "Administrative Expenses"). Any reconciliation of the Administrative Expenses shall be substantially in the same manner as specified in Section 6.5 below, to the extent such provisions are applicable. Tenant's obligation to pay such Administrative Expenses shall survive the expiration or earlier termination of this Lease. 6.4 Payment of Expenses: Landlord shall estimate Tenant's Share of the Operating Expenses and Tax Expenses for the calendar year in which the Lease commences. Commencing on the 5 Commencement Date, one-twelfth (1/12th) of this estimated amount shall be paid by Tenant to Landlord, as Additional Rent, and thereafter on the first (1st) day of each month throughout the remaining months of such calendar year. Thereafter, Landlord may estimate such expenses as of the beginning of each calendar year during the Term of this Lease and Tenant shall pay one-twelfth (1/12th) of such estimated amount as Additional Rent hereunder on the first (1st) day of each month during such calendar year and for each ensuing calendar year throughout the Term of this Lease. Tenant's obligation to pay Tenant's Share of Operating Expenses and Tax Expenses shall survive the expiration or earlier termination of this Lease. 6.5 Annual Reconciliation: By June 30th of each calendar year, or as soon thereafter as reasonably possible Landlord shall endeavor to furnish Tenant with all accounting of actual Operating Expenses and Tax Expenses. Within thirty (30) days of Landlord's delivery of such accounting, Tenant shall pay to Landlord the amount of any underpayment. Notwithstanding the foregoing, failure by Landlord to give such accounting by such date shall not constitute a waiver by Landlord of its right to collect any of Tenant's underpayment at any time. Landlord shall credit the amount of any overpayment by Tenant toward the next estimated monthly installment(s) falling due, or where the Term of the Lease has expired, refund the amount of overpayment to Tenant. If the Term of the Lease expires prior to the annual reconciliation of expenses Landlord shall have the right to reasonably estimate Tenant's Share of such expenses, and if Landlord determines that an underpayment is due, Tenant hereby agrees that Landlord shall be entitled to deduct such underpayment from Tenant's Security Deposit. If Landlord reasonably determines that an overpayment has been made by Tenant, Landlord shall refund said overpayment to Tenant as soon as practicable thereafter. Notwithstanding the foregoing, failure of Landlord to accurately estimate Tenant's Share of such expenses or to otherwise perform such reconciliation of expenses, including without limitation, Landlord's failure to deduct any portion of any underpayment from Tenant's Security Deposit, shall not constitute a waiver of Landlord's right to collect any of Tenant's underpayment at any time during the Term of the Lease or at any time after the expiration or earlier termination of this Lease. 6.6 Audit: After delivery to Landlord of at least thirty (30) days prior written notice, Tenant, at its sole cost and expense through any accountant designated by it, shall have the right to examine and/or audit the books and records evidencing such costs and expenses for the previous one (1) calendar year, during Landlord's reasonable business hours but not more frequently than once during any calendar year. Any such accounting firm designated by Tenant may not be compensated on a contingency fee basis. The results of any such audit (and any negotiations between the parties related thereto) shall be maintained strictly confidential by Tenant and its accounting firm and shall not be disclosed, published or otherwise disseminated to any other party other than to Landlord and its authorized agents. Landlord and Tenant shall use their best efforts to cooperate in such negotiations and to promptly resolve any discrepancies between Landlord and Tenant in the accounting of such costs and expenses. 7. Utilities: Utility Expenses, Common Area Utility Costs and all other sums or charges set forth in this Section 7 are considered part of Additional Rent. In addition to the Base Rent set forth in Section 3 hereof, Tenant shall pay the cost of all water, sewer use, sewer discharge fees and sewer connection fees, gas, heat, electricity, refuse pickup, janitorial service, telephone and other utilities billed or metered separately to the Premises and/or Tenant. Tenant shall also pay Tenant's Share of any assessments or charges for utility or similar purposes included within any tax bill for the Lot on which the Premises are situated, including, without limitation, entitlement fees, allocation unit fees, and/or any similar fees or charges, and any penalties related thereto. For any such utility fees or use charges that are not billed or metered separately to Tenant, including without limitation, water and refuse pick up charges, Tenant shall pay to Landlord, as Additional Rent without prior notice or demand, on the Commencement Date and thereafter on the first (1st) day of each month throughout the balance of the Term of this Lease the amount which is attributable to Tenant's use of the utilities or similar services, as reasonably estimated and determined by Landlord based upon factors such as size of the Premises and intensity of use of such utilities by Tenant such that Tenant shall pay the portion of such charges reasonably consistent with Tenant's use of such utilities and similar services ("Utility Expenses"). If Tenant disputes any such estimate or determination, then Tenant shall either pay the estimated amount or cause the Premises to be separately metered at Tenant's sole expense. In addition, Tenant shall pay to Landlord Tenant's Share of any Common Area utility costs, fees, charges or expenses ("Common Area Utility Costs"). Tenant shall pay to Landlord one-twelfth (1/12th) of the estimated amount of Tenant's Share of the Common Area Utility Costs on the Commencement Date and thereafter on the first (1st) day of each month throughout the balance of the Term of this Lease and any reconciliation thereof shall be substantially in the same manner as specified in Section 6.5 above. The amount of Tenant's Share of Common Area Utility Costs shall be reviewed from time to time by Landlord and shall be subject to modification by Landlord if there is a change in the rentable square footage of the Premises, the Building and/or the Park. Tenant acknowledges that the Premises may become subject to the rationing of utility services or restrictions on utility use as required by a public utility company, governmental agency or other similar entity having jurisdiction thereof. Notwithstanding any such rationing or restrictions on use of any such utility services, Tenant acknowledges and agrees that its tenancy and occupancy hereunder shall be subject to such rationing restrictions as may be imposed upon Landlord, Tenant, the Premises, the Building or the Park, and Tenant shall in no event be excused or relieved from any covenant or obligation to be kept or performed by Tenant 6 by reason of any such rationing or restrictions. Tenant further agrees to timely and faithfully pay, prior to delinquency, any amount, tax, charge, surcharge, assessment or imposition levied, assessed or imposed upon the Premises, or Tenant's use and occupancy thereof. Notwithstanding anything to the contrary contained herein, if permitted by applicable Laws, Landlord shall have the right at any time and from time to time during the Term of this Lease to either contract for service from a different company or companies (each such company shall be referred to herein as an "Alternate Service Provider") other than the company or companies presently providing electricity service for the Building or the Park (the "Electric Service Provider") or continue to contract for service from the Electric Service Provider, at Landlord's sole discretion. Tenant hereby agrees to cooperate with Landlord, the Electric Service Provider, and any Alternate Service Provider at all times and, as reasonably necessary, shall allow Landlord, the Electric Service Provider, and any Alternate Service Provider reasonable access to the Building's electric lines, feeders, risers, wiring, and any other machinery within the Premises. 8. Late Charges: Any and all sums or charges set forth in this Section 9 are considered part of Additional Rent. Tenant acknowledges that late payment (the fifth day of each month or any time thereafter) by Tenant to Landlord of Base Rent, Tenant's Share of Operating Expenses, Tax Expenses, Common Area Utility Costs, and Utility Expenses, Administrative Expenses or other sums due hereunder, will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to fix. Such costs include, without limitation, processing and accounting charges, and late charges that may be imposed on Landlord by the terms of any note secured by any encumbrance against the Premises, and late charges and penalties due to the late payment of real property taxes on the Premises. Therefore, if any installment of Rent or any other sum due from Tenant is not received by Landlord when due, Tenant shall promptly pay to Landlord all of the following, as applicable: (a) an additional sum equal to eight percent (8%) of such delinquent amount plus interest on such delinquent amount at the rate equal to the prime rate plus three percent (3%) for the time period such payments are delinquent as a late charge for every month or portion thereof that such sums remain unpaid, (b) the amount of seventy-five dollars ($75) for each three-day notice prepared for, or served on, Tenant, (c) the amount of fifty dollars ($50) relating to checks for which there are not sufficient funds. If Tenant delivers to Landlord a check for which there are not sufficient funds, Landlord may, at its sole option, require Tenant to replace such check with a cashier's check for the amount of such check and all other charges payable hereunder. The parties agree that this late charge and the other charges referenced above represent a fair and reasonable estimate of the costs that Landlord will incur by reason of late payment by Tenant. Acceptance of any late charge or other charges shall not constitute a waiver by Landlord of Tenant's default with respect to the delinquent amount, nor prevent Landlord from exercising any of the other rights and remedies available to Landlord for any other breach of Tenant under this Lease. If a late charge or other charge becomes payable for any three (3) installments of Rent within any twelve (12) month period, then Landlord, at Landlord's sole option, can either require the Rent be paid quarterly in advance, or be paid monthly in advance by cashier's check or by electronic funds transfer. 9. Use of Premises: 9.1 Compliance with Laws, Recorded Matters, and Rules and Regulations: The Premises are to be used solely for the purposes and uses specified in the Basic Lease Information and for no other uses or purposes without Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed so long as the proposed use (i) does not involve the use of Hazardous Materials other than as expressly permitted under the provisions of Section 29 below, (ii) does not require any additional parking in excess of the parking spaces already licensed to Tenant pursuant to the provisions of Section 24 of this Lease, and (iii) is compatible and consistent with the other uses then being made in the Park and in other similar types of buildings in the vicinity of the Park, as reasonably determined by Landlord. The use of the Premises by Tenant and its employees, representatives, agents, invitees, licensees, subtenants, customers or contractors (collectively, "Tenant's Representatives") shall be subject to, and at all times in compliance with, (a) any and all applicable laws, ordinances, statutes, orders and regulations as same exist from time to time (collectively, the "Laws"), (b) any and all documents, matters or instruments, including without limitation, any declarations of covenants, conditions and restrictions, and any supplements thereto, each of which has been or hereafter is recorded in any official or public records with respect to the Premises, the Building, the Lot and/or the Park, or any portion thereof (collectively, the "Recorded Matters"), and (c) any and all rules and regulations set forth in Exhibit C, attached to and made a part of this Lease, and any other reasonable rules and regulations promulgated by Landlord now or hereafter enacted relating to parking and the operation of the Premises, the Building and the Park (collectively, the "Rules and Regulations"). Tenant agrees to, and does hereby, assume full and complete responsibility to ensure that the Premises are adequate to fully meet the needs and requirements of Tenant's intended operations of its business within the Premises, and Tenant's use of the Premises and that same are in compliance with all applicable Laws throughout the Term of this Lease. Additionally, Tenant shall be solely responsible for the payment of all costs, fees and expenses associated with any modifications, improvements or alterations to the Premises, Building, the Common Areas and/or the Park occasioned by the enactment of, or changes to, any Laws arising from Tenant's particular use of the Premises or 7 alterations, improvements or additions made to the Premises regardless of when such Laws became effective, 9.2 Prohibition on Use: Tenant shall not use the Premises or permit anything to be done in or about the Premises nor keep or bring anything therein which will in any way conflict with any of the requirements of the Board of Fire Underwriters or similar body now or hereafter constituted or in my way increase the existing rate of or affect any policy of fire or other insurance upon the Building or any of its contents, or cause a cancellation of any insurance policy. No auctions may be held or otherwise conducted in, on or about the Premises, the Building, the Lot or the Park without Landlord's written consent thereto, which consent may be given or withheld in Landlord's sole discretion. Tenant shall not do or permit anything to be done in or about the Premises which will interfere with the rights of Landlord, other tenants or occupants of the Building, other buildings in the Park, or other persons or businesses in the area, or injure or annoy other tenants or use or allow the Premises to be used for any unlawful or objectionable purpose, as determined by Landlord, in its reasonable discretion, for the benefit, quiet enjoyment and use by Landlord and all other tenants or occupants of the Building or other buildings in the Park; nor shall Tenant cause, maintain or permit any private or public nuisance in, on or about the Premises, Building, Park and/or the Common Areas, including, but not limited to, any offensive odors, noises, fumes or vibrations. Tenant shall not damage or deface or otherwise commit or suffer to be committed any waste in, upon or about the Premises. Tenant shall not place or store, nor permit any other person or entity to place or store, any property, equipment, materials, supplies, personal property or any other items or goods outside of the Premises for any period of time. Tenant shall not permit any animals, including, but not limited to, any household pets, to be brought or kept in or about the Premises except for animals specifically trained to aid disabled persons which are specifically required by a physically disabled person. Tenant shall place no loads upon the floors, walls, or ceilings in excess of the maximum designed load permitted by the applicable Uniform Building Code or which may damage the Building or outside areas; nor place any harmful liquids in the drainage systems; nor dump or store waste materials, refuse or other such materials, or allow such to remain outside the Building area, except for any non-hazardous or non-harmful materials which may be stored in refuse dumpsters or in any enclosed trash areas provided. Tenant shall honor the terms of all Recorded Matters relating to the Premises, the Building, the Lot and/or the Park. Tenant shall honor the Rules and Regulations. If Tenant fails to comply with such Laws, Recorded Matters, Rules and Regulations or the provisions of this Lease, Landlord shall have the right to collect from Tenant a reasonable sum as a penalty, in addition to all rights and remedies of Landlord hereunder including, but not limited to, the payment by Tenant to Landlord of all Enforcement Expenses and Landlord's costs and expenses, if any, to cure any of such failures of Tenant, if Landlord, at its sole option, elects to undertake such cure. 10. Alterations and Additions; and Surrender of Premises: 10.1 Alterations and Additions: Tenant shall not install any signs, fixtures, improvements, nor make or permit any other alterations or additions to the Premises without the prior written consent of Landlord. If any such alteration or addition is expressly permitted by Landlord, Tenant shall deliver at least twenty (20) days prior notice to Landlord, from the date Tenant intends to commence construction, sufficient to enable Landlord to post a Notice of Non-Responsibility. In all events, Tenant shall obtain all permits or other governmental approvals prior to commencing any of such work and deliver a copy of same to Landlord. All alterations and additions shall be installed by a licensed contractor reasonably approved by Landlord, at Tenant's sole expense in compliance with all applicable Laws (including, but not limited to, the ADA as defined herein), Recorded Matters, and Rules and Regulations. Tenant shall keep the Premises and the property on which the Premises are situated free from any liens arising out of any work performed, materials furnished or obligations incurred by or on behalf of Tenant. As a condition to Landlord's consent to the installation of any fixtures, additions or other improvements, Landlord may require Tenant to post and obtain a completion and indemnity bond for up to one hundred (100%) of the cost of the work. 10.2 Surrender of Premises: Upon the termination of this Lease, whether by forfeiture, lapse of time or otherwise, or upon the termination of Tenant's right to possession of the Premises, Tenant will at once surrender and deliver up the Premises, together with the fixtures (other than trade fixtures), additions and improvements which Landlord has notified Tenant, in writing, that Landlord will require Tenant not to remove, to Landlord in good condition and repair (including, but not limited to, replacing all light bulbs and ballasts not in good working condition) and in the condition in which the Premises existed as of the Commencement Date, except for reasonable wear and tear. Reasonable wear and tear shall not include any damage or deterioration to the floors of the Premises arising from the use of forklifts in, on or about the Premises (including, without limitation, any marks or stains of any portion of the floors), and any damage or deterioration that would have been prevented by proper maintenance by Tenant or Tenant otherwise performing all of its obligations under this Lease. Upon such termination of this Lease, Tenant shall remove all tenant signage, trade fixtures, furniture, furnishings, personal property, additions, and other improvements unless Landlord requests, in writing, that Tenant not remove some or all of such fixtures (other than trade fixtures), additions or improvements installed by, or on behalf of Tenant or situated in or about the Premises. By the date which is twenty (20) days prior to such termination of this Lease, 8 Landlord shall notify Tenant in writing of those fixtures (other than trade fixtures), alterations, additions and other improvements which Landlord shall require Tenant not to remove from the Premises. Tenant shall repair any damage caused by the installation or removal of such signs, trade fixtures, furniture, furnishings, fixtures, additions and improvements which are to be removed from the Premises by Tenant hereunder. If Landlord fails to so notify Tenant at least twenty (20) days prior to such termination of this Lease, then Tenant shall remove all tenant signage, alterations, furniture, furnishings, trade fixtures, additions and other improvements installed in or about the Premises by, or on behalf of Tenant. Tenant shall ensure that the removal of such items and the repair of the Premises will be completed prior to such termination of this Lease. 11. Repairs and Maintenance: 11.1 Tenant's Repairs and Maintenance Obligations: Except for those portions of the Building to be maintained by Landlord, as provided in Sections 11.2 and 11.3 below, Tenant shall, at Tenant's sole cost and expense, keep and maintain the Premises and the adjacent dock and staging areas in good, clean and safe condition and repair to the reasonable satisfaction of Landlord including, but not limited to, repairing any damage caused by Tenant or Tenant's Representatives and replacing any property so damaged by Tenant or Tenant's Representatives. Without limiting the generality of the foregoing, Tenant shall be solely responsible for maintaining, repairing and replacing (a) all mechanical systems, heating, ventilation and air conditioning systems exclusively serving the Premises, (b) all plumbing, electrical wiring and equipment serving the Premises, (c) all interior lighting (including, without limitation, light bulbs and/or ballasts) and exterior lighting serving the Premises or adjacent to the Premises, (d) all glass, windows, window frames, window casements, skylights, interior and exterior doors, door frames and door closers, (e) all roll-up doors, ramps and dock equipment, including without limitation, dock bumpers, dock plates, dock seals, dock levelers and dock lights, (f) all tenant signage, (g) lifts for disabled persons serving the Premises, (h) sprinkler systems, fire protection systems and security systems, (i) all partitions, fixtures, equipment, interior painting, and interior walls and floors of the Premises and every part thereof (including, without limitation, any demising walls contiguous to any portion of the Premises). 11.2 Reimbursable Repairs and Maintenance Obligations: Subject to the provisions of Sections 6 and 9 of this Lease and except for (i) the obligations of Tenant set forth in Section 11.1 above, (ii) the obligations of Landlord set forth in Section 11.3 below, and (iii) the repairs rendered necessary by the intentional or negligent acts or omissions of Tenant or any of Tenant's Representatives, Landlord agrees, at Landlord's expense, subject to reimbursement pursuant to Section 6 above, to keep in good repair the plumbing and mechanical systems exterior to the Premises, any rail spur and rail crossing, the roof, roof membranes, exterior walls of the Building, signage (exclusive of tenant signage), and exterior electrical wiring and equipment, exterior lighting, exterior glass, exterior doors/entrances and door closers, exterior window casements, exterior painting of the Building (exclusive of the Premises), and underground utility and sewer pipes outside the exterior walls of the Building. For purposes of this Section 11.2, the term "exterior" shall mean outside of and not exclusively serving the Premises. Unless otherwise notified by Landlord, in writing, that Landlord has elected to procure and maintain the following described contract(s), Tenant shall procure and maintain (a) the heating, ventilation and air conditioning systems preventative maintenance and repair contract(s); such contract(s) to be on a bi-monthly or quarterly basis, as reasonably determined by Landlord, and (b) the fire and sprinkler protection services and preventative maintenance and repair contract(s) (including, without limitation, monitoring services); such contract(s) to be on a bi-monthly or quarterly basis, as reasonably determined by Landlord. Landlord reserves the right, but without the obligation to do so, to procure and maintain (i) the heating, ventilation and air conditioning systems preventative maintenance and repair contract(s), and/or (ii) the fire and sprinkler protection services and preventative maintenance and repair contract(s) (including, without limitation, monitoring services). If Landlord so elects to procure and maintain any such contract(s), Tenant will reimburse Landlord for the cost thereof in accordance with the provisions of Section 6 above. If Tenant procures and maintains any of such contract(s), Tenant will promptly deliver to Landlord a true and complete copy of each such contract and any and all renewals or extensions thereof, and each service report or other summary received by Tenant pursuant to or in connection with such contract(s). 11.3 Landlord's Repairs and Maintenance Obligations: Except for repairs rendered necessary by the intentional or negligent acts or omissions of Tenant or any of Tenant's Representatives, Landlord agrees, at Landlord's sole cost and expense, to (a) keep in good repair the structural portions of the floors, foundations and exterior perimeter walls of the Building (exclusive of glass and exterior doors), and (b) replace the structural portions of the roof of the Building (excluding the roof membrane) as, and when, Landlord reasonably determines such replacement to be necessary. 11.4 Tenant's Failure to Perform Repairs and Maintenance Obligations: Except for normal maintenance and repair of the items described above, Tenant shall have no right of access to or right to install any device on the roof of the Building nor make any penetrations of the roof of the Building without the express prior written consent of Landlord. If Tenant refuses or neglects to repair and maintain the Premises and the adjacent areas properly as required herein and to the reasonable satisfaction of Landlord, 9 Landlord may, but without obligation to do so, at any time make such repairs and/or maintenance without Landlord having any liability to Tenant for any loss or damage that may accrue to Tenant's merchandise, fixtures or other property, or to Tenant's business by reason thereof, except to the extent any damage is caused by the willful misconduct or gross negligence of Landlord or its authorized agents and representatives. In the event Landlord makes such repairs and/or maintenance, upon completion thereof Tenant shall pay to Landlord, as additional rent, the Landlord's costs for making such repairs and/or maintenance, plus ten percent (10%) for overhead, upon presentation of a bill therefor, plus any Enforcement Expenses. The obligations of Tenant hereunder shall survive the expiration of the Term of this Lease or the earlier termination thereof. Tenant hereby waives any right to repair at the expense of Landlord under any applicable Laws now or hereafter in effect respecting the Premises. 12. Insurance: 12.1 Types of Insurance: Tenant shall maintain in full force and effect at all times during the Term of this Lease, at Tenant's sole cost and expense, for the protection of Tenant and Landlord, as their interests may appear, policies of insurance issued by a carrier or carriers reasonably acceptable to Landlord and its lender(s) which afford the following coverages: (i) worker's compensation: statutory limits; (ii) employer's liability, as required by law, with a minimum limit of $100,000 per employee and $500,000 per occurrence; (iii) commercial general liability insurance (occurrence form) providing coverage against any and all claims for bodily injury and property damage occurring in, on or about the Premises arising out of Tenant's and Tenant's Representatives' use and/or occupancy of the Premises. Such insurance shall include coverage for blanket contractual liability, fire damage, premises, personal injury, completed operations, products liability, personal and advertising, and a plate-glass rider to provide coverage for all glass in, on or about the Premises including, without limitation, skylights. Such insurance shall have a combined single limit of not less than One Million Dollars ($1,000,000) per occurrence with a Two Million Dollar ($2,000,000) aggregate limit and excess/umbrella insurance in the amount of Two Million Dollars ($2,000,000). If Tenant has other locations which it owns or leases, the policy shall include an aggregate limit per location endorsement. If necessary, as reasonably determined by Landlord, Tenant shall provide for restoration of the aggregate limit; (iv) comprehensive automobile liability insurance: a combined single limit of not less than $2,000,000 per occurrence and insuring Tenant against liability for claims arising out of the ownership, maintenance, or use of any owned, hired or non-owned automobiles; (v) "all risk" or "special purpose" property insurance, including without limitation, sprinkler leakage, boiler and machinery comprehensive form, if applicable, covering damage to or loss of any personal property, trade fixtures, inventory, fixtures and equipment located in, on or about the Premises, and in addition, coverage for flood, earthquake, and business interruption of Tenant, together with, if the property of Tenant's invitees is to be kept in the Premises, warehouser's legal liability or bailee customers insurance for the full replacement cost of the property belonging to invitees and located in the Premises. Such insurance shall be written on a replacement cost basis (without deduction for depreciation) in an amount equal to one hundred percent (100%) of the full replacement value of the aggregate of the items referred to in this subparagraph (v); and (vi) such other insurance as Landlord deems necessary and prudent or as may otherwise be required by any of Landlord's lenders or joint venture partners. 12.2 Insurance Policies: Insurance required to be maintained by Tenant shall be written by companies (i) licensed to do business in the State of California, (ii) domiciled in the United States of America, and (iii) having a "General Policyholders Rating" of at least A:X (or such higher rating as may be required by a lender having a lien on the Premises) as set forth in the most current issue of "A.M. Best's Rating Guides." Any deductible amounts under any of the insurance policies required hereunder shall not exceed Ten Thousand Dollars ($10,000). Tenant shall deliver to Landlord certificates of insurance and true and complete copies of any and all endorsements required herein for all insurance required to be maintained by Tenant hereunder at the time of execution of this Lease by Tenant. Tenant shall, at least thirty (30) days prior to expiration of each policy, furnish Landlord with certificates of renewal or "binders" thereof. Each certificate shall expressly provide that such policies shall not be cancelable or otherwise subject to modification except after thirty (30) days prior written notice to the parties named as additional insureds as required in this Lease (except for cancellation for nonpayment of premium, in which event cancellation shall not take effect until at least ten (10) days' notice has been given to Landlord). Tenant shall have the right to provide insurance coverage which it is obligated to carry pursuant to the terms of this Lease under a blanket insurance policy, provided such blanket policy expressly affords coverage for the Premises and for Landlord as required by this Lease. 12.3 Additional Insureds and Coverage: Landlord, any property management company and/or agent of Landlord for the Premises, the Building, the Lot or the Park, and any lender(s) of Landlord having a lien against the Premises, the Building, the Lot or the Park shall be named as additional insureds under all of the policies required in Section 12.1(iii) above. Additionally, such policies shall provide for severability of interest. All insurance to be maintained by Tenant shall, except for workers' compensation and employer's liability insurance, be primary, without right of contribution from insurance maintained by Landlord. Any umbrella/excess liability policy (which shall be in "following form") shall provide that if the underlying aggregate is exhausted, the excess coverage will drop down as primary insurance. The limits of 10 insurance maintained by Tenant shall not limit Tenant's liability under this Lease. It is the parties' intention that the insurance to be procured and maintained by Tenant as required herein shall provide coverage for any and all damage or injury arising from or related to Tenant's operations of its business and/or Tenant's or Tenant's Representatives' use of the Premises and/or any of the areas within the Park, whether such events occur within the Premises (as described in Exhibit A hereto) or in any other areas of the Park. It is not contemplated or anticipated by the parties that the aforementioned risks of loss be borne by Landlord's insurance carriers, rather it is contemplated and anticipated by Landlord and Tenant that such risks of loss be borne by Tenant's insurance carriers pursuant to the insurance policies procured and maintained by Tenant as required herein. 12.4 Failure of Tenant to Purchase and Maintain Insurance: In the event Tenant does not purchase the insurance required in this Lease or keep the same in full force and effect throughout the Term of this Lease (including any renewals or extensions), Landlord may, but without obligation to do so, purchase the necessary insurance and pay the premiums therefor. If Landlord so elects to purchase such insurance, Tenant shall promptly pay to Landlord as Additional Rent, the amount so paid by Landlord, upon Landlord's demand therefor. In addition, Landlord may recover from Tenant and Tenant agrees to pay, as Additional Rent, any and all Enforcement Expenses and damages which Landlord may sustain by reason of Tenant's failure to obtain and maintain such insurance. If Tenant fails to maintain any insurance required in this Lease, Tenant shall be liable for all losses, damages and costs resulting from such failure. 13. Waiver of Subrogation: Landlord and Tenant hereby mutually waive their respective rights of recovery against each other for any loss of, or damage to, either parties' property to the extent that such loss or damage is insured by an insurance policy required to be in effect at the time of such loss or damage. Each party shall obtain any special endorsements, if required by its insurer whereby the insurer waives its rights of subrogation against the other party. This provision is intended to waive fully, and for the benefit of the parties hereto, any rights and/or claims which might give rise to a right of subrogation in favor of any insurance carrier. The coverage obtained by Tenant pursuant to Section 12 of this Lease shall include, without limitation, a waiver of subrogation endorsement attached to the certificate of insurance. The provisions of this Section 13 shall not apply in those instances in which such waiver of subrogation would invalidate such insurance coverage or would cause either party's insurance coverage to be voided or otherwise uncollectible. 14. Limitation of Liability and Indemnity: Except to the extent of damage resulting from the active gross negligence or willful misconduct of Landlord or its authorized representatives, Tenant agrees to protect, defend (with counsel acceptable to Landlord) and hold Landlord and Landlord's lenders, partners, members, property management company (if other than Landlord), agents, directors, officers, employees, representatives, contractors, shareholders, successors and assigns and each of their respective partners, members, directors, employees, representatives, agents, contractors, shareholders, successors and assigns (collectively, the "Indemnitees") harmless and indemnify the Indemnitees from and against all liabilities, damages, claims, losses, judgments, charges and expenses (including reasonable attorneys' fees, costs of court and expenses necessary in the prosecution or defense of any litigation including the enforcement of this provision) arising from or in any way related to, directly or indirectly, (i) Tenant's or Tenant's Representatives' use of the Premises, Building and/or the Park, (ii) the conduct of Tenant's business, (iii) from any activity, work or thing done, permitted or suffered by Tenant in or about the Premises, (iv) in any way connected with the Premises or with the improvements or personal property therein, including, but not limited to, any liability for injury to person or property of Tenant, Tenant's Representatives, or third party persons, and/or (v) Tenant's failure to perform any covenant or obligation of Tenant under this Lease. Tenant agrees that the obligations of Tenant herein shall survive the expiration or earlier termination of this Lease. Except to the extent of damage resulting from the active gross negligence or willful misconduct of Landlord or its authorized representatives, to the fullest extent permitted by law, Tenant agrees that neither Landlord nor any of Landlord's lender(s), partners, members, employees, representatives, legal representatives, successors or assigns shall at any time or to any extent whatsoever be liable, responsible or in any way accountable for any loss, liability, injury, death or damage to persons or property which at any time may be suffered or sustained by Tenant or by any person(s) whomsoever who may at any time be using, occupying or visiting the Premises, the Building or the Park, including, but not limited to, any acts, errors or omissions by or on behalf of any other tenants or occupants of the Building and/or the Park. Tenant shall not, in any event or circumstance, be permitted to offset or otherwise credit against any payments of Rent required herein for matters for which Landlord may be liable hereunder. Landlord and its authorized representatives shall not be liable for any interference with light or air, or for any latent defect in the Premises or the Building. 11 15. Assignment and Subleasing: 15.1 Prohibition: Tenant shall not assign, mortgage, hypothecate, encumber, grant any license or concession, pledge or otherwise transfer this Lease (collectively, "assignment"), in whole or in part, whether voluntarily or involuntarily or by operation of law, nor sublet or permit occupancy by any person other than Tenant of all or any portion of the Premises without first obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant hereby agrees that Landlord may withhold its consent to any proposed sublease or assignment if the proposed sublessee or assignee or its business is subject to compliance with additional requirements of the ADA (defined below) and/or Environmental Laws (defined below) beyond those requirements which are applicable to Tenant, unless the proposed sublessee or assignee shall (a) first deliver plans and specifications for complying with such additional requirements and obtain Landlord's written consent thereto, and (b) comply with all Landlord's conditions for or contained in such consent, including without limitation, requirements for security to assure the lien-free completion of such improvements. If Tenant seeks to sublet or assign all or any portion of the Premises, Tenant shall deliver to Landlord at least thirty (30) days prior to the proposed commencement of the sublease or assignment (the "Proposed Effective Date") the following: (i) the name of the proposed assignee or sublessee; (ii) such information as to such assignee's or sublessee's financial responsibility and standing as Landlord may reasonably require; and (iii) the aforementioned plans and specifications, if any. Within ten (10) days after Landlord's receipt of a written request from Tenant that Tenant seeks to sublet or assign all or any portion of the Premises, Landlord shall deliver to Tenant a copy of Landlord's standard form of sublease or assignment agreement (as applicable), which instrument shall be utilized for each proposed sublease or assignment (as applicable), and such instrument shall include a provision whereby the assignee or sublessee assumes all of Tenant's obligations hereunder and agrees to be bound by the terms hereof. As Additional Rent hereunder, Tenant shall pay to Landlord a fee in the amount of five hundred dollars ($500) plus Tenant shall reimburse Landlord for actual legal and other expenses incurred by Landlord in connection with any actual or proposed assignment or subletting. In the event the sublease or assignment (1) by itself or taken together with prior sublease(s) or partial assignment(s) covers or totals, as the case may be, more than twenty-five percent (25%) of the rentable square feet of the Premises or (2) is for a term which by itself or taken together with prior or other subleases or partial assignments is greater than fifty percent (50%) of the period remaining in the Term of this Lease as of the time of the Proposed Effective Date, then Landlord shall have the right, to be exercised by giving written notice to Tenant, to recapture the space described in the sublease or assignment. If such recapture notice is given, it shall serve to terminate this Lease with respect to the proposed sublease or assignment space, or, if the proposed sublease or assignment space covers all the Premises, it shall serve to terminate the entire term of this Lease in either case, as of the Proposed Effective Date. However, no termination of this Lease with respect to part or all of the Premises shall become effective without the prior written consent, where necessary, of the holder of each deed of trust encumbering the Premises or any part thereof. If this Lease is terminated pursuant to the foregoing with respect to less than the entire Premises, the Rent shall be adjusted on the basis of the proportion of square feet retained by Tenant to the square feet originally demised and this Lease as so amended shall continue thereafter in full force and effect. Each permitted assignee or sublessee shall assume and be deemed to assume this Lease and shall be and remain liable jointly and severally with Tenant for payment of Rent and for the due performance of, and compliance with all the terms, covenants, conditions and agreements herein contained on Tenant's part to be performed or complied with, for the term of this Lease. No assignment or subletting shall affect the continuing primary liability of Tenant (which, following assignment, shall be joint and several with the assignee), and Tenant shall not be released from performing any of the terms, covenants and conditions of this Lease. Tenant hereby acknowledges and agrees that it understands that Landlord's accounting department may process and accept Rent payments without verifying that such payments are being made by Tenant, a permitted sublessee or a permitted assignee in accordance with the provisions of this Lease. Although such payments may be processed and accepted by such accounting department personnel, any and all actions or omissions by the personnel of Landlord's accounting department shall not be considered as acceptance by Landlord of any proposed assignee or sublessee nor shall such actions or omissions be deemed to be a substitute for the requirement that Tenant obtain Landlord's prior written consent to any such subletting or assignment, and any such actions or omissions by the personnel of Landlord's accounting department shall not be considered as a voluntary relinquishment by Landlord of any of its rights hereunder nor shall any voluntary relinquishment of such rights be inferred therefrom. For purposes hereof, in the event Tenant is a corporation, partnership, joint venture, trust or other entity other than a natural person, any change in the direct or indirect ownership of Tenant (whether pursuant to one or more transfers) which results in a change of more than fifty percent (50%) in the direct or indirect ownership of Tenant shall be deemed to be an assignment within the meaning of this Section 15 and shall be subject to all the provisions hereof. Any and all options, first rights of refusal, tenant improvement allowances and other similar rights granted to Tenant in this Lease, if any, shall not be assignable by Tenant unless expressly authorized in writing by Landlord. 15.2 Excess Sublease Rental or Assignment Consideration: In the event of any sublease or assignment of all or any portion of the Premises where the rent or other consideration provided for in the sublease or assignment either initially or over the term of the sublease or assignment exceeds the Rent or pro rata portion of the Rent, as the case may be, for such space reserved in the Lease, Tenant shall pay the Landlord monthly, as Additional Rent, at the same time as the monthly installments of Rent are payable 12 hereunder, seventy-five percent (75%) of the excess of each such payment of rent or other consideration in excess of the Rent called for hereunder. 15.3 Waiver: Notwithstanding any assignment or sublease, or any indulgences, waivers or extensions of time granted by Landlord to any assignee or sublessee, or failure by Landlord to take action against any assignee or sublessee, Tenant waives notice of any default of any assignee or sublessee and agrees that Landlord may, at its option, proceed against Tenant without having taken action against or joined such assignee or sublessee, except that Tenant shall have the benefit of any indulgences, waivers and extensions of time granted to any such assignee or sublessee. 16. Ad Valorem Taxes: Prior to delinquency, Tenant shall pay all taxes and assessments levied upon trade fixtures, alterations, additions, improvements, inventories and personal property located and/or installed on or in the Premises by, or on behalf of, Tenant; and if requested by Landlord, Tenant shall promptly deliver to Landlord copies of receipts for payment of all such taxes and assessments. To the extent any such taxes are not separately assessed or billed to Tenant, Tenant shall pay the amount thereof as invoiced by Landlord. 17. Subordination: Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any bona fide mortgagee or deed of trust beneficiary with a lien on all or any portion of the Premises or any ground lessor with respect to the land of which the Premises are a part, the rights of Tenant under this Lease and this Lease shall be subject and subordinate at all times to: (i) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Building or the land upon which the Building is situated or both, and (ii) the lien of any mortgage or deed of trust which may now exist or hereafter be executed in any amount for which the Building, the Lot, ground leases or underlying leases, or Landlord's interest or estate in any of said items is specified as security. Notwithstanding the foregoing, Landlord or any such ground lessor, mortgagee, or any beneficiary shall have the right to subordinate or cause to be subordinated any such ground leases or underlying leases or any such liens to this Lease. If any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination and upon the request of such successor to Landlord, attorn to and become the Tenant of the successor in interest to Landlord, provided such successor in interest will not disturb Tenant's use, occupancy or quiet enjoyment of the Premises so long as Tenant is not in default of the terms and provisions of this Lease. The successor in interest to Landlord following foreclosure, sale or deed in lieu thereof shall not be (a) liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) subject to any offsets or defenses which Tenant might have against any prior lessor; (c) bound by prepayment of more than one (1) month's Rent, except in those instances when Tenant pays Rent quarterly in advance pursuant to Section 8 hereof, then not more than three months' Rent; or (d) liable to Tenant for any Security Deposit not actually received by such successor in interest to the extent any portion or all of such Security Deposit has not already been forfeited by, or refunded to, Tenant. Landlord shall be liable to Tenant for all or any portion of the Security Deposit not forfeited by, or refunded to Tenant, until and unless Landlord transfers such Security Deposit to the successor in interest. Tenant covenants and agrees to execute (and acknowledge if required by Landlord, any lender or ground lessor) and deliver, within five (5) days of a demand or request by Landlord and in the form requested by Landlord, ground lessor, mortgagee or beneficiary, any additional documents evidencing the priority or subordination of this Lease with respect to any such ground leases or underlying leases or the lien of any such mortgage or deed of trust. Tenant's failure to timely execute and deliver such additional documents shall, at Landlord's option, constitute a material default hereunder. It is further agreed that Tenant shall be liable to Landlord, and shall indemnify Landlord from and against any loss, cost, damage or expense, incidental, consequential, or otherwise, arising or accruing directly or indirectly, from any failure of Tenant to execute or deliver to Landlord any such additional documents, together with any and all Enforcement Expenses. 18. Right of Entry: Tenant grants Landlord or its agents the right to enter the Premises at all reasonable times upon reasonable notice to tenant for purposes of inspection, exhibition, posting of notices, repair or alteration. At Landlord's option, Landlord shall at all times have and retain a key with which to unlock all the doors in, upon and about the Premises, excluding Tenant's vaults and safes. It is further agreed that Landlord shall have the right to use any and all means Landlord deems necessary to enter the Premises in an emergency. Landlord shall have the right to place "for rent" or "for lease" signs on the outside of the Premises, the Building and in the Common Areas. Landlord shall also have the right to place "for sale" signs on the outside of the Building and in the Common Areas. Tenant hereby waives any claim from damages or for any injury or inconvenience to or interference with Tenant's business, or any other loss occasioned thereby except for any claim for any of the foregoing arising out of the active gross negligence or willful misconduct of Landlord or its authorized representatives. 13 19. Estoppel Certificate: Tenant shall execute (and acknowledge if required by any lender or ground lessor) and deliver to Landlord, within five (5) days after Landlord provides such to Tenant, a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification), the date to which the Rent and other charges are paid in advance, if any, acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder or specifying such defaults as are claimed, and such other matters as Landlord may reasonably require. Any such statement may be conclusively relied upon by Landlord and any prospective purchaser or encumbrancer of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon the Tenant that (a) this Lease is in full force and effect, without modification except as may be represented by Landlord; (b) there are no uncured defaults in Landlord's performance; and (c) not more than one month's Rent has been paid in advance, except in those instances when Tenant pays Rent quarterly in advance pursuant to Section 8 hereof, then not more than three month's Rent has been paid in advance. Failure by Tenant to so deliver such certified estoppel certificate shall be a material default of the provisions of this Lease. Tenant shall be liable to Landlord, and shall indemnify Landlord from and against any loss, cost, damage or expense, incidental, consequential, or otherwise, arising or accruing directly or indirectly, from any failure of Tenant to execute or deliver to Landlord any such certified estoppel certificate, together with any and all Enforcement Expenses. 20. Tenant's Default: The occurrence of any one or more of the following events shall, at Landlord's option, constitute a material default by Tenant of the provisions of this Lease: 20.1 The abandonment of the Premises by Tenant or the vacation of the Premises by Tenant which would cause any insurance policy to be invalidated or otherwise lapse. Tenant agrees to notice and service of notice as provided for in this Lease and waives any right to any other or further notice or service of notice which Tenant may have under any statute or law now or hereafter in effect; 20.2 The failure by Tenant to make any payment of Rent, Additional Rent or any other payment required hereunder on the date said payment is due. Tenant agrees to notice and service of notice as provided for in this Lease and waives any right to any other or further notice or service of notice which Tenant may have under any statute or law now or hereafter in effect; 20.3 The failure by Tenant to observe, perform or comply with any of the conditions, covenants or provisions of this Lease (except failure to make any payment of Rent and/or Additional Rent) and such failure is not cured within the time period required under the provisions of this Lease. If such failure is susceptible of cure but cannot reasonably be cured within the aforementioned time period (if any), as determined reasonably by Landlord, Tenant shall promptly commence the cure of such failure and thereafter diligently prosecute such cure to completion within the time period specified by Landlord in any written notice regarding such failure as may be delivered to Tenant by Landlord. In no event or circumstance shall Tenant have more than sixty (60) days to complete any such cure, unless otherwise expressly agreed to in writing by Landlord (in Landlord's sole discretion); 20.4 The making of a general assignment by Tenant for the benefit of creditors, the filing of a voluntary petition by Tenant or the filing of an involuntary petition by any of Tenant's creditors seeking the rehabilitation, liquidation, or reorganization of Tenant under any law relating to bankruptcy, insolvency or other relief of debtors and, in the case of an involuntary action, the failure to remove or discharge the same within sixty (60) days of such filing, the appointment of a receiver or other custodian to take possession of substantially all of Tenant's assets or this leasehold, Tenant's insolvency or inability to pay Tenant's debts or failure generally to pay Tenant's debts when due, any court entering a decree or order directing the winding up or liquidation of Tenant or of substantially all of Tenant's assets, Tenant taking any action toward the dissolution or winding up of Tenant's affairs, the cessation or suspension of Tenant's use of the Premises, or the attachment, execution or other judicial seizure of substantially all of Tenant's assets or this leasehold; 20.5 Tenant's use or storage of Hazardous Materials in, on or about the Premises, the Building, the Lot and/or the Park other than as expressly permitted by the provisions of Section 29 below; or 20.6 The making of any material misrepresentation or omission by Tenant in any materials delivered by or on behalf of Tenant to Landlord pursuant to this Lease. 21. Remedies for Tenant's Default: 21.1 Landlord's Rights: In the event of Tenant's material default under this Lease, Landlord may terminate Tenant's right to possession of the Premises by any lawful means in which case upon delivery of written notice by Landlord this Lease shall terminate on the date specified by Landlord in such notice and Tenant shall immediately surrender possession of the Premises to Landlord. In addition, the Landlord shall have the immediate right of re-entry whether or not this Lease is terminated, and if this right 14 of re-entry is exercised following abandonment of the Premises by Tenant, Landlord may consider any personal property belonging to Tenant and left on the Premises to also have been abandoned. No re-entry or taking possession of the Premises by Landlord pursuant to this Section 21 shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant. If Landlord relets the Premises or any portion thereof, (i) Tenant shall be liable immediately to Landlord for all costs Landlord incurs in reletting the Premises or any part thereof, including, without limitation, broker's commissions, expenses of cleaning, redecorating, and further improving the Premises and other similar costs (collectively, the "Reletting Costs"), and (ii) the rent received by Landlord from such reletting shall be applied to the payment of, first, any indebtedness from Tenant to Landlord other than Base Rent, Operating Expenses, Tax Expenses, Administrative Expenses, Common Area Utility Costs, and Utility Expenses; second, all costs including maintenance, incurred by Landlord in reletting; and, third, Base Rent, Operating Expenses, Tax Expenses, Administrative Expenses, Common Area Utility Costs, Utility Expenses, and all other sums due under this Lease. Any and all of the Reletting Costs shall be fully chargeable to Tenant and shall not be prorated or otherwise amortized in relation to any new lease for the Premises or any portion thereof. After deducting the payments referred to above, any sum remaining from the rental Landlord receives from reletting shall be held by Landlord and applied in payment of future Rent as Rent becomes due under this Lease. In no event shall Tenant be entitled to any excess rent received by Landlord. Reletting may be for a period shorter or longer than the remaining term of this Lease. No act by Landlord other than giving written notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. So long as this Lease is not terminated, Landlord shall have the right to remedy any default of Tenant, to maintain or improve the Premises, to cause a receiver to be appointed to administer the Premises and new or existing subleases and to add to the Rent payable hereunder all of Landlord's reasonable costs in so doing, with interest at the maximum rate permitted by law from the date of such expenditure. 21.2 Damages Recoverable: If Tenant breaches this Lease and abandons the Premises before the end of the Term, or if Tenant's right to possession is terminated by Landlord because of a breach or default under this Lease, then in either such case, Landlord may recover from Tenant all damages suffered by Landlord as a result of Tenant's failure to perform its obligations hereunder, including, but not limited to, the portion of any broker's or leasing agent's commission incurred with respect to the leasing of the Premises to Tenant for the balance of the Term of the Lease remaining after the date on which Tenant is in default of its obligations hereunder, and all Reletting Costs, and the worth at the time of the award (computed in accordance with paragraph (3) of Subdivision (a) of Section 1951.2 of the California Civil Code) of the amount by which the Rent then unpaid hereunder for the balance of the Lease Term exceeds the amount of such loss of Rent for the same period which Tenant proves could be reasonably avoided by Landlord and in such case, Landlord prior to the award, may relet the Premises for the purpose of mitigating damages suffered by Landlord because of Tenant's failure to perform its obligations hereunder; provided, however, that even though Tenant has abandoned the Premises following such breach, this Lease shall nevertheless continue in full force and effect for as long as Landlord does not terminate Tenant's right of possession, and until such termination, Landlord shall have the remedy described in Section 1951.4 of the California Civil Code (Landlord may continue this Lease in effect after Tenant's breach and abandonment and recover Rent as it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable limitations) and may enforce all its rights and remedies under this Lease, including the right to recover the Rent from Tenant as it becomes due hereunder. The "worth at the time of the award" within the meaning of Subparagraphs (a)(1) and (a)(2) of Section 1951.2 of the California Civil Code shall be computed by allowing interest at the rate of ten percent (10%) per annum. Tenant waives redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or under any other present or future law, in the event Tenant is evicted or Landlord takes possession of the Premises by reason of any default of Tenant hereunder. 21.3 Rights and Remedies Cumulative: The foregoing rights and remedies of Landlord are not exclusive; they are cumulative in addition to any rights and remedies now or hereafter existing at law, in equity by statute or otherwise, or to any equitable remedies Landlord may have, and to any remedies Landlord may have under bankruptcy laws or laws affecting creditor's rights generally. In addition to all remedies set forth above, if Tenant materially defaults under this Lease, any and all Base Rent waived by Landlord under Section 3 above shall be immediately due and payable to Landlord and all options granted to Tenant hereunder shall automatically terminate, unless otherwise expressly agreed to in writing by Landlord. 21.4 Waiver of a Default: The waiver by Landlord of any default of any provision of this Lease shall not be deemed or construed a waiver of any other default by Tenant hereunder or of any subsequent default of this Lease, except for the default specified in the waiver. 22. Holding Over: If Tenant holds possession of the Premises after the expiration of the Term of this Lease with Landlord's consent, Tenant shall become a tenant from month-to-month upon the terms and provisions of this Lease, provided the monthly Base Rent during such hold over period shall be 150% of the 15 Base Rent due on the last month of the Lease Term, payable in advance on or before the first day of each month. Acceptance by Landlord of the monthly Base Rent without the additional fifty percent (50%) increase of Base Rent shall not be deemed or construed as a waiver by Landlord of any of its rights to collect the increased amount of the Base Rent as provided herein at any time. Such month-to-month tenancy shall not constitute a renewal or extension for any further term. All options, if any, granted under the terms of this Lease shall be deemed automatically terminated and be of no force or effect during said month-to-month tenancy. Tenant shall continue in possession until such tenancy shall be terminated by either Landlord or Tenant giving written notice of termination to the other party at least thirty (30) days prior to the effective date of termination. This paragraph shall not be construed as Landlord's permission for Tenant to hold over. Acceptance of Base Rent by Landlord following expiration or termination of this Lease shall not constitute a renewal of this Lease. 23. Landlord's Default: Landlord shall not be deemed in breach or default of this Lease unless Landlord fails within a reasonable time to perform all obligation required to be performed by Landlord hereunder. For purposes of this provision, a reasonable time shall not be less than thirty (30) days after receipt by Landlord of written notice specifying the nature of the obligation Landlord has not performed; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days, after receipt of written notice, is reasonably necessary for its performance, then Landlord shall not be in breach or default of this Lease if performance of such obligation is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 24. Parking: Tenant shall have a license to use the number of non-designated and non-exclusive parking spaces specified in the Basic Lease Information. Landlord shall exercise reasonable efforts to insure that such spaces are available to Tenant for its use, but Landlord shall not be required to enforce Tenant's right to use the same. 25. Sale of Premises: In the event of any sale of the Premises by Landlord or the cessation otherwise of Landlord's interest therein, Landlord shall be and is hereby entirely released from any and all of its obligations to perform or further perform under this Lease and from all liability hereunder accruing from or after the date of such sale; and the purchaser, at such sale or any subsequent sale of the Premises shall be deemed, without any further agreement between the parties or their successors in interest or between the parties and any such purchaser, to have assumed and agreed to carry out any and all of the covenants and obligations of the Landlord under this Lease. For purposes of this Section 25, the term "Landlord" means only the owner and/or agent of the owner as such parties exist as of the date on which Tenant executes this Lease. A ground lease or similar long term lease by Landlord of the entire Building, of which the Premises are a part, shall be deemed a sale within the meaning of this Section 25. Tenant agrees to attorn to such new owner provided such new owner does not disturb Tenant's use, occupancy or quiet enjoyment of the Premises so long as Tenant is not in default of any of the provisions of this Lease. 26. Waiver: No delay or omission in the exercise of any right or remedy of Landlord on any default by Tenant shall impair such a right or remedy or be construed as a waiver. The subsequent acceptance of Rent by Landlord after default by Tenant of any covenant or term of this Lease shall not be deemed a waiver of such default, other than a waiver of timely payment for the particular Rent payment involved, and shall not prevent Landlord from maintaining an unlawful detainer or other action based on such breach. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly Rent and other sums due hereunder shall be deemed to be other than on account of the earliest Rent or other sums due, nor shall any endorsement or statement on any check or accompanying any check or payment be deemed an accord and satisfaction; and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Rent or other sum or pursue any other remedy provided in this Lease. No failure, partial exercise or delay on the part of the Landlord in exercising any right, power or privilege hereunder shall operate as a waiver thereof. 27. Casualty Damage: If the Premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord. In case the Building shall be so damaged by fire or other casualty that substantial alteration or reconstruction of the Building shall, in Landlord's sole opinion, be required (whether or not the Premises shall have been damaged by such fire or other casualty), Landlord may, at its option, terminate this Lease by notifying Tenant in writing of such termination within ninety (90) days after the date of such damage, in which event the Rent shall be abated as of the date of such damage. If Landlord does not elect to terminate this Lease, and provided insurance proceeds and any contributions from Tenant, if necessary, are available to fully repair the damage, Landlord shall within seventy-five (75) days after the date of such damage commence to repair and restore the Building and shall proceed with reasonable diligence to restore the Building (except that Landlord shall not be responsible for delays outside its control) to substantially the same condition in which it was immediately prior to 16 the happening of the casualty; provided, Landlord shall not be required to rebuild, repair, or replace any part of Tenant's furniture, furnishings, fixtures and/or equipment removable by Tenant or any improvements, alterations or additions installed by or for the benefit of Tenant under the provisions of this Lease. Landlord shall not in any event be required to spend for such work an amount in excess of the insurance proceeds (excluding any deductible) and any contributions from Tenant, if necessary, actually received by Landlord as a result of the fire or other casualty. Landlord shall not be liable for any inconvenience or annoyance to Tenant, injury to the business of Tenant, loss of use of any part of the Premises by the Tenant or loss of Tenant's personal property resulting in any way from such damage or the repair thereof, except that, subject to the provisions of the next sentence, Landlord shall allow Tenant a fair diminution of Rent during the time and to the extent the Premises are unfit for occupancy. Notwithstanding anything to the contrary contained herein, if the Premises or any other portion of the Building be damaged by fire or other casualty resulting from the intentional or negligent acts or omissions of Tenant or any of Tenant's Representatives, (i) the Rent shall not be diminished during the repair of such damage, (ii) Tenant shall not have any right to terminate this Lease due to the occurrence of such casualty or damage, and (iii) Tenant shall be liable to Landlord for the cost and expense of the repair and restoration of all or any portion of the Building caused thereby (including, without limitation, any deductible) to the extent such cost and expense is not covered by insurance proceeds. In the event the holder of any indebtedness secured by the Premises requires that the insurance proceeds be applied to such indebtedness, then Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within thirty (30) days after the date of notice to Tenant of any such event, whereupon all rights and obligations shall cease and terminate hereunder except for those obligations expressly intended to survive any such termination of this Lease. Except as otherwise provided in this Section 27, Tenant hereby waives the provisions of Sections 1932(2.), 1933(4.), 1941 and 1942 of the California Civil Code. 28. Condemnation: If twenty-five percent (25%) or more of the Premises is condemned by eminent domain, inversely condemned or sold in lieu of condemnation for any public or quasi-public use or purpose ("Condemned"), then Tenant or Landlord may terminate this Lease as of the date when physical possession of the Premises is taken and title vests in such condemning authority, and Rent shall be adjusted to the date of termination. Tenant shall not because of such condemnation assert any claim against Landlord or the condemning authority for any compensation because of such condemnation, and Landlord shall be entitled to receive the entire amount of any award without deduction for any estate of interest or other interest of Tenant. If neither party elects to terminate this Lease, Landlord shall, if necessary, promptly proceed to restore the Premises or the Building to substantially its same condition prior to such partial condemnation, allowing for the reasonable effects of such partial condemnation, and a proportionate allowance shall be made to Tenant, as solely determined by Landlord, for the Rent corresponding to the time during which, and to the part of the Premises of which, Tenant is deprived on account of such partial condemnation and restoration. Landlord shall not be required to spend funds for restoration in excess of the amount received by Landlord as compensation awarded. 29. Environmental Matters/Hazardous Materials: 29.1 Hazardous Materials Disclosure Certificate: Prior to executing this Lease, Tenant has completed, executed and delivered to Landlord Tenant's initial Hazardous Materials Disclosure Certificate (the "Initial HazMat Certificate"), a copy of which is attached hereto as Exhibit G and incorporated herein by this reference. Tenant covenants, represents and warrants to Landlord that the information on the Initial HazMat Certificate is true and correct and accurately describes the use(s) of Hazardous Materials which will be made and/or used on the Premises by Tenant. Tenant shall commencing with the date which is one year from the Commencement Date and continuing every year thereafter, complete, execute, and deliver to Landlord, a Hazardous Materials Disclosure Certificate ("the "HazMat Certificate") describing Tenant's present use of Hazardous Materials on the Premises, and any other reasonably necessary documents as requested by Landlord. The HazMat Certificate required hereunder shall be in substantially the form as that which is attached hereto as Exhibit E. 29.2 Definition of Hazardous Materials: As used in this Lease, the term Hazardous Materials shall mean and include (a) any hazardous or toxic wastes, materials or substances, and other pollutants or contaminants, which are or become regulated by any Environmental Laws; (b) petroleum, petroleum by products, gasoline, diesel fuel, crude oil or any fraction thereof; (c) asbestos and asbestos containing material, in any form, whether friable or non-friable; (d) polychlorinated biphenyls; (c) radioactive materials; (f) lead and lead-containing materials; (g) any other material, waste or substance displaying toxic, reactive, ignitable or corrosive characteristics, as all such terms are used in their broadest sense, and are defined or become defined by any Environmental Law (defined below); or (h) any materials which cause or threatens to cause a nuisance upon or waste to any portion of the Premises, the Building, the Lot, the Park or any surrounding property; or poses or threatens to pose a hazard to the health and safety of persons on the Premises or any surrounding property. 17 29.3 Prohibition; Environmental Laws: Tenant shall not be entitled to use nor store any Hazardous Materials on, in, or about the Premises, the Building, the Lot and the Park, or any portion of the foregoing, without, in each instance, obtaining Landlord's prior written consent thereto. If Landlord consents to any such usage or storage, then Tenant shall be permitted to use and/or store only those Hazardous Materials that are necessary for Tenant's business and to the extent disclosed in the HazMat Certificate and as expressly approved by Landlord in writing, provided that such usage and storage is only to the extent of the quantities of Hazardous Materials as specified in the then applicable HazMat Certificate as expressly approved by Landlord and provided further that such usage and storage is in full compliance with any and all local, state and federal environmental, health and/or safety-related laws, statutes, orders, standards, courts' decisions, ordinances, rules and regulations (as interpreted by judicial and administrative decisions), decrees, directives, guidelines, permits or permit conditions, currently existing and as amended, enacted, issued or adopted in the future which are or become applicable to Tenant or all or any portion of the Premises (collectively, the "Environmental Laws"). Tenant agrees that any changes to the type and/or quantities of Hazardous Materials specified in the most recent HazMat Certificate may be implemented only with the prior written consent of Landlord, which consent may be given or withheld in Landlord's sole discretion. Tenant shall not be entitled nor permitted to install any tanks under, on or about the Premises for the storage of Hazardous Materials without the express written consent of Landlord, which may be given or withheld in Landlord's sole discretion. Landlord shall have the right at all times during the Term of this Lease to (i) inspect the Premises, (ii) conduct tests and investigations to determine whether Tenant is in compliance with the provisions of this Section 29, and (iii) request lists of all Hazardous Materials used, stored or otherwise located on, under or about any portion of the Premises and/or the Common Areas. The cost of all such inspections, tests and investigations shall be borne solely by Tenant, if Landlord reasonably determines that Tenant or any of Tenant's Representatives are directly or indirectly responsible in any manner for any contamination revealed by such inspections, tests and investigations. The aforementioned rights granted herein to Landlord and its representatives shall not create (a) a duty on Landlord's part to inspect, test, investigate, monitor or otherwise observe the Premises or the activities of Tenant and Tenant's Representatives with respect to Hazardous Materials, including without limitation, Tenant's operation, use and any remediation related thereto, or (b) liability on the part of Landlord and its representatives for Tenant's use, storage, disposal or remediation of Hazardous Materials, it being understood that Tenant shall be solely responsible for all liability in connection therewith. 29.4 Tenant's Environmental Obligations: Tenant shall give to Landlord immediate verbal and follow-up written notice of any spills, releases, discharges, disposals, emissions, migrations, removals or transportation of Hazardous Materials on, under or about any portion of the Premises or in any Common Areas. Tenant, at its sole cost and expense, covenants and warrants to promptly investigate, clean up, remove, restore and otherwise remediate (including, without limitation, preparation of any feasibility studies or reports and the performance of any and all closures) any spill, release, discharge, disposal, emission, migration or transportation of Hazardous Materials arising from or related to the intentional or negligent acts or omissions of Tenant or Tenant's Representatives such that the affected portions of the Park and any adjacent property are returned to the condition existing prior to the appearance of such Hazardous Materials. Any such investigation, clean up, removal, restoration and other remediation shall only be performed after Tenant has obtained Landlord's prior written consent, which consent shall not be unreasonably withheld so long as such actions would not potentially have a material adverse long-term or short-term effect on any portion of the Premises, the Building, the Lot or the Park. Notwithstanding the foregoing, Tenant shall be entitled to respond immediately to an emergency without first obtaining Landlord's prior written consent. Tenant, at its sole cost and expense, shall conduct and perform, or cause to be conducted and performed, all closures as required by any Environmental Laws or any agencies or other governmental authorities having jurisdiction thereof. If Tenant fails to so promptly investigate, clean up, remove, restore, provide closure or otherwise so remediate, Landlord may, but without obligation to do so, take any and all steps necessary to rectify the same and Tenant shall promptly reimburse Landlord, upon demand, for all costs and expenses to Landlord of performing investigation, clean up, removal, restoration, closure and remediation work. All such work undertaken by Tenant, as required herein, shall be performed in such a manner so as to enable Landlord to make full economic use of the Premises, the Building, the Lot and the Park after the satisfactory completion of such work. 29.5 Environmental Indemnity: In addition to Tenant's obligations as set forth hereinabove, Tenant and Tenant's officers and directors agree to, and shall, protect, indemnify, defend (with counsel acceptable to Landlord) and hold Landlord and the other Indemnitees harmless from and against any and all claims, judgments, damages, penalties, fines, liabilities, losses (including, without limitation, diminution in value of any portion of the Premises, the Building, the Lot or the Park, damages for the loss of or restriction on the use of rentable or usable space, and from any adverse impact of Landlord's marketing of any space within the Building and/or Park), suits, administrative proceedings and costs (including, but not limited to, attorneys' and consultant fees and court costs) arising at any time during or after the Term of this Lease in connection with or related to, directly or indirectly, the use, presence, transportation, storage, disposal, migration, removal, spill, release or discharge of Hazardous Materials on, in or about any portion of the Premises, the Common Areas, the Building, the Lot or the Park as a result (directly or indirectly) of the intentional or negligent acts or omissions of Tenant or any of Tenant's Representatives. Neither the 18 written consent of Landlord to the presence, use or storage of Hazardous Materials in, on, under or about any portion of the Premises, the Building, the Lot and/or the Park, nor the strict compliance by Tenant with all Environmental Laws shall excuse Tenant and Tenant's officers and directors from its obligations of indemnification pursuant hereto. Tenant shall not be relieved of its indemnification obligations under the provisions of this Section 29.5 due to Landlord's status as either an "owner" or "operator" under any Environmental Laws. 29.6 Survival: Tenant's obligations and liabilities pursuant to the provisions of this Section 29 shall survive the expiration or earlier termination of this Lease. If it is determined by Landlord that the condition of all or any portion of the Premises, the Building, the Lot and/or the Park is not in compliance with the provisions of this Lease with respect to Hazardous Materials, including without limitation all Environmental Laws at the expiration or earlier termination of this Lease, then in Landlord's sole discretion, Landlord may require Tenant to hold over possession of the Premises until Tenant can surrender the Premises to Landlord in the condition in which the Premises existed as of the Commencement Date and prior to the appearance of such Hazardous Materials except for reasonable wear and tear, including without limitation, the conduct or performance of any closures as required by any Environmental Laws. The burden of proof hereunder shall be upon Tenant. For purposes hereof, the term "reasonable wear and tear" shall not include any deterioration in the condition or diminution of the value of any portion of the Premises, the Building, the Lot and/or the Park in any manner whatsoever related to directly, or indirectly, Hazardous Materials. Any such holdover by Tenant will be with Landlord's consent, will not be terminable by Tenant in any event or circumstance and will otherwise be subject to the provisions of Section 22 of this Lease. 30. Financial Statements: Tenant, for the reliance of Landlord, any lender holding or anticipated to acquire a lien upon the Premises, the Building or the Park or any portion thereof, or any prospective purchaser of the Building or the Park or any portion thereof, within ten (10) days after Landlord's request therefor, but not more often than once annually so long as Tenant is not in default of this Lease, shall deliver to Landlord the then current audited financial statements of Tenant (including interim periods following the end of the last fiscal year for which annual statements are available) which statements shall be prepared or compiled by a certified public accountant and shall present fairly the financial condition of Tenant at such dates and the result of its operations and changes in its financial positions for the periods ended on such dates. If an audited financial statement has not been prepared, Tenant shall provide Landlord with an unaudited financial statement and/or such other information, the type and form of which are acceptable to Landlord in Landlord's reasonable discretion, which reflects the financial condition of Tenant. If Landlord so requests, Tenant shall deliver to Landlord an opinion of a certified public accountant, including a balance sheet and profit and loss statement for the most recent prior year, all prepared in accordance with generally accepted accounting principles consistently applied. Any and all options granted to Tenant hereunder shall be subject to and conditioned upon Landlord's reasonable approval of Tenant's financial condition at the time of Tenant's exercise of any such option. 31. General Provisions: 31.1 Time. Time is of the essence in this Lease and with respect to each and all of its provisions in which performance is a factor. 31.2 Successors and Assigns. The covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties hereto. 31.3 Recordation. Tenant shall not record this Lease or a short form memorandum hereof without the prior written consent of the Landlord. 31.4 Landlord's Personal Liability. The liability of Landlord (which, for purposes of this Lease, shall include Landlord and the owner of the Building if other than Landlord) to Tenant for any default by Landlord under the terms of this Lease shall be limited to the actual interest of Landlord and its present or future partners or members in the Premises or the Building, and Tenant agrees to look solely to the Premises for satisfaction of any liability and shall not look to other assets of Landlord nor seek any recourse against the assets of the individual partners, members, directors, officers, shareholders, agents or employees of Landlord (including without limitation, any property management company of Landlord); it being intended that Landlord and the individual partners, members, directors, officers, shareholders, agents and employees of Landlord (including without limitation, any property management company of Landlord) shall not be personally liable in any manner whatsoever for any judgment or deficiency. The liability of Landlord under this Lease is limited to its actual period of ownership of title to the Building, and Landlord shall be automatically released from further performance under this Lease upon transfer of Landlord's interest in the Premises or the Building. 19 31.5 Separability. Any provisions of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provisions hereof and such other provision shall remain in full force and effect. 31.6 Choice of Law. This Lease shall be governed by, and construed in accordance with the laws of the State of California. 31.7 Attorneys' Fees. In the event any dispute between the parties results in litigation or other proceeding, the prevailing party shall be reimbursed by the party not prevailing for all reasonable costs and expenses, including, without limitation, reasonable attorneys' and experts' fees and costs incurred by the prevailing party in connection with such litigation or other proceeding, and any appeal thereof. Such costs, expenses and fees shall be included in and made a part of the judgment recovered by the prevailing party, if any. 31.8 Entire Agreement. This Lease supersedes any prior agreements, representations, negotiations or correspondence between the parties, and contains the entire agreement of the parties on matters covered. No other agreement, statement or promise made by any party, that is not in writing and signed by all parties to this Lease, shall be binding. 31.9 Warranty of Authority. On the date that Tenant executes this Lease, Tenant shall deliver to Landlord an original certificate of status for Tenant issued by the California Secretary of State or statement of partnership for Tenant recorded in the county in which the Premises are located, as applicable, and such other documents as Landlord may reasonably request with regard to the lawful existence of Tenant. Each person executing this Lease on behalf of a party represents and warrants that (1) such person is duly and validly authorized to do so on behalf of the entity it purports to so bind, and (2) if such party is a partnership, corporation or trustee, that such partnership, corporation or trustee has full right and authority to enter into this Lease and perform all of its obligations hereunder. Tenant hereby warrants that this Lease is valid and binding upon Tenant and enforceable against Tenant in accordance with its terms. 31.10 Notices. Any and all notices and demands required or permitted to be given hereunder to Landlord shall be in writing and shall be sent: (a) by United States mail, certified and postage prepaid; or (b) by personal delivery; or (c) by overnight courier, addressed to Landlord at 30 Executive Park, Suite 100, Irvine, California 92614. Any and all notices and demands required or permitted to be given hereunder to Tenant shall be in writing and shall be sent: (i) by United States mail, certified and postage prepaid; or (ii) by personal delivery to any employee or agent of Tenant over the age of eighteen (18) years of age; or (iii) by overnight courier, all of which shall be addressed to Tenant at the Premises. Notice and/or demand shall be deemed given upon the earlier of actual receipt or the third day following deposit in the United States mail. Any notice or requirement of service required by any statute or law now or hereafter in effect, including, but not limited to, California Code of Civil Procedure Sections 1161, 1161.1, and 1162 (including any amendments, supplements or substitutions thereof), is hereby waived by Tenant. 31.11 Joint and Several. If Tenant consists of more than one person or entity, the obligations of all such persons or entities shall be joint and several. 31.12 Covenants and Conditions. Each provision to be performed by Tenant hereunder shall be deemed to be both a covenant and a condition. 31.13 Waiver of Jury Trial. The parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way related to this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, the Building or the Park, and/or any claim of injury, loss or damage. 31.14 Counterclaims. In the event Landlord commences any proceedings for nonpayment of Rent, Additional Rent, or any other sums or amounts due hereunder, Tenant shall not interpose any counterclaim of whatever nature or description in any such proceedings, provided, however, nothing contained herein shall be deemed or construed as a waiver of the Tenant's right to assert such claims in any separate action brought by Tenant or the right to offset the amount of any final judgment owed by Landlord to Tenant. 31.15 Underlining. The use of underlining within the Lease is for Landlord's reference purposes only and no other meaning or emphasis is intended by this use, nor should any be inferred. 31.16 Merger. The voluntary or other surrender of this Lease by Tenant, the mutual termination or cancellation hereof by Landlord and Tenant, or a termination of this Lease by Landlord for a material default by Tenant hereunder, shall not work a merger, and, at the sole option of Landlord, (i) shall terminate all or any existing subleases or subtenancies, or (ii) may operate as an assignment to Landlord of any or all of such subleases or subtenancies. Landlord's election of either or both of the foregoing options 20 shall be exercised by delivery by Landlord of written notice thereof to Tenant and all known subtenants under any sublease. 32. Signs: All signs and graphics of every kind visible in or from public view or corridors or the exterior of the Premises shall be subject to Landlord's prior written approval and shall be subject to any applicable governmental laws, ordinances, and regulations and in compliance with Landlord's sign criteria as same may exist from time to time or as set forth in Exhibit II hereto and made a part hereof. Tenant shall remove all such signs and graphics prior to the termination of this Lease. Such installations and removals shall be made in a manner as to avoid damage or defacement of the Premises; and Tenant shall repair any damage or defacement, including without limitation, discoloration caused by such installation or removal. Landlord shall have the right, at its option, to deduct from the Security Deposit such sums as are reasonably necessary to remove such signs, including, but not limited to, the costs and expenses associated with any repairs necessitated by such removal. Notwithstanding the foregoing, in no event shall any: (a) neon, flashing or moving sign(s) or (b) sign(s) which shall interfere with the visibility of any sign, awning, canopy, advertising matter, or decoration of any kind of any other business or occupant of the Building or the Park be permitted hereunder. Tenant further agrees to maintain any such sign, awning, canopy, advertising matter, lettering, decoration or other thing as may be approved in good condition and repair at all times. 33. Mortgagee Protection: Upon any default on the part of Landlord, Tenant will give written notice by registered or certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage covering the Premises who has provided Tenant with notice of their interest together with an address for receiving notice, and shall offer such beneficiary or mortgagee a reasonable opportunity to cure the default (which, in no event shall be less than ninety (90) days), including time to obtain possession of the Premises by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure. If such default cannot be cured within such time period, then such additional time as may be necessary will be given to such beneficiary or mortgagee to effect such cure so long as such beneficiary or mortgagee has commenced the cure within the original time period and thereafter diligently pursues such cure to completion, in which event this Lease shall not be terminated while such cure is being diligently pursued. Tenant agrees that each lender to whom this Lease has been assigned by Landlord is an express third party beneficiary hereof. Tenant shall not make any prepayment of Rent more than one (1) month in advance without the prior written consent of each such lender, except if Tenant is required to make quarterly payments of Rent in advance pursuant to the provisions of Section 8 above. Tenant waives the collection of any deposit from such lender(s) or any purchaser at a foreclosure sale of such lender(s)' deed of trust unless the lender(s) or such purchaser shall have actually received and not refunded the deposit. Tenant agrees to make all payments under this Lease to the lender with the most senior encumbrance upon receiving a direction, in writing, to pay said amounts to such lender. Tenant shall comply with such written direction to pay without determining whether an event of default exists under such lender's loan to Landlord. 34. Quitclaim: Upon any termination of this Lease, Tenant shall, at Landlord's request, execute, have acknowledged and deliver to Landlord a quitclaim deed of Tenant's interest in and to the Premises. If Tenant fails to so deliver to Landlord such a quitclaim deed, Tenant hereby agrees that Landlord shall have the full authority and right to record such a quitclaim deed signed only by Landlord and such quitclaim deed shall be deemed conclusive and binding upon Tenant. 35. Modifications for Lender: If, in connection with obtaining financing for the Premises or any portion thereof, Landlord's lender shall request reasonable modification(s) to this Lease as a condition to such financing, Tenant shall not unreasonably withhold, delay or defer its consent thereto, provided such modifications do not materially adversely affect Tenant's rights hereunder or the use, occupancy or quiet enjoyment of Tenant hereunder. 36. Warranties of Tenant: Tenant hereby warrants and represents to Landlord, for the express benefit of Landlord, that Tenant has undertaken a complete and independent evaluation of the risks inherent in the execution of this Lease and the operation of the Premises for the use permitted hereby, and that, based upon said independent evaluation, Tenant has elected to enter into this Lease and hereby assumes all risks with respect thereto. Tenant hereby further warrants and represents to Landlord, for the express benefit of Landlord, that in entering into this Lease, Tenant has not relied upon any statement, fact, promise or representation (whether express or implied, written or oral) not specifically set forth herein in writing and that any statement, fact, promise or representation (whether express or implied, written or oral) made at any time to Tenant, which is not expressly incorporated herein in writing, is hereby waived by Tenant. 21 37. Compliance with Americans with Disabilities Act: Landlord and Tenant hereby agree and acknowledge that the Premises, the Building and/or the Park may be subject to the requirements of the Americans with Disabilities Act, a federal law codified at 42 U.S.C. 12101 et seq, including, but not limited to Title III thereof, all regulations and guidelines related thereto, together with any and all laws, rules, regulations, ordinances, codes and statutes now or hereafter enacted by local or state agencies having jurisdiction thereof, including all requirements of Title 24 of the State of California, as the same may be in effect on the date of this Lease and may be hereafter modified, amended or supplemented (collectively, the "ADA"). Tenant shall be solely responsible for conducting its own independent investigation of this matter and for ensuring that the design of all improvements or alterations to be made to the Premises by, or on behalf of, Tenant strictly comply with all requirements of the ADA. Subject to reimbursement pursuant to Section 6 of the Lease, if any barrier removal work or other work is required to the Building, the Common Areas or the Park under the ADA, then such work shall be the responsibility of Landlord; provided, if such work is required under the ADA as a result of Tenant's use of the Premises or any work or alteration made to the Premises by or on behalf of Tenant, then such work shall be performed by Landlord at the sole cost and expense of Tenant. Except as otherwise expressly provided in this provision, Tenant shall be responsible at its sole cost and expense for fully and faithfully complying with all applicable requirements of the ADA, including without limitation, not discriminating against any disabled persons in the operation of Tenant's business in or about the Premises, and offering or otherwise providing auxiliary aids and services as, and when, required by the ADA. Within ten (10) days after receipt, Landlord and Tenant shall advise the other party in writing, and provide the other with copies of (as applicable), any notices alleging violation of the ADA relating to any portion of the Premises or the Building; any claims made or threatened in writing regarding noncompliance with the ADA and relating to any portion of the Premises or the Building; or any governmental or regulatory actions or investigations instituted or threatened regarding noncompliance with the ADA and relating to any portion of the Premises or the Building. Tenant shall and hereby agrees to protect, defend (with counsel acceptable to Landlord) and hold Landlord and the other Indemnitees harmless and indemnify the Indemnitees from and against all liabilities, damages, claims, losses, penalties, judgments, charges and expenses (including reasonable attorneys' fees, costs of court and expenses necessary in the prosecution or defense of any litigation including the enforcement of this provision) arising from or in any way related to, directly or indirectly, Tenant's or Tenant's Representatives' violation or alleged violation of the ADA. Tenant agrees that the obligations of Tenant herein shall survive the expiration or earlier termination of this Lease. 38. Brokerage Commission: Landlord and Tenant each represents and warrants for the benefit of the other that it has had no dealings with any real estate broker, agent or finder in connection with the Premises and/or the negotiation of this Lease, except for the Broker(s) (as set forth on Page 1), and that it knows of no other real estate broker, agent or finder who is or might be entitled to a real estate brokerage commission or finder's fee in connection with this Lease or otherwise based upon contacts between the claimant and Tenant. Each party shall indemnify and hold harmless the other from and against any and all liabilities or expenses arising out of claims made for a fee or commission by any real estate broker, agent or finder in connection with the Premises and this Lease other than Broker(s), if any, resulting from the actions of the indemnifying party. Any real estate brokerage commission or finder's fee payable to the Broker(s) in connection with this Lease shall only be payable and applicable to the extent of the initial Term of the Lease and to the extent of the Premises as same exist as of the date on which Tenant executes this Lease. Unless expressly agreed to in writing by Landlord and Broker(s), no real estate brokerage commission or finder's fee shall be owed to, or otherwise payable to, the Broker(s) for any renewals or other extensions of the initial Term of this Lease or for any additional space leased by Tenant other than the Premises as same exists as of the date on which Tenant executes this Lease. Tenant further represents and warrants to Landlord that Tenant will not receive (i) any portion of any brokerage commission or finder's fee payable to the Broker(s) in connection with this Lease or (ii) any other form of compensation or incentive from the Broker(s) with respect to this Lease. 39. Quiet Enjoyment: Landlord covenants with Tenant, upon the paying of Rent and observing and keeping the covenants, agreements and conditions of this Lease on its part to be kept, and during the periods that Tenant is not otherwise in default of any of the terms or provisions of this Lease, and subject to the rights of any of Landlord's lenders, (i) that Tenant shall and may peaceably and quietly hold, occupy and enjoy the Premises and the Common Areas during the Term of this Lease, and (ii) neither Landlord, nor any successor or assign of Landlord, shall disturb Tenant's occupancy or enjoyment of the Premises and the Common Areas. 40. Landlord's Ability to Perform Tenant's Unperformed Obligations: Notwithstanding anything to the contrary contained in this Lease, if Tenant shall fail to perform any of the terms, provisions, covenants or conditions to be performed or complied with by Tenant pursuant to this Lease, and/or if the failure of Tenant relates to a matter which in Landlord's judgment reasonably exercised is of an emergency nature and such failure shall remain uncured for a period of time commensurate with such emergency, then Landlord may, at Landlord's option without any obligation to do so, and in its sole discretion as to the 22 necessity therefor, perform any such term, provision, covenant, or condition, or make any such payment and Landlord by reason of so doing shall not be liable or responsible for any loss or damage thereby sustained by Tenant or anyone holding under or through Tenant. If Landlord so performs any of Tenant's obligations hereunder, the full amount of the cost and expense entailed or the payment so made or the amount of the loss so sustained shall immediately be owing by Tenant to Landlord, and Tenant shall promptly pay to Landlord upon demand, as Additional Rent, the full amount thereof with interest thereon from the date of payment it the greater of (i) ten percent (10%) per annum, or (ii) the highest rate permitted by applicable law and Enforcement Expenses. IN WITNESS WHEREOF, this Lease is executed by the parties as of the Lease Date referenced on Page 1 of this Lease. LANDLORD: Lincoln Ventura Technology Center I, a California Limited partnership By: Patrician Associates, Inc., a California corporation, general partner By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- Date: -------------------------------------- By: Lincoln Camarillo, a California limited partnership, general partner By: LPC MS, Inc., as agent and manager for owner By: ---------------------------------------- Terry Thompson, Vice President, Operations Date: --------------------------------------- TENANT: Interlink Electronics, Inc., a Delaware corporation (NOTE: Two (2) signatures required to be valid.) By: /s/ DAVID ARTHUR ---------------------------------------- Name: David Arthur -------------------------------------- Title: Sr. V.P Operations ------------------------------------- Date: Aug 13, 1998 -------------------------------------- By: /s/ ---------------------------------------- Name: /s/ -------------------------------------- Title: /s/ ------------------------------------- Date: /s/ -------------------------------------- 23 EX-21.1 3 LIST OF SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES The Company owns 80% of the outstanding voting stock of the following subsidiary: Subsidiary Name Jurisdiction of Incorporation --------------- ----------------------------- Interlink Electronics K.K. Japan EX-23.1 4 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Interlink Electronics, Inc.: As independent public accountants, we hereby consent to the incorporation of our report dated February 11, 1999 included in this Form 10-K, into the Company's previously filed Registration Statement No. 33-60380. It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 1998 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Arthur Andersen LLP Los Angeles, California March 29, 1999 EX-24.1 5 POWERS OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY (Interlink Form 10-K) The undersigned, an officer and/or director of Interlink Electronics, Inc., a Delaware corporation (the "Company"), does hereby constitute and appoint E. Michael Thoben, III the undersigned's true and lawful attorney and agent, to do any and all acts and things and execute in the undersigned's name as an officer or director of the Company the Annual Report on Form 10-K and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred. Dated: March 26, 1999. GEORGE GU ----------------------------------------- George Gu EUGENE F. HOVANEC ----------------------------------------- Eugene F. Hovanec MERRITT M. LUTZ ----------------------------------------- Merritt M. Lutz CAROLYN MACDOUGALL ----------------------------------------- Carolyn MacDougall EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 US DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 3,900 0 6,758 0 6,796 17,628 1,561 0 19,577 3,489 0 0 0 24,694 216 19,577 22,095 22,095 13,954 7,253 359 0 127 402 0 402 0 0 0 402 .08 .08
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