-----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, CfaANzWZXputG2YQ1HeLHH7yfPN+zQl6SNp7UMBpt59JwVsFsNgjxLqvCCipiF5+ N4El4VsEdYLi62v23oOjyA== 0000898430-96-003717.txt : 19960814 0000898430-96-003717.hdr.sgml : 19960814 ACCESSION NUMBER: 0000898430-96-003717 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TAITRON COMPONENTS INC CENTRAL INDEX KEY: 0000942126 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 954249240 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-25844 FILM NUMBER: 96609360 BUSINESS ADDRESS: STREET 1: 25202 ANZA DR CITY: SANTA CLARITA STATE: CA ZIP: 91355 BUSINESS PHONE: 8052576060 MAIL ADDRESS: STREET 1: 25202 ANZA DR CITY: SANTA CLARITA STATE: CA ZIP: 91355 10QSB 1 FORM 10-QSB U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT COMMISSION FILE NUMBER: 0-25844 TAITRON COMPONENTS INCORPORATED (Exact Name of Small Business Issuer as Specified in Its Charter) CALIFORNIA 95-4249240 (State Or Other Jurisdiction of (I.R.S. Employer Incorporation Or Organization) Identification No.) 25202 ANZA DRIVE SANTA CLARITA, CALIFORNIA 91355 (Address Of Principal Executive Offices) (805) 257-6060 (Issuer's Telephone Number, Including Area Code) NONE (Former Name, Address and Fiscal Year, if Changed Since Last Report) Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --------- --------- State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: Class A Common Stock, $.001 par value, 6,167,341 shares outstanding as of April 30, 1996 Class B Common Stock, $.001 par value, 762,612 shares outstanding as of April 30, 1996 Transitional Small Business Disclosure Format (check one) YES NO X --------- --------- TABLE OF CONTENTS
ITEM PAGE NO. ---- ------- PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION 13 Item 6. Exhibits 13
Page 2 of 15 PART I. FINANCIAL INFORMATION Item 1. Financial Statements TAITRON COMPONENTS INCORPORATED Balance Sheets (Dollars in Thousands)
JUNE 30, DECEMBER 31, 1996 1995 ----------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 588 1,145 Trade accounts receivable, net 5,057 5,363 Inventory 38,242 27,752 Deferred income taxes 477 400 Prepaid expenses and other current assets 198 92 -------- ------ Total current assets 44,562 34,752 Property and equipment, net 1,713 1,627 Other assets 13 1 -------- ------ Total assets $ 46,288 36,380 ======== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 14,500 -- Trade accounts payable 4,376 12,862 Accrued liabilities 651 881 Current portion of long-term debt 17 16 Income taxes payable (23) 155 Total current liabilities 19,521 13,914 -------- ------ Long-term debt, less current portion 502 511 -------- ------ Convertible, subordinated note 3,000 -- -------- ------ Shareholders' equity: Preferred stock, $.001 par value. Authorized 5,000,000 shares; none issued or outstanding -- -- Common stock, no par value. Authorized 10,000,000 shares; none issued and outstanding. -- -- Class A common stock, $.001 par value. Authorized 20,000,000 shares; issued and outstanding 6,167,341 shares 6 6 Class B common stock, $.001 par value. Authorized, issued and outstanding 762,612 shares 1 1 Additional paid-in capital 14,531 14,531 Retained earnings 8,727 7,417 -------- ------ Total shareholders' equity 23,265 21,955 -------- ------ Total liabilities and shareholders' equity $ 46,288 36,380 -------- ------
See accompanying notes to financial statements Page 3 of 15 TAITRON COMPONENTS INCORPORATED Statements of Earnings (Dollars in thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------ ---------------------------- 1996 1995 1996 1995 ------------------------------ ---------------------------- (Unaudited) (Unaudited) Net sales $ 7,824 9,203 15,889 17,507 Cost of goods sold 5,402 6,024 10,790 11,587 ------------------------------ ---------------------------- Gross profit 2,422 3,179 5,099 5,920 Selling, general and administrative 1,244 1,389 2,601 2,736 expenses ------------------------------ ---------------------------- Operating earnings 1,178 1,790 2,498 3,184 Interest expense, net 247 20 294 164 Other expense (income), net 12 6 16 (17) ------------------------------ ---------------------------- Earnings before income taxes 918 1,764 2,188 3,037 Income tax expense 369 721 878 1,238 ------------------------------ ---------------------------- Net earnings $ 550 1,043 1,310 1,799 ------------------------------ ---------------------------- Net earnings per share $ .08 .16 .19 .33 ============================== ============================ Weighted average common shares outstanding 6,998,000 6,491,000 6,985,000 5,451,000 ============================== ============================
See accompanying notes to financial statements Page 4 of 15 TAITRON COMPONENTS INCORPORATED Statements of Cash Flows (Dollars in thousands)
SIX MONTHS ENDED JUNE 30 ------------------------ 1996 1995 ----------- --------- (Unaudited) Cash flows from operating activities: Net earnings $ 1,310 1,799 -------- ------ Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 56 65 Deferred income taxes (77) (100) Changes in: Trade accounts receivable 306 (1,185) Inventory (10,490) (1,712) Prepaid expenses and other current (106) (64) assets Other assets (12) 2 Trade accounts payable (8,486) 1,987 Accrued liabilities (230) 133 Income taxes payable (178) (765) -------- ------ Total adjustments (19,217) (1,640) -------- ------ Net cash from (used) in operating activities (17,907) 159 -------- ------ Cash flows from investing activities acquisitions of property and equipment (142) (84) -------- ------ Cash flows from financing activities: Net borrowings on notes payable 14,500 (5,364) Payments on long-term debt (8) (13) Proceeds from issuance of Common Stock 11,305 Proceeds from issuance of Convertible, subordinated note 3,000 -- -------- ------ Net cash provided by financing activities 17,492 5,928 -------- ------ Net increase (decrease) in cash and cash equivalents (557) 6,003 Cash and cash equivalents, beginning of period 1,145 59 -------- ------ Cash and cash equivalents, end of period $ 588 6,062 ======== ====== Supplemental disclosure of cash flow information: Cash paid for interest $ 301 250 ======== ====== Cash paid for income taxes $ 1,134 2,102 ======== ======
See accompanying notes to financial statements Page 5 of 15 TAITRON COMPONENTS INCORPORATED Notes to Financial Statements (All amounts are unaudited except the balance sheet as of December 31, 1995) (1) BASIS OF PRESENTATION The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of Management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation for each of the periods presented. The results of operations for interim periods are not necessarily indicative of results to be achieved for full fiscal years. In accordance with item 310(b) to form 10-QSB of Regulation S-B, the accompanying financial statements and related footnotes have been condensed and do not contain certain information that is included in the Company's annual financial statements and footnotes thereto. For further information refer to the financial statements and related footnotes for the year ended December 31, 1995 and "MANAGEMENT'S DISCUSSION AND ANALYSIS", included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Revenue is recognized upon shipment of the merchandise. Reserves for sales allowances and customer returns are established based upon historical experience and management's estimates as shipments are made. Sales returns for the quarters ended June 30, 1996 and 1995 aggregated $645,000 and $315,000, respectively and for the six months ended June 30, 1996 and 1995 aggregated $977,000 and $683,000 respectively. ALLOWANCE FOR SALES RETURNS AND DOUBTFUL ACCOUNTS The allowance for sales returns and doubtful accounts at June 30, 1996 and December 31, 1995 aggregated $168,000 and $138,000, respectively. INVENTORY Inventory, consisting principally of products for resale, is stated at the lower of cost or market, using the first-in, first-out method. The value presented is net of valuation allowances of $623,000 and $447,000 at June 30, 1996 and December 31, 1995, respectively. (3) NET EARNINGS PER SHARE Net earnings per share is based on the weighted average number of common shares outstanding as adjusted for the common stock reverse split described in note 4, for all periods presented. Pursuant to the requirements of the Securities and Exchange Commission, common stock issued by the Company during the 12 months immediately preceding the initial public offering (note 4) have been included in the calculation of the weighted average common shares outstanding as if they were outstanding for all periods presented using the treasury stock method. (4) SHAREHOLDERS' EQUITY In MarchE1995, the Board of Directors authorized the filing of a registration statement for an initial public offering of the Company's common stock. In that connection, the Company recorded a .891-for-1 reverse stock split of its common stock outstanding at December 31, 1995. Accordingly, all references to the number of shares outstanding have been adjusted to give effect to the aforementioned reverse stock split. Page 6 of 15 Additionally, the Company: . Authorized the issuance of up to 5,000,000 shares of newly authorized Preferred Stock, par value $.001 per share. . Authorized the issuance of up to 20,000,000 shares of newly authorized Class A Common Stock, par value $.001 per share. Each holder of Class A Common Stock is entitled to one vote for each share held. . Authorized the issuance of 762,612 shares of newly created Class B Common Stock, par value $.001 per share. Each holder of Class B Common Stock is entitled to ten votes for each share held. . Reclassified all of the shares of the Company's common stock outstanding at December 31, 1995 for an equal number of shares of Class A Common Stock. . Authorized the exchange of all Class A Common Stock (762,612 shares) held by the Chief Executive Officer/Director for an equal number of shares of Class B Common Stock. The Company effected the exchange in March 1995. On April 19, 1995, the Company sold 2,530,000 shares of Class A Common Stock at $5.25 per share in connection with its initial public offering. The net proceeds from this offering aggregated approximately $11.3 million. In addition, as additional underwriting compensation and finders fee, the company issued warrants exercisable over a period of four years commencing April 19, 1996 to purchase up to 220,000 shares of Class A Common Stock at $6.30, which is 120% of the initial public offering price. (5) STOCK INCENTIVE PLAN In March 1995, the Company and its shareholders established the 1995 Stock Incentive Plan expiring in March 2005. In April 1995, the Company granted 119,000 ten-year options to purchase shares of the Company's Class A Common Stock at $5.25 per share. Additionally, in June 1995, the Company granted 226,500 ten-year options to purchase shares of the Company's Class A Common Stock at $7.13 per share. The options vest ratably over three years commencing one year from the date of grant. Also, in April 1995, the Company granted 6,600 stock appreciation rights to certain employees. The exercise price of each right is $5.25. (6) INCOME TAXES Income taxes were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by Management. (7) NOTES PAYABLE In June 1995, the Company entered into unsecured revolving line of credit agreement which provided the Company up to $10 million for operating purposes and up to an additional $5 million for business acquisition purposes. The $10 million line of credit expires in June 1997. Due to the need for funds to finance recent opportunistic purchases of inventory and the upcoming acquisition of a computer system, the Company entered into an amendment to its line of credit agreement on March 30, 1996, which converted the $5 million business acquisition facility into a $5 million revolving line of credit, which reduces to $2.5 million on November 1, 1996 and matures on January 2, 1997. This revolving line of credit bears interest at the same rates as those under the $10 million facility. In connection with this amendment, the bank required that the Company secure both credit facilities with substantially all of the Company's assets. Additionally, as part of this amendment, the Company entered into a $2 million letter of credit facility. At June 30, 1996 there was $14.5 million outstanding under the $10 million and $5 million revolving lines of credit. (8) CONVERTIBLE SUBORDINATED NOTE PAYABLE In May 1996, the Company issued a five year Convertible, Subordinated Note (the Note)for $3,000,000, at 8% simple interest per annum. The Note is convertible into the Company's Class A Common Stock at the conversion price of $5.25 per share. These securities have not been registered under the Securities Act of Page 7 of 15 1933, as amended (the Act), in the belief that the securities are exempt from such registration under Regulation S of the Act. Interest is payable annually, on each of the Note's anniversary date, and the principal is due May 18, 2001. Page 8 of 15 Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations Results of Operations The Company distributes a wide variety of transistors, diodes and other semiconductors and optoelectronic devices to other electronic distributors and to original equipment manufacturers who incorporate them in their products. The following table sets forth, for the periods indicated, certain operating amounts and ratios as a percentage of net sales.
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED JUNE 30, JUNE 30, --------------------------------------------------- (Dollars in thousands) 1996 1995 1996 1995 - ---------------------- --------------------------------------------------- Net sales $7,824 9,203 $15,889 17,507 Cost of goods sold 5,402 6,024 10,790 11,587 Gross profit 2,422 3,179 5,099 5,920 % of net sales 31.0.% 34.5% 32.1% 33.8% Selling, general and administrative 1,244 1,389 2,601 2,736 expenses % of net sales 15.9% 15.1% 16.4% 15.6% Operating earnings 1,178 1,790 2,498 3,184 % of net sales 15.0% 19.5% 15.7% 18.2% Net earnings 550 1,043 1,310 1,799 % of net sales 7.0% 11.3% 8.2% 10.3%
Page 9 of 15 The year 1995 was exceptionally good for Taitron and other discrete suppliers. For most of 1995, the demand for discrete semiconductors, in general, was greater than the supply. This intense competition for the available supply of discrete semiconductors pushed the prices higher than in normal market conditions. The Company, from time to time, had to decline some sales because of the limited supply of certain of these products. Shortages in 1995 created demands resulting in excess inventories at end- users, distributors and retailers. In the first half of 1996, the majority of Taitron's customers have been struggling with inventory adjustments and corrections. To help customers readjust their inventories, Taitron strategically decided to accept more returns and order cancellations than it normally would. To help suppliers and maintain Taitron's long term partnership, the Company decided to increase inventory levels and intensify its long standing purchasing strategy by making opportunistic purchases of suppliers' uncommitted capacity, at favorable pricing. As a result the Company's inventory has increased significantly, during the first two quarters of 1996, leading to the leasing of additional warehouse space. This strategy will posture the Company to be price competitive, while still maintaining acceptable profit margins. The Company believes, that these strategies with customers and suppliers will benefit the Company in the long run. However, there can be no assurance that this will happen. Three Month Period Ended June 30, 1996 Compared To The Three Month Period Ended June 30, 1995 Net sales for the three months ended June 30, 1996 were $7,824,000, compared with net sales for the three months ended June 30, 1995 of $9,203,000, a decrease of $1,379,,000 or 15.0%. This 1996 sales decrease was attributable to a decline in domestic volumes of $1,008,000. Price reductions accounted for approximately $325,000 of the decrease in net sales. Cost of goods sold decreased by $622,000 to $5,402,000 for the three month period ended June 30, 1996, a decrease of 10.3% from the three month period ended June 30, 1995. Gross profits decreased by $757,000 to $2,422,000 for the three months ended June 30, 1996 from $3,179,000 for the same period in 1995, and decreased as a percentage of net sales to 31.0% from 34.5%. Cost of goods sold as a percentage of net sales was 69.0% in the second quarter of 1996, an increase from 65.5% in the second quarter of 1995. Selling, general and administrative expenses decreased by $145,000 or 10.5% for the second quarter of 1996 compared to the same period of 1995. These costs, as a percentage of net sales, increased slightly to 15.9% for the three months ended June 30, 1996 from 15.1% for the three months ended June 30, 1995. Operating earnings decreased by $612,000 or 34.2% between the three month periods ended June 30, 1996 and 1995, and decreased as a percentage of sales to 15.0% to 19.5%. Interest expense, net of interest income, for the three months ended June 30, 1996 increased $227,000 compared to the three months ended June 30, 1995. This increase is due primarily to increased borrowings during the second quarter of 1996 compared to the second quarter of 1995. Income taxes were $369,000 in the second quarter of 1996, representing an effective tax rate of 40.2%, compared to $721,000 for the second quarter of 1995, an effective tax rate of 40.9%. The Company had net earnings of $550,000 for the second quarter ended June 30, 1996 as compared with net earnings of $1,043,000 for the second quarter ended June 30, 1995, an decrease of $493,000 or 47.3% for reasons discussed above. Net earnings as a percentage of net sales decreased to 7.0% from 11.3%. Page 10 of 15 Six Month Period Ended June 30, 1996 Compared To The Six Month Period Ended June 30, 1995. Net sales for the six months ended June 30, 1996 were $15,889,000, compared with the six months ended June 30, 1995 of $17,507 ,000, a decrease of $1,618,000 or 9.2%. This 1996 sales decrease was attributable to a decline in domestic volumes of approximately $1,333,000. Price reductions accounted for approximately $400,000 of the decrease in net sales. A decrease in export sales of $540,000 also contributed to the decline in net sales. These decreases were offset by a net increase in sales to new customers of approximately $655,000. Cost of goods sold decreased by $797,000 to $10,790,000 for the six month period ended June 30, 1996, a decrease of 6.9% from the six month period ended June 30, 1995. Gross profits decreased by $821,000 to $5,099,000 for the six months ended June 30, 1996 from $5,920,000 for the same period in 1995, and decreased as a percentage of net sales to 32.1% from 33.8%. Cost of net sales, as a percentage of sales was 67.9% in the first six months of 1996, and 66.2% in the same period of 1995. Selling, general and administrative expenses decreased by $135,000 or 4.9% between the six months of 1996 and the same period of 1995. These costs, as a percentage of net sales, were 16.4% for the six months ended June 30, 1996 and 15.6% for the six months ended June 30, 1995 . Earnings from operations decreased by $685,000 or 21.5% between the six months periods ended June 30, 1996 and 1995, and decreased as a percentage of net sales to 15.7% from 18.2%. Interest expense, net of interest income, for the six months ended June 30, 1996 increased $130,000 compared to the six months ended June 30, 1995. This increase is due primarily to increased borrowings during the first half of 1996 compared to the first half of 1995. Other expenses, net of other income, increased $33,000 between the six month periods ended June 30, 1996 and 1995. Income taxes were $878,000 in the first six months of 1996, representing an effective tax rate of 40.1%, compared to $1,237,000 for the first six months of 1995, an effective tax rate of 40.8%. The Company had net earnings of $1,310,000 for the six months ended June 30, 1996 as compared with net earnings of $1,799,000 for the six months ended June 30, 1995, a decrease of $489,000 or 27.2% for reasons discussed above. Net earnings as a percentage of net sales decreased to 8.2% from 10.3%. Liquidity and Capital Resources Since 1993, the Company has satisfied its liquidity requirements principally through cash generated from operations, short-term commercial loans, a convertible subordinated note and the sale of equity securities, including its initial public offering in April 1995. The Company's cash flows provided by (used in) operating, investing and financing activities for the six months ended June 30, 1996 and 1995 were as follows:
SIX MONTHS ENDED JUNE 30, ------------------------- 1996 1995 ----------- ---------- (In thousands) Operating activities................. $(17,907) 159 Investing activities................. (142) (83) Financing activities................. 17,492 5,927
Page 11 of 15 Since early 1995, as sales and earnings before income taxes increased, the Company's cash requirements for operating activities have increased in order to finance significantly higher levels of inventory and accounts receivable. In addition, in positioning itself as a "discrete semiconductor superstore," the Company has been required to significantly increase its inventory levels. As a consequence, inventory has grown from $27.8 million at December 31, 1995 to $38.2 million at June 30, 1996. Management believes that current inventory levels are more than adequate to meet the needs of its customers under current market conditions. A decrease of inventory levels was planned during the second half of 1996 and no additional increase is planned until mid to late 1997. The discrete semiconductor products distributed by the Company are mature products, used in a wide range of commercial and industrial products and industries. As a result, the Company has never experienced any material amounts of product obsolescence. The Company also attempts to control its inventory risks by matching large customer orders with simultaneous orders to suppliers. Nonetheless, the high levels of inventory carried by the Company increase the risks of price fluctuations and product obsolescence. Investment activities in 1996 and 1995 consisted of the purchase of property and equipment, principally computer equipment. The Company expects to invest about $400,000 over the next four years in hardware and software for a new fully integrated information system. On April 19, 1995, the Company completed its initial public offering of 2,530,000 shares of its Class A Common Stock. The net proceeds of approximately $11.3 million were used during 1995 to retire bank debt in the amount of $5.4 million, to repay $670,000 in long-term mortgage debt, to expand inventory and for general corporate purposes. As of June 30, 1996, the Company's unused sources of funds consisted of approximately $1.1 million in cash and borrowing capacity under the Company's $10 million and $5 million revolving lines of credit, both of which are provided by Union Bank and expire at various dates in late 1996 through mid 1997 (see note 7 in Notes to Financial Statements). The agreement governing these facilities contains covenants that impose limitations on the Company, and requires the Company to be in compliance with certain financial ratios. If the Company fails to comply with the covenants contained in the agreement, the bank may be able to accelerate the maturity of the indebtedness. As of June 30, 1996, the Company was in compliance with the required financial ratios and covenants. Additionally, both lines of credit are secured by substantially all of the Company's assets, other than real property. In May 1996, the Company issued a five year Subordinated Convertible Note (the Note) for $3,000,000, at 8% simple interest per annum. The Note is convertible into the Company's Class A Common Stock at the conversion price of $5.25 per share. These securities have not been registered under the Securities Act of 1933, as amended (the Act), in the belief that the securities are exempt from such registration under Regulation S of the Act. Interest is payable annually, on each of the Note's anniversary date, and the principal is due May 18, 2001. The Company believes that funds generated from operations, the amended bank revolving lines of credit and the convertible subordinated note will be sufficient to finance its working capital and capital expenditure requirements for the foreseeable future. Page 12 of 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Convertible Subordinated Note Agreement, dated May 18, 1996, by and between the Registrant and Tenrich Holdings. 10.2 Lease Agreement, dated May 29, 1996, by and between Scott Valencia Property Company as Lessor and Taitron Components Incorporated, as Lessee for property located at 27827 Ave. Scott, Santa Clarita, California, 91355. (b) Reports on Form 8-K: None Page 13 of 15 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TAITRON COMPONENTS INCORPORATED Date: August 12, 1996 By: /s/ David M. Turner ------------------- David M. Turner, Chief Financial Officer (Principal Financial Officer) (Chief Accounting Officer) Page 14 of 15 EXHIBIT INDEX SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------- ----------- ------------ 10.1 Convertible Subordinated Note Agreement, dated May 18, 1996, by and between the Registrant and Tenrich Holdings. 10.2 Lease Agreement, dated May 29, 1996, by and between Scott Valencia Property Company as Lessor and Taitron Components Incorporated, as Lessee for property located at 27827 Ave. Scott, Santa Clarita, California, 91355. Page 15 of 15 EX-10.1 2 CONVERTIBLE SUBORDINATED NOTE AGREEMENT TAITRON COMPONENTS INCORPORATED CONVERTIBLE SUBORDINATED NOTE PURCHASE AGREEMENT This Convertible Subordinated Note Purchase Agreement (The "Agreement") is made and entered into as of May 18, 1996 by and between Taitron Components -- Incorporated, a California corporation (the "Company", and Tenrich Holdings Ltd. --------------------- (the "Purchaser"). 1. Authorization and Sale of Convertible Subordinated Notes. -------------------------------------------------------- 1.1 Authorization. The Company has authorized the execution and ------------- delivery of 8% Convertible Subordinated Notes (the "Notes"), in the aggregate principal amount of at least U.S. $2,000,000, but not to exceed U.S. $3,000,000, in substantially the form attached hereto as Exhibit A. The Notes are Exhibit A. The Notes are convertible, as therein set forth, into the Company's Class A Common Stock, par value $0.001 per share (the "Common Stock"), at the conversion price and subject to the adjustments set forth in the Notes. The Notes and the Common Stock are referred to herein collectively as the "Securities." 1.2 Purchase and Sale of the Notes. On the terms and subject to the ------------------------------ conditions of this Agreement, the Company agrees to sell to the Purchaser, and the Purchaser agrees to purchase from the Company, a Note or Notes in the principal amount of $3,000,000, for the purchase price of 100% of the principal ---------- amount thereof. 2. Closing Delivery. ---------------- 2.1 Closing Date. The closing of the purchase and sale of the Notes ------------ hereunder (the "Closing") shall be held at the offices of the Company, 25202 Anza Drive, Santa Clarita, California 91355, at 10:00 a.m. on May 18, 1996 or at -- such other time and place as is agreed to by the parties (the "Closing Date"); provided, however, that if any condition to Closing is not satisfied prior to - -------- ------- the Closing Date, the Company shall have the right to extend the Closing for a period not to exceed 30 days. At the Closing, the Company will deliver to the Purchaser a Note or Notes substantially in the form of Exhibit A in the principal amount set forth in Section 1.2 above, which Note(s) shall be registered in the Purchaser's name, against payment of the purchase price therefor in immediately available U.S. Dollar funds by bank cashiers check payable to the order of the Company or by wire transfer to the account of the Company. 3. Representations and Warranties of the Company. The Company represents --------------------------------------------- and warrants to the Purchaser that: 3.1 Organization, Standing and Corporate Power. The Company is a ------------------------------------------ corporation duly organized, validly existing and in good standing under the laws of the State of California, with all requisite power and authority to own, lease and operate its properties and carry on its business as presently conducted. The Company has the corporate power and authority to enter into, execute and deliver this Agreement and the Notes and to perform the provisions hereof and thereof. 3.2 Authorization, etc. This Agreement and the Notes have been duly ------------------ authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon their execution and delivery the Notes will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights and (b) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3.3 Form 10-KSB, Form 10-QSB, Proxy Statement and Annual Report. You ----------------------------------------------------------- have heretofore been furnished with a copy of the Company's Form 10-KSB for the fiscal year ended December 31, 1995, the Company's Form 10-QSB for the quarter ended March 31, 1996, the Company's Proxy Statement for the Annual Meeting of the Shareholders held on May 10, 1996 and the Company's 1995 Annual Report (the "SEC Documents") which generally set forth information with respect to Company and its business. Additional copies of such documents are attached hereto as Exhibit B. 4. Representations and Warranties of the Purchaser. The Purchaser ----------------------------------------------- represents and warrants to the Company that: 4.1 Authorization. Assuming due execution and delivery by the Company, ------------- this Agreement constitutes the legal, valid, binding and enforceable obligation of the Purchaser, except as such enforceability may be limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights and (b) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.2 Investment. The Purchaser has been advised that the Securities ---------- have not been registered under the Securities Act of 1933, as amended (the "Act"), in reliance on Regulation S under the Act, and in connection therewith, the Purchaser understands that the 2 Company is relying in part on the representations and warranties set forth in this Section 4.2; 4.2.1 the Purchaser is not a citizen, national or resident of the United States of America or its territories or possessions; 4.2.2 the Purchaser is, and will be at the time of the Closing, located outside the United States, the purchase of the Notes and the performance of the Purchaser's obligations hereunder and under any related agreements are legally permitted by all laws and regulations to which the Purchaser is subject, and all consents, approvals or authorizations of, and all designations, declarations or filings with, any governmental authority or agency required in the jurisdiction in which the Purchaser is located in connection with the valid execution and delivery of this Agreement and the performance of the Purchaser's obligations hereunder have been obtained by the Purchaser and will be effective on the Closing Date; 4.2.3 the Purchaser is acquiring the Notes for the Purchaser's own account and not with a view to, or for sale in connection with, any distribution thereof; 4.2.4 the Purchaser is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D promulgated under the Act, is an experienced and sophisticated investor, is able to fend for itself in the transactions contemplated by this Agreement, and has such knowledge and experience in financial and business matters that it is capable of evaluating the risks and merits of acquiring the Notes. The Purchaser has had, during the course of this transaction and prior to its purchase of the Notes, the opportunity to ask questions of, and receive answers from, the Company, concerning the Company, its business and the terms and conditions of this Agreement. The Purchaser represents and warrants that the nature and amount of the Notes it is purchasing are consistent with its investment objectives, abilities and resources and that it has the ability to bear the economic risk associated with its investment in the Notes; 4.2.5 the Purchaser recognizes that the Company has no obligation to register the Securities or to comply with any exemption from such registration except as set forth in this Agreement; and 4.2.6 the Purchaser recognizes that no public market now exists for the Notes and that a public market may never exist for the Notes. 3 4.3 Lock-up Agreements. The Purchaser has been advised that the ------------------ lock-up agreements entered into by each of the Company's directors, officers and certain shareholders in connection with the Company's initial public offering of its Common Stock expire on May 19, 1996. 5. Transfer of Securities. None of the Securities shall be transferable ---------------------- except upon the conditions specified in this Section 5, which conditions are intended to insure compliance with the provisions of Regulation S of the Act in respect to the transfer of such Securities. 5.1 Legend. Each certificate or other document evidencing any of the ------ Securities shall be endorsed with a legend substantially in the following form: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD ONLY PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE OF THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE ACT. THESE SECURITIES MAY NOT BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. 5.2 Restricted Period. During the 40 day period immediately ----------------- following the Closing Date, the Purchaser will not offer or sell any Securities to a "U.S. Person" or for the account of a "U.S. Person" (as that term is defined by Rule 902 of Regulation S). 5.3 Removal of Legend. If in the reasonable opinion of counsel for ----------------- the Company, or the opinion of counsel for the Purchaser, which opinion is reasonably satisfactory to counsel for the Company, all future dispositions of the Securities by the Purchaser or any contemplated transferee would be exempt from the registration and prospectus delivery requirements of the Act and the qualification requirements of applicable state securities laws, then the legend set forth in Section 5.1 above may be removed from the certificates representing such Securities. 6. Registration Rights. ------------------- 6.1 Definitions. As used in this Section 6, the following terms ----------- shall have the following meanings: 6.1.1 The terms "Register," "Registered" and "Registration" -------- ---------- ------------ refer to a registration effected by preparing and filing a registration statement in compliance with the Act (the "Registration Statement"), and the ---------------------- declaration or ordering by the 4 Securities and Exchange Commission (the "Commission") of the effectiveness of ---------- of such Registration Statement. 6.1.2 "Registrable Securities" shall mean (a) all shares of ---------------------- Common Stock not previously sold to the public that are issued or issuable upon conversion of the Notes and (b) any shares of Common Stock issued as a dividend or other distribution with respect to, or in exchange or in replacement or, the shares specified in clause (a) above. 6.1.3 "Registration Expenses" shall mean all expenses --------------------- incurred by the Company in complying with this Section 6, including, without limitation, all federal and state registration, qualification and filing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration. 6.2 Demand Registration on Form S-3. In the event that the ------------------------------- Company receives from the Purchaser a written request that the Company effect a Registration on Form S-3 (or any successor form to Form S-3 regardless of its designation) at a time when the Company is eligible to Register securities on Form S-3 for an offering of Registrable Securities, the Company will as soon as practicable use its best efforts to effect Registration of the Registrable Securities specified in such request. The Company shall have the right to delay, for a period not exceeding 180 days from the notice given pursuant to this Section 6.2, the filing of a Registration Statement pursuant to this Section 6.2 if in the good faith judgement of the Board of Directors of the Company such filing would, if not so delayed, materially and adversely affect a then proposed or pending financial project, acquisition, merger or corporate reorganization or otherwise be detrimental to the Company or its shareholders. With respect to a Demand Registration under this Section 6.2, the Company may, within 30 days of its receipt of written request therefor, give written notice to the Purchaser that it intends to Register its securities under the Act, and such Registration will thereafter be deemed a Company-initiated Registration and not a Demand Registration under this Section 6.2 and will be governed by the provisions of Section 6.3 of this Agreement. Any Registration Statement filed pursuant to the request of the Purchaser under this Section 6.2 may, subject to the provisions hereof, include other securities of the Company which are held by persons who, by virtue of agreements with the Company, are entitled to include their securities in such Registration. The Company shall be obligated pursuant to this Section 6.2 to file only one Registration which becomes effective, whether or not the Registration Statement at the time it becomes effective covers all or a portion of the Registerable Securities. The Purchaser shall not be deemed to have effected a Demand Registration pursuant to 5 this Section 6.2 unless and until the Registration Statement is declared effective. The Company shall not be obligated to Register the Registerable Securities pursuant to this Section 6.2, if, in the reasonable opinion of counsel to the Company, such Registerable Securities would be freely tradeable without need of such Registration. 6.3 Piggyback Registration. If the Company shall propose to ---------------------- Register any shares of Common Stock (other than on Form S-8 or Form S-4 or any successor form thereto), the Company shall give the Purchaser written notice of such proposed Registration at least 20 days prior to the filing of such Registration Statement. Upon written request received by the Company from the Purchaser within 10 days after the giving of such written notice by the Company, the Company shall include or cause to be included in any such Registration Statement all or such portion of the Registerable Securities as the Purchaser may request; provided, however, that the Company may at any time withdraw or -------- ------- cease proceeding with any such Registration with no liability to the Purchaser; and provided further, that in connection with any Registration involving an -------- ------- underwriting, the managing underwriter may (if in its reasonable opinion marketing factors so require) limit the number of shares (including the Registration Securities) included in such offering (other than shares being sold by the Company). In the event of any such limitation, the total number of Registerable Securities to be offered for the account of the Purchaser and of all other shares requested to be included therein by other shareholders who have been granted Registration rights by the Company shall be reduced pro rata in proportion to the respective number of shares requested to be included therein by each participant to the extent necessary to reduce the total number of shares proposed to be Registered to the number of shares recommended by the managing underwriter. 6.4 Registration Procedures. The Company will: (a) use its best ----------------------- efforts to keep any Registration effective for a period of 90 days or until the purchaser has completed the distribution described in the Registration Statement relating thereto, whichever first occurs; and (b) furnish such number of prospectuses (including preliminary prospectuses) and other documents as the Purchaser from time to time may reasonably request. 6.5 Conversion of Notes. The Registration Rights set forth in ------------------- this Section 6 are conditioned upon the conversion of the Notes into the Common Stock with respect to which Registration is sought prior to the later of (a) the effective date of the Registration Statement and (b) two days prior to the closing date, if any, of the offering made by the Registration Statement. 6 6.6 Expense of Registration. All Registration Expenses incurred in ----------------------- connection with any registration, qualification or compliance pursuant to Section 6.2 or 6.3 shall be borne by the Company. 6.7 Information Furnished by the Purchaser. It shall be a condition -------------------------------------- precedent to the Company's obligations under this Section 6 that the Purchaser furnish to the Company such information regarding the Purchaser and the proposed distribution as the Company may reasonable request. 6.8 Indemnification. --------------- 6.8.1 Indemnification by Purchaser. To the extent permitted by ---------------------------- law, the Purchaser will indemnify the Company, each of its directors and officers, each underwriter, if any, and each person who controls the Company or such underwriter within the meaning of the Act (each such party referred to as an "indemnified party"), against all claims, losses, damages and liabilities (or actions in respect thereof) to the extent such claims, losses, damages and liabilities arise out of or are based upon any untrue statement (or alleged untrue statement) of a material fact contained in any such Registration Statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Purchaser will reimburse such indemnified parties for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case only to the extent that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such Registration Statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by the Purchaser and stated to be for use in connection with the offering of securities of the Company; provided, however, that the -------- ------- obligations of the Purchaser hereunder shall be limited to an amount equal to the proceeds received by the Purchaser from such Registration. 6.8.2 Indemnification by the Company. To the extent permitted ------------------------------ by law, the Company will indemnify the Purchaser and each underwriter, if any, and each person who controls any underwriter (all such parties referred to collectively as "indemnified parties"), against all claims, losses, damages and liabilities (or actions in respect thereof) to the extent such claims, losses, damages or liabilities arise out of or are based upon any untrue statement (or alleged untrue statement) of a material fact contained in any such Registration Statement, prospectus, offering circular or other document or any omission (or 7 alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Act applicable to the Company and relating to any action or inaction required of the Company in connection with any such Registration, qualification or compliance, and the Company will reimburse such indemnified parties for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the -------- ------- Company shall not be liable to the Purchaser or any underwriter or controlling person in the event any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or omission made in such registration statement, preliminary prospectus, summary prospectus, prospectus or amendment or supplement thereto, or any other document, in reliance upon and in conformity with written information furnished to the Company by the Purchaser or any such underwriter or controlling person, specifically for use therein. 6.8.3 Indemnification Procedure. If any action is brought against ------------------------- an indemnified party in respect of which indemnity may be sought hereunder against an indemnifying party, such indemnified party shall promptly notify the indemnifying party in writing of the institution of such action and the indemnifying party shall assume the defense of the action, including the employment of counsel satisfactory to the indemnified party and payment as incurred of all fees and expenses related thereto. The indemnified party shall have the right to employ its own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (a) the employment of such counsel and the payment of fees and expenses thereof shall have been authorized in writing by the indemnifying party in connection with the defense of the action or (b) the indemnifying party shall have failed promptly after notice by such indemnified party to assume the defense of such action or proceeding and to employ counsel satisfactory to the indemnified party in any such action or proceeding or (c) the named parties to any such action or proceeding (including any impleaded parties) include both such indemnified party and the indemnifying party, and such indemnified party shall have been advised by counsel that there may be legal defenses available to such indemnified party which are different from or additional to those available to the indemnifying party (in which case, if such indemnified party notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action), it being understood, however, that the indemnifying party shall not, in connection with any one such action or proceeding or separate but substantially similar or related action or proceedings in the same jurisdiction arising out of the same general allegations or 8 circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for such indemnified party. Anything in this paragraph to the contrary notwithstanding, the indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent. The indemnity agreements contained in this Section 6.8 shall remain in full force and effect regardless of any investigation made by or on behalf of any indemnified party, and shall survive any termination of this Agreement. 6.8.4 Contribution. If the indemnification provided for ------------- above in this Section 6.8 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnifying party and indemnified party in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or ommission or alleged omission to state a material fact, has been made by, or relates to information supplied by, the indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6.8.4 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. If the full amount of the contribution specified in this Section 6.8.4 is not permitted by law, then such indemnified party shall be entitled to contribution from the indemnifying party to the full extent permitted by law. No party found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any party who was not found guilty of such fraudulent misrepresentation. 9 6.9 Transfer and Termination of Registration Rights. The ----------------------------------------------- Registration Rights set forth in this Section 6 may not be transferred by the Purchaser and such Registration Rights shall terminate at such time as the Purchaser is no longer the owner of at least 50% of the total number of Registrable Securities into which the Notes could have been originally converted (with appropriate adjustments for any stock splits or dividends). 7. Conditions to Obligations of Purchasers. The obligation of the --------------------------------------- Purchaser to purchase Notes at the Closing is subject to each of the following conditions having been fulfilled on or prior to the Closing Date: 7.1 Representations and Warranties Correct; Performance of ------------------------------------------------------ Obligations. The representations and warranties made by the Company in Section - ----------- 3 hereof shall be true and correct when made, and shall be true and correct on the Closing Date with the same force and effect as if they had been made on and as of said date and the Company shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to the Closing Date. 7.2 Consents and Waivers. The Company shall have obtained any -------------------- and all consents, permits and waivers and made all filings necessary for consummation of the transactions contemplated by this Agreement. 7.3 Legal Investment. At the time of the Closing, the purchase ---------------- of the Notes by the Purchaser hereunder shall be legally permitted by all laws and regulations to which the Purchaser and the Company are subject. 8. Condition to Obligations of the Company. The Company's --------------------------------------- obligation to issue, sell and deliver the Notes to the Purchaser at the Closing is subject to the following conditions having been fulfilled on or prior to the Closing Date: 8.1 Representations and Warranties Correct; Performance of ------------------------------------------------------ Obligations. The representations and warranties made by the Purchaser in - ----------- Section 4 hereof shall be true and correct when made, and shall be true and correct on the Closing Date with the same force and effect as if they had been made on and as of said date and the Purchaser shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to the Closing Date. 8.2 Consents and Waivers. The Company shall have obtained any -------------------- and all consents, permits and waivers and made all filings necessary for consummation of the transactions contemplated by this Agreement. 10 8.3 Legal Investment. At the time of the Closing, the purchase ---------------- of the Notes by the Purchaser hereunder shall be legally permitted by all laws and regulations to which the Purchaser and the Company are subject. 8.4 U.S. $2,000,000 in Notes Sold. The Company shall have sold ----------------------------- Notes with a principal amount of at least U.S. $2,000,000. 9. Financial Information. The Company will furnish the following --------------------- reports to the Purchaser for so long as the Purchaser owns any of the Notes: 9.1 Annual Reports on 10-K. As soon as practicable after the ---------------------- end of each fiscal year, the Company's Annual Report on Form 10-KSB or Form 10-K, as applicable, and 9.2 Quarterly Reports on 10-Q. As soon as practicable after ------------------------- the end of the first, second and third quarterly accounting period in each fiscal year, the Company's Quarterly Report on Form 10-QSB or 10-Q, as applicable. 10. Miscellaneous. ------------- 10.1 Successors and Assigns. Subject to the foregoing terms and ---------------------- conditions, and to the restrictions on transfer described in the Note, the rights and obligations of the Company and the Purchaser shall inure to the benefit of and be binding upon the respective executors, administrators, heirs, transferees, successors and assigns of the Company and the Purchaser. 10.2 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND ------------- CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS BETWEEN CALIFORNIA RESIDENTS ENTERED INTO AND TO BE PERFORMED ENTIRELY WITHIN CALIFORNIA. 10.3 Survival. The representations, warranties, covenants and -------- agreements made herein shall survive the execution of this Agreement and the Closing of the transactions contemplated hereby, notwithstanding any investigation made by the Purchaser. All statements as to factual matters contained in any certificate, exhibit or other instrument delivered by or on behalf of the Company pursuant hereto shall be deemed to be the representations and warranties of the Company hereunder as of the date of such certificate or instrument. 10.4 Entire Agreement. This Agreement, the Note and the other ---------------- documents delivered pursuant hereto and thereto, constitute the full and entire understanding and agreement between the parties with respect to the subjects hereto and thereof. 11 10.5 Notices. Except as otherwise provide herein, all ------- communications hereunder shall be in writing or by either telecopier or telegraph and, if to the company, shall be mailed, telecopied or telegraphed or delivered to Taitron Components Incorporated, 25202 Anza Drive, Santa Clarita, CA 91355 (telecopier: (805) 257-6415) Attention: Stewart Wang, President; and if to the Purchaser, shall be mailed, telecopied, telegraphed or delivered to Room 204, Oriental Centre, 67-71 Chatham Road, Tsimshatsui, Kowloon, HK. - ----------------------------------------------------------------------- (telecopier: (852) 2367 6006) Attention: ___________________________________. --------------- All notices given by telecopy or telegraph shall be promptly confirmed by letter. Any party hereto may by notice so given change its address for future notice hereunder. 10.6 Severability. In case any provision of this Agreement ------------ shall be invalid, illegal or unenforceable, it shall, to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable, the intent of the parties, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 10.7 Titles and Headings. The titles and headings contained ------------------- in this Agreement are intended for reference and shall not by themselves determine the construction or interpretation of this Agreement. 10.8 Counterparts. This Agreement may be executed in any ------------ number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10.9 Withholding. The Company may withhold taxes from any ----------- interest payment or payments made under the Notes to the extent necessary to satisfy the Company's obligation to withhold taxes under the laws of the United States, of any State thereof, or any 12 political subdivision thereunder, whether the Company is required to withhold to enable it to claim an income tax deduction for interest paid, or otherwise. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed themselves or by their respective representatives thereunto duly authorized as of the day and year first above written. TAITRON COMPONENTS INCORPORATED By: [Signature Appears Here] --------------------------- PURCHASER Tenrich Holdings Limited [Signature Appears Here] ------------------------------- 13 EXHIBIT A THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD ONLY PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE OF THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE ACT. THESE SECURITIES MAY NOT BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. TAITRON COMPONENTS INCORPORATED 8% SUBORDINATED CONVERTIBLE NOTE -------------------------------- U.S. $3,000,000 May 18, 1996 ---------- ------------ Subject to the terms and conditions of this 8% Subordinated Convertible Note (the "Note"), TAITRON COMPONENTS INCORPORATED, a California corporation (the "Company"), for value received, promises to pay to the order of Tenrich ------- Holdings Ltd. or its registered assigns (the "Noteholder"), whose address is set - ------------- forth in Section 9.3 below, the principal amount of (U.S. $3,000,000), plus ---------- simple interest on the unpaid principal balance from the date hereof at the rate of eight percent (8%) per annum. Such principal amount plus all accrued but previously unpaid interest will be due and payable on the fifth anniversary of the Note Date. Interest payments shall be made annually on each anniversary of the Note Date. Principal and interest payable hereunder shall be paid to the Noteholder in lawful money of the United States of America by wire transfer to such bank account or at such other address or location as shall be specified by the Noteholder. Overdue interest shall bear interest at the rate of eight percent (8%) per annum from the date on which it is due until paid. This Note is issued pursuant to that certain Convertible Subordinated Note Purchase Agreement dated of even date herewith between the Company and the Noteholder (the "Agreement"). The following is a statement of the rights of the Noteholder and the terms and conditions to which this Note is subject, and to which the Company and the Noteholder, by the acceptance of this Note, agree. 1. Definitions. As used in this Note, the following terms, unless the ----------- context otherwise requires, shall have the following meanings: 1.1 "Company" shall mean the Company and shall include any corporation ------- that shall succeed to or assume the obligations of the Company under this Note. 1.2 "Common Stock" shall mean the Class A Common Stock, par value ------------ $0.001 per share, of the Company. 1.3 "Conversion Price" shall mean the price, determined pursuant to the ---------------- provisions of Section 2 of this Note, at which shares of Common Stock shall be deliverable upon conversion of this Note. 1.4 "Note Date" shall mean the date on which this Note was originally --------- issued, which is set forth on the first page of this Note in the heading. 1.5 "Merger" shall mean any consolidation of the Company with, or ------ merger of the Company with or into, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification of, or change in, the outstanding shares of Common Stock), or any proposed sale or transfer to another corporation of all or substantially all of the assets of the Company. The Company shall be the "surviving corporation" in any Merger if the Company, or its shareholders --------------------- immediately before the transaction, shall own (immediately after the transaction) equity securities, other than warrants, options or similar rights to subscribe to or purchase equity securities, of the surviving or acquiring corporation, or its parent corporation, possessing more than 50% of the voting power of the surviving or acquiring corporation or its parent corporation; and in making the determination of ownership by the shareholders of a corporation, immediately after the transaction, of equity securities pursuant to the preceding clause, equity securities which they owned immediately before the transaction as shareholders of another party to the transaction shall be disregarded. For the purposes of this Section 1.5, voting power of a corporation shall be calculated by assuming the conversion of all then outstanding convertible equity securities (including those convertible at some future date) but not assuming the exercise of any warrants, options or other rights to subscribe to or purchase voting shares. 2. Conversion. ---------- 2.1 Noteholder Conversion; Conversion Price. On the terms and subject --------------------------------------- to the conditions set forth in this Note, 2 Noteholder may, at any time prior to payment in full of the principal amount of this Note, convert all or any part then convertible of the then unpaid principal amount of this Note, in increments of at least U.S. $100,000 (unless the unpaid principal is less than U.S. $100,000 in which case the debenture must be converted in full), into that number of shares of Common Stock that results from dividing the Conversion Price in effect at the time of conversion into the principal amount of this Note or a specified portion thereof to be converted. The Conversion Price initially shall be U.S. $_____ (the average closing sales price for the Common Stock (or the closing bid, if no sales were reported) as quoted on the Nasdaq National Market on the last three market trading days prior to the Closing Date). All calculations under this Section 2 shall be made to the nearest cent. 2.2 Notice by Noteholder. Before the Noteholder shall be -------------------- entitled to convert this Note pursuant to Section 2.1 above, the Noteholder shall surrender this Note, duly endorsed, to the office of the Company or any transfer agent for such Note and shall give written notice (the "Noteholder Conversion Notice") to the Company at such office that the Noteholder elects to convert the same. The Noteholder Conversion Notice shall indicate the amount of unpaid principal of this Note that the Noteholder has elected to convert and shall state the name and names in which the certificate or certificates for the shares of Common Stock are to be issued. 2.3 Conversion Date. Conversion of all or part of this Note --------------- pursuant to this Section 2 shall be deemed effective upon the date of surrender and delivery of both this Note and the corresponding Noteholder Conversion Notice. 2.4 Mechanics and Effect of Conversion. ---------------------------------- 2.4.1 No Fractional Shares: New Notes. No fractional -------------------------------- shares of Common Stock shall be issued upon conversion of this Note. In lieu of any fractional shares to which the Noteholder would otherwise be entitled, the Company shall pay the fair market value of that fractional share (as determined by reference to the average closing sales price for the Common Stock (or the closing bid, if no sales were reported) as quoted on the Nasdaq National Market on the last market trading prior to the Conversion Date) in cash. At its expense, the Company shall, as soon as practicable after the conversion of this Note, issue and deliver to the Noteholder a certificate or certificates for the number of shares of Common Stock to which the Noteholder shall be entitled upon such conversion (or other securities or cash as the case may be), together with a check payable to the Noteholder for any cash amounts payable as described above in lieu of fractional shares. In the case of conversion by the Noteholder, if less than the entire unpaid principal amount of this Note is being converted, 3 a new Note, of like tenor and date, shall be issued by the Company and executed by the Noteholder representing the unpaid principal amount of this Note after such conversion and carrying the same rights to interest (unpaid and to accrue) carried by the non-converted portion of this Note before conversion so that there will not be any loss or gain of interest thereon. Upon conversion of this Note (whether partially or in full), the Company shall be forever released from its obligation to pay the principal amount so converted, and from its obligation to pay all accrued but previously unpaid interest on such principal amount. 2.4.2 No Payment of Interest Upon Conversion. No payment shall be -------------------------------------- made with respect to accrued but previously unpaid interest on the converted principal amount. 2.4.3 Regulatory Compliance. If any shares of Common Stock to be --------------------- reserved for the purpose of conversion of this Note require registration or listing with, or approval of, any governmental authority, stock exchange or other regulatory body under any federal or state law or regulation or otherwise, before such shares may be validly issued or delivered to the registered holder thereof upon conversion, the Company will, as expeditiously as possible and at its expense, endeavor to secure such registration, listing or approval. 2.4.4 Notice of Distribution. If the Company makes a record of the ---------------------- holders of Common Stock for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, the Company shall mail to the Noteholder, at least 10 days prior to the record date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. 2.4.5 Charges, Taxes and Expenses. Issuance of a certificate for --------------------------- shares of Common Stock upon the conversion of this Note shall be made without charge to the Noteholder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificate shall be issued in the name of the Noteholder or, subject to satisfaction of the provisions of Section 5 of the Agreement, in such name or names as may be directed by the Noteholder; provided, however, that upon any transfer involved in the issuance -------- ------- or delivery of any certificate for shares of Common Stock or replacement Notes in a name other than that in which the Note to which such issuance relates was registered, the Company may require, as a condition thereto, the 4 payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 2.5 Adjustment to Conversion Price. If the Company should at any ------------------------------ time or from time to time after the Note Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock, then, following such record date (or the date of such dividend, distribution, split or subdivision if no record date is fixed), and provided that such stock split, dividend or other distribution is actually effected, the Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of this Note shall be increased in proportion to such increase in the number of outstanding shares of Common Stock. If the number of shares of Common Stock outstanding at any time after the Note Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of this Note shall be decreased in proportion to such decrease in the number of outstanding shares of Common Stock. For purposes of this Section 2.5, the number of shares of Common Stock outstanding at any date shall include only the shares of Common Stock then actually issued and outstanding. 2.6 Recapitalizations. If at any time or from time to time there ----------------- shall be a recapitalization of the Common Stock (other than a subdivision, combination or Merger transaction provided for elsewhere in this Section 2), provision shall be make so that the Noteholder shall thereafter be entitled to receive upon conversion of this Note the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled upon such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 2 with respect to the rights of the Noteholder after the recapitalization to the end that the provisions of this Section 2, including adjustment of the Conversion Price and the number of shares issuable upon conversion of this Note, shall be applicable after that event as nearly equivalent as may be practicable. 2.7 Mergers. In the event of a proposed Merger, the Company shall ------- deliver to the Noteholder a notice setting forth the principal terms of such Merger no later than 20 days before the effective date of such Merger. The terms of the Merger shall provide that after the consummation of the Merger, the Noteholder may convert this Note into the number of shares of stock or other securities or property which a holder of the number of shares of 5 Common Stock of the Company deliverable upon conversion of this Note would have been entitled upon such Merger, and the surviving corporation shall be bound by the terms of this Note. Appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the Noteholder, to the end that the provisions set forth herein (including all provisions with respect to changes in and other adjustments to the Conversion Price provided in Sections 2.5 and 2.6 of this Note) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of this Note. 2.8 Certificate as to Adjustments. Upon the occurrence of each ----------------------------- adjustment or readjustment of the Conversion Price or price provided in Sections 2.5, 2.6 and 2.7 of this Note, upon request by the Noteholder, the Company at its expense shall compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to the Noteholder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon written request at any time of the Noteholder, furnish or cause to be furnished to the Noteholder a like certificate setting forth (a) such adjustment and readjustment, (b) the Conversion Price in effect at the time, and (c) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon the conversion of this Note. 2.9 No Impairment. The Company will not, by amendment of its ------------- Articles of Incorporation or through any reorganization, recapitalization, transfer or assets, consolidation, merger dissolution, issuance or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 2 in order to protect the conversion rights of the Noteholder from impairment. 2.10 Miscellaneous Conversion Price Matters. The Company shall at -------------------------------------- all times reserve and keep available out of its authorized but unissued Common Stock the full number of shares of Common Stock deliverable upon conversion of all of the principal amount of this Note and shall, at its own expense, take all such actions and obtain all such permits and orders as may be necessary to enable the Company lawfully to issue such Common Stock to the registered Noteholder(s) upon the conversion of this Note. The Company also hereby covenants that its issuance of this Note shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary 6 certificates for shares of the Common Stock upon conversion of this Note. 3. Treatment of Note. To the extent permitted by generally accepted ----------------- accounting principles consistently applied, the Company shall treat, account and report this Note as debt and not equity for accounting purposes and with respect to any returns filed with federal, state or local tax authorities. 4. Subordination. The Company, for itself and its successors and ------------- assigns, covenants and agrees, and the Noteholder and each successive holder of this Note, by the acceptance of this Note, likewise covenants and agrees, that the payment of the principal of and interest and premium, if any, on this Note is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all the Company's "Senior Indebtedness," and that these subordination provisions are for the benefit of the holders of Senior Indebtedness. This Section 4 shall constitute a continuing Offer to all persons who, in reliance upon such provisions, become holders of, or continue to hold, Senior Indebtedness, and such provisions are made for the benefit of the holders of Senior Indebtedness, and such holders are made obligees hereunder and they or each of them may enforce such provisions. Without limiting the generality of the foregoing, it is acknowledged and agreed that Union Bank, a Division of Union Bank of California, N.A., is a holder of Senior Indebtedness, that such provisions are made for its benefit, and that it may enforce such provisions. 4.1 Definitions. As used in this Section 4, and also in Section 5: ----------- 4.1.1 "Indebtedness" of any corporation shall mean the principal ------------ of (and premium, if any) and unpaid interest, fees and other payments due in connection with (a) indebtedness which is for money borrowed from others; (b) indebtedness of any other person for money borrowed guaranteed, directly or indirectly, in any manner by such corporation, or in effect guaranteed, directly or indirectly, by such corporation through an agreement, contingent or otherwise; (c) all indebtedness secured by any mortgage, lien, pledge, charge or other encumbrance upon property owned by such corporation, even though such corporation has not in any manner become liable for the payment of such indebtedness; (d) all indebtedness of such corporation created or arising under any conditional sale, lease (intended primarily as a financing device), or other title retention agreement with respect to property acquired by such corporation wherein the rights and remedies of the seller, lessor or lender under such agreement or lease in the event 7 of a default are limited to repossession or sale of such properties; (e) any other obligation whether outstanding on the Note Date or thereafter created or assumed with respect to which the Company shall be or become liable which the Company shall designate as "Indebtedness"; and (f) deferrals, amendments, refinancing, renewals, extensions and refundings of any such indebtedness. 4.1.2 "Senior Indebtedness" shall mean Indebtedness incurred or ------------------- assumed by the Company, either before or after the date of this Agreement, which is for money borrowed or evidenced by bonds, notes, reimbursement agreements in respect of letters of credit, debentures or similar instruments (a) pursuant to a short-term instrument which constitutes commercial paper, or (b) the holder or holders of which are banks, savings institutions, trust companies, insurance companies, investment trusts, pension funds, pension trusts, employees' profit-sharing trusts, financial institutions or corporations engaged as the substantial part of their business or operations in investing funds in securities, or any other person lending the Company amounts in excess of U.S. $100,000 or any of them, or (c) obligations which otherwise would have been considered Senior Indebtedness except that they were created or arose under a conditional sale, lease (intended primarily as a financing device) or other similar title retention agreement with respect to the property of the Company or its Subsidiaries wherein the rights and remedies of the seller, lessor or lender under such agreement or lease are limited, in the event of default, to repossession or sale of such properties; provided, however, that there shall be -------- ------- excluded from the definition of Senior Indebtedness any borrowing which by its terms ranks on a parity with or is subordinate to the Notes. 4.2 Payment in Event of Bankruptcy or Similar Event. Upon any ----------------------------------------------- receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization or arrangements with creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation or any other marshalling of the assets and liabilities, of the Company, or otherwise (a) no amount shall be paid by the Company in respect of the principal of or interest or premium, if any, on this Note at the time outstanding, unless and until the principal, premium, if any, and interest upon all Senior Indebtedness shall first be paid in full, in cash, (b) no claim or proof of claim shall be filed with the company by or on behalf of the Noteholder which shall assert any right to receive any payments in respect of the principal of and interest or premium, if any, on this Note, except subject to the payment in full of the principal of, premium, if any, and interest on all of the Senior Indebtedness then outstanding, in cash, (c) any payment or distribution of assets of the Company of any kind or character, whether in cash, 8 property or securities to which the holders of the Notes would be entitled except for the provisions of this Section 4, shall be paid by the liquidating trustee or agent or other person making such payment or distribution, whether a trustee in bankruptcy, a receiver or otherwise, directly to the holders of Senior Indebtedness (pro rata to each holder on the basis of the respective amounts of Senior Indebtedness owed to such holder), to the extent necessary to pay in full, in cash, all Senior Indebtedness remaining unpaid after giving effect to any prior or concurrent payment or distribution to the holders of the Senior Indebtedness on the Senior Indebtedness, and (d) in the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than payments described in the provisos below) shall be received by the holder of any Note before all Senior Indebtedness is paid in full, in cash, such payment or distribution shall be received and held in trust for and shall be paid over to holders of Senior Indebtedness (pro rata to each such holder on the basis of the respective amounts of Senior Indebtedness owed to such holder), for application to the payment of all Senior Indebtedness remaining unpaid until all such Senior Indebtedness shall have been paid in full, in cash, after giving effect to any prior or concurrent payment or distribution to the holders of the Senior Indebtedness on the Senior indebtedness; provided, however, that this -------- ------- subparagraph (d) shall apply only to payments or distributions received by the holder of any Note after the commencement by the Company of proceedings relating to its winding up dissolution, liquidation or reorganization as described in this Section; provided, however, that: -------- ------- (1) in the event that a court of competent jurisdiction in a reorganization proceeding under any applicable bankruptcy or reorganization law authorizes payment or delivery of any cash, property, stock or obligation to the Noteholder and such court takes into account the subordination of this Note to Senior Indebtedness, the holder of Senior Indebtedness shall not be paid or delivered any such cash, property, stock or obligations; and (2) if the Noteholder, pursuant to a reorganization, dissolution or liquidation proceeding, receives any stock or obligations of the Company as reorganized, or by a corporation that has succeeded to the Company or acquired the Company's property and assets, such stock or obligations shall not be delivered to the holders of Senior Indebtedness, if such stock or obligations are subordinate and junior at least to the full extent provided in this Section 4 to the payment of all Senior Indebtedness then outstanding. 4.3 Subordination When Senior Indebtedness Due, etc. In the event of ----------------------------------------------- and during the continuance of any default by the 9 Company with respect to the payment of any Senior Indebtedness when due (whether at a stated maturity date, upon acceleration or otherwise) and if any holder or holders of any such Senior Indebtedness shall require, no payment of principal, premium or interest on the Note shall be made by the Company until payment of the full amount of such Senior Indebtedness then due has been made in cash; provided, however, that the Noteholder shall, nevertheless, be entitled to - -------- ------- receive such payment of the Note after the expiration of 180 days after the occurrence of such default (a) if Noteholder shall have not received a certificate from any holder or holders of such Senior Indebtedness, within 15 days after delivery to them of a request by the Noteholder at any time after such 180th day, to the effect that such holders of Senior Indebtedness have taken and are taking all such commercially reasonable actions as are necessary or appropriate to enforce their rights to prompt payment of such Senior Indebtedness, and (b) thereafter, if the Noteholder shall have not received such a certificate within 15 days after delivery by it of a request therefor made from time to time to such holder or holders of Senior Indebtedness, provided that such request may not be made at any time within 60 days of the prior receipt of such a certificate by the Noteholder. 4.4 Effect of Subordination. Nothing contained in this Section 4 ----------------------- shall impair, as between the Company and the Noteholder, the obligation of the Company, which is absolute and unconditional, to pay the Noteholder the principal hereof and interest hereon as and when the same become due and payable, or shall prevent the Noteholder, upon default under this Note, from exercising all rights, power and remedies otherwise provided herein or by applicable law, all subject to the rights, if any, of the holders of Senior Indebtedness under this Section 4. 4.5 Subrogation. Subject to the payment in full, in cash, of all ----------- Senior Indebtedness and until this Note shall be paid in full, the Noteholder shall be subrogated (equally and ratably with the holders of all Indebtedness of the Company which, by its terms, ranks on a parity with this Note) to all rights of any such holder of Senior Indebtedness to receive payments or distributions of assets of the Company, but only to the extent the Noteholder has made any payment to any holder of Senior Indebtedness pursuant to the subordination provisions of this Note. No such payments or distributions applicable to the Senior Indebtedness shall, as between the Company and its creditors, other than the holders of Senior Indebtedness and the Noteholder, be deemed to be a payment by the Company to or on account of this Note; and for the purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness to which the Noteholder would be entitled except for the provisions of this Section 4 shall, as between the Company and its creditors, other than the holders of Senior 10 Indebtedness and the Noteholder, be deemed to be a payment by the Company to or on account of the Senior Indebtedness. 4.6 Reliance by Note Holders. Upon any payment or distribution of ------------------------ assets of the Company referred to in this Section 4, the holders of the Notes shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding up, liquidation or reorganization proceedings are pending or upon a certificate of the liquidating trustee or agent or other person making any distribution the holders of Notes for the purpose of ascertaining the amount of the Senior Indebtedness, the holders thereof, the amounts paid or distributed thereon and all other facts pertinent thereto or to this Section 4. 4.7 Rights of Holders of Senior Indebtedness Not to Be Impaired. ----------------------------------------------------------- Subject to Section 4.3 hereof, no right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impair by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder or by any noncompliance by the Company with the terms, provisions and covenants of this Note, regardless of any knowledge thereof which any such holder may have or otherwise be charge with. 4.8 When Distribution Must Be Paid Over. In the event that the Company ----------------------------------- shall make any payment to the Noteholder on account of the principal or interest on the Note at the time when such payment is prohibited by Section 4.3, such payment shall be held by the Noteholder, in trust for the benefit of, and shall be forthwith over and delivered to, the holders of Senior Indebtedness (pro rata as to each of such holders on the basis of the amount of Senior Indebtedness held by them) or their representative or the trustee under the indenture or other agreement (if any) pursuant to which Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. If a distribution is made to the holder of this Note that because of this Section 4.8 should not have been made to it, the holder of this Note who receives the distribution shall hold it in trust for the holders of Senior Indebtedness and pay it over to them as their interests may appear. 4.9 Notices By Company. The Company shall promptly notify the Note- ------------------ holder of any facts known to the Company that would cause 11 a payment of principal of or interest of this Note to violate this Section 4, but failure to give such notice shall not affect the subordination of this Note to the Senior Indebtedness provided in this Section 4. 5. Events of Default. If any of the following events shall occur and be ----------------- continuing (each individually referred to as an "Event of Default"), the Noteholder may declare the entire unpaid principal and accrued interest on this Note immediately due and payable, without any other presentment, demand, protest or other notice of any kind or character, all of which are hereby expressly waived; provided, however, that with respect to the Events of Default described -------- ------- in Sections 5.2 and 5.3 below, the unpaid principal and accrued interest on this Note shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by the Company: 5.1 Principal or Interest. (a) Any default in the payment of any -------------------- part of the interest of this Note shall occur and such default shall be continuing uncured or unwaived for 30 days after the Noteholder has given the Company written notice thereof or (b) the Company's failure to observe any covenant or other provision contained in this Note or the Agreement and such failure of observation shall be continuing uncured or unwaived for 30 days after the Noteholder has given the Company written notice thereof; 5.2 Involuntary Bankruptcy. Within 270 days after the ---------------------- commencement of an action against the Company seeking any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar relief under any statute, law or regulation, such action shall not have been dismissed or all orders or proceedings thereunder affecting the operations or the business of the Company stayed, or the stay of any such order or proceeding shall thereafter be set aside, or within 270 days after the appointment without the consent or acquiescence of the Company of any trustee, receiver or liquidator of the Company or of all or any substantial part of the properties of the Company, such appointment shall not have been vacated; 5.3 Voluntary Bankruptcy. The Company shall have commenced a -------------------- voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall have consented to the entry of an order for relief in an involuntary case under any such law, or shall have consented to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian or similar official, of the Company or for any substantial part of its property, or shall have made any general assignment for the benefit of creditors, or shall have failed generally to pay its debts as they become due or shall have 12 admitted in writing its inability to pay its debts generally as they become due, or shall have taken any corporate action in furtherance of any of the foregoing; or 5.4 Cross-Default. Any declared default of the Company under any Senior ------------- Indebtedness of the Company for borrowed money that gives the holder thereof the right to accelerate such Senior Indebtedness, and such Senior Indebtedness is in fact accelerated by such holder, and such acceleration is continuing unrescinded. 5.5 Remedies. If any of the foregoing Events of Default shall have -------- occurred and be continuing, the Noteholder may proceed to protect and enforce its rights under this Note by an action in law, suit in equity or other appropriate proceeding, whether for specific performance of any agreement contained in this Note or in the Agreement or for an injunction against a violation of any terms of this Note or of the Agreement or in aid of the exercise of any power granted by this Note, the Agreement or by law. In case any action is brought arising from a breach of any provision of this Note, the non- prevailing party shall pay to the prevailing party all of the prevailing party's fees and expenses, including without limitation reasonable attorneys' fees, relating to such action. No course of dealing and no delay on the part of the Noteholder in exercising any right shall operate as a waiver thereof or otherwise prejudice the Noteholder's rights, powers or remedies. No right, power or remedy conferred by this Note or by the Agreement upon the Noteholder shall be exclusive of any right, power or remedy referred to in this Note or the Agreement, or now or hereafter available at law, in equity, by statute or otherwise. 5.6 Unpaid Interest. In case any one or more Events of Default shall --------------- occur and be continuing, any due but unpaid interest shall continue to remain due and accrue interest thereon at the rate of eight percent (8%) per annum from the date on which it is due until paid. 6. No Shareholder Rights. This Note shall not entitle the Noteholder to any --------------------- voting rights or other rights as a shareholder of the Company, prior to conversion hereof. 7. Redemption. This Note shall be subject to redemption under the ---------- circumstances set forth in this Section 7. 7.1 Optional Redemption. The Company, at its option, may redeem in whole ------------------- or in part the principal amount of this Note at any time or from time to time on or after the first anniversary of the Note Date. Upon redemption of this Note, the Company also shall pay to the Noteholder the interest relating to such redeemed principal amount which is accrued and unpaid to the date of redemption plus a premium as set forth below in Section 7.2. 13 7.2 Premium. The premium for purposes of this Section 7 shall be ------- calculated as follows: (a) if redemption of this Note pursuant to this Section 7 occurs on or after the first anniversary of the Note Date but before the second anniversary of the Note Date, the premium shall be an amount equal to fifteen percent (15%) of the principal amount of this Note which is so redeemed; (b) if redemption of this Note pursuant to this Section 7 occurs on or after the second anniversary of the Note Date but before the third anniversary of the Note Date, the premium shall be an amount equal to ten percent (10%) of the principal amount of this Note which is so redeemed; (c) if redemption of this Note pursuant to this Section 7 occurs on or after the third anniversary of the Note Date but before the fourth anniversary of the Note Date, the premium shall be an amount equal to ten percent (5%) of the principal amount of this Note which is so redeemed; and (d) if the redemption of this Note occurs after the fourth anniversary of the Note Date, there shall be no prepayment premium. 7.3 Notice of Redemption. At least 30 but not more than 60 days -------------------- prior to the date fixed for any redemption (the "Redemption Date"), notice shall be given to the Noteholder of the election of the Company to redeem all or a specified portion of the principal amount of this Note (the "Redemption Notice"). The Redemption Notice shall specify the place at which payment may be obtained and the date on which the Noteholder's Conversion Rights as to the amount to be redeemed shall terminate pursuant to Section 2 and calling upon the Noteholder to surrender this Note to the Company in the manner and at the place designated. On the Redemption Date, the Noteholder shall surrender this Note to the Company in the manner and at the place designated in the Redemption Notice, and thereupon redemption shall be made to the Noteholder and this Note shall be cancelled. In the event that less than all of the principal amount of this Note is redeemed, upon surrender of this Note to the Company, the Company shall execute and deliver to the Noteholder a new Note of Notes of authorized denominations in principal amount equal to the unpaid principal amount of this Note. 7.4 Cessation of Rights. From and after the Redemption Date, unless ------------------- there has been a default in redemption, all interest on the redeemed principal amount shall cease to accrue and all rights of the Noteholder as a holder of this Note shall cease with respect to the principal amount redeemed and, with respect to such 14 amount, this Note thereafter shall not be deemed to be outstanding for any purpose whatsoever. 7.5 Undertaking. By acceptance of this Note, the Noteholder agrees ----------- to execute and deliver such documents as may reasonably be requested from time to time by the Company in order to implement the foregoing provisions of this Section 7. 8. Registration, Transfer and Exchange of the Note. The Company shall ----------------------------------------------- keep at its principal office a register in which it will provide for the registration and transfer of this Note, at its own expense (excluding transfer taxes). Transfer of this Note is restricted by, among other things, certain provisions in the Agreement relating to the transfer of securities. Subject to compliance with applicable laws and the restrictions on transfer described in the Agreement, this Note and all rights hereunder are transferable and assignable at the office of the Company, by the Noteholder in person or by the duly authorized representative of the Noteholder, upon surrender of this Note. If this Note is surrendered at said office for registration of transfer or exchange (accompanied in the case of a registration or transfer by a written instrument of transfer in satisfactory to the Company, at its expense, shall deliver in exchange one or more new Notes in denominations as requested by the Noteholder (but in no case less than U.S. $100,000), for the aggregate unpaid principal amount. Any note or notes issued in a transfer or exchange shall carry the same rights to interest (unpaid and to accrue) carried by this Note so transferred or exchanged so that there will not be any loss or gain of interest on the Note surrendered. Prior to due presentation for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner and holder of this Note for the purpose of receiving payment of principal of and interest on this Note and for all other purposes whatsoever. Prior to the sale or transfer of any Note, the Noteholder shall surrender said Note to the Company in exchange for a new Note in the principal amount equal to the unpaid balance of principal of the Note surrendered. 9. Miscellaneous. ------------- 9.1 Successors and Assigns. Subject to the foregoing terms and ---------------------- conditions, and to the restrictions on transfer described in the Agreement, the rights and obligations of the Company and the Noteholder shall inure to the benefit of and be binding upon the respective executors, administrators, heirs, transferees, successors and assigns of the Company and the Noteholder. 15 7.3 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND ------------- CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS BETWEEN CALIFORNIA RESIDENTS ENTERED INTO AND TO BE PERFORMED ENTIRELY WITHIN CALIFORNIA. 9.3 Notices. Except as otherwise provided herein, all communications ------- hereunder shall be in writing or by either telecopier of telegraph and, if to the Company, shall be mailed, telecopied or telegraphed or delivered to Taitron Components Incorporated, 25202 Anza Drive, Santa Clarita, CA 91355 (telecopier: (805) 257-6415) Attention: Stewart Wang, President; and if to the Noteholder, shall be mailed, telecopied, telegraphed or delivered to Room 204, Oriental ------------------ Centre, 67-71 Chatham Road, Tsimshatsui, Kowloon, HK. (telecopier: (852) 2367 - ----------------------------------------------------- ----------- 6006 ) Attention: . All notices given by telecopy - ---------- ------------------------ or telegraph shall be promptly confirmed by letter. Any party hereto may by notice so given change its address for future notice hereunder. 9.4 Severability. In case any provision of this Note shall be ------------ invalid, illegal or unenforceable, it shall, to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable, the intent of the parties, and the validity, legality and enforceability of the remaining provisions of this Note shall not in any way be affected or impaired thereby. 9.5 Waiver and Amendment. Any provision of this Note may be amended, -------------------- waived or modified upon the written consent of the transferee, successor or assign of the Noteholder or, if such Note has been transferred by the Noteholder, the holders of at least fifty-one per cent (51%) of the aggregate principal amount of all of the Notes then outstanding. 9.6 Lost, Stolen, Mutilated or Destroyed Note. If this Note is ----------------------------------------- lost, stolen, mutilated or destroyed, the Company shall, on such terms as to indemnity or otherwise as it may reasonable impose (which shall , in the case of a mutilated Note, include the surrender and cancellation thereof), issue a new Note of like denomination and tenor as the Note so lost, stolen, mutilated or destroyed. 7.4 Titles and Headings. The titles and headings contained in this ------------------- Note are intended for reference and shall not by themselves determine the construction or interpretation of this Note. 9.7 Entire Agreement. This Note, the Agreement and the other ---------------- documents delivered pursuant hereto and thereto, constitute the full and entire understanding and agreement between the parties with respect to the subjects hereof and thereof. 16 IN WITNESS WHEREOF, the Company has caused this Note to be issued as of the date first written above. TAITRON COMPONENTS INCORPORATED By: [SIGNATURE APPEARS HERE] ----------------------------- Its: ----------------------------- 17 EX-10.2 3 LEASE AGREEMENT [LOGO OF AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION APPEARS HERE] STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET (Do not use this form for Multi-Tenant Property) 1. Basic Provisions ("Basic Provisions") 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, May --- 29, 1996 is made by and between SCOTT VALENCIA PROPERTY COMPANY, a California - -- -- --------------------------------------------- general partnership ("Lessor") and TAITRON COMPONENTS INCORPORATED, a California - ------------------- --------------------------------------------- corporation ("Lessee"), (collectively the "Parties," or individually a "Party). - ----------- 1.2 Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of the Lease, and commonly known by the street address of 27827 Ave. Scott, Santa Clarita located in the ------------------------------- County of Los Angeles, State of California, and generally described as (describe ----------- ---------- briefly the nature of the property) approximately 29,669 s.f. within a larger ----------------------------------------- concrete tilt-up building, as outlined in red on Exhibit A hereto ("Premises"). - ----------------------------------------------------------------- (See Paragraph 2 for further provisions.) 1.3 Term: two (2) years and 1/2 months ("Original Term") commencing June ------- --- ---- 16, 1996 ("Commencement Date") and ending June 30, 1998 ("Expiration Date"). - -------- ------------- (See Paragraph 3 for further provisions.) 1.4 Early Possession: Upon lease execution ("Early Possession Date"). -------------------- (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 Base Rent $12,460.00 per month ("Base Rent"), payable on the 1st day ---------- --- of each month commencing June 16, 1996 (See Addendum for Paragraph 1.5 Cont'd.) ------------------------------------------------------ (See Paragraph 4 for further provisions.) [X] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Base Rent Paid Upon Execution: $18,690.00 as Base Rent for the period ---------- June 16, 1996 through July 31, 1996. - ----------------------------------- 1.7 Security Deposit: $12,460.00 ("Security Deposit"). (See Paragraph 5 ---------- for further provisions.) 1.8 Permitted Use: warehousing and distribution of electronic components, ------------------------------------------------------ and related activities (See Paragraph 6 for further provisions.) - ---------------------- 1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 Real Estate Brokers: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): Group 100/Jim McDonald ---------------------- represents [X] Lessor exclusively ("Lessor's Broker"); [_] both Lessor and Lessee, and CB Commercial Real Estate Group, Inc. represents [X] Lessee ------------------------------------- exclusively ("Lessee's Broker"); [_] both Lessee and Lessor. (See Paragraph 15 for further provisions.) 1.11 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by N/A ("Guarantor"). (See Paragraph 37 for further provisions.) --- 1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of Paragraphs * through 58 and Exhibits A *1.5 Cont'd. and 49 all of which - -- --------------------- constitute a part of this Lease. 2. Premises. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating , and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non- compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 Compliance with Covenants, Restrictions and Building Code. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. IF the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 3. Term. 3.1 Term. The Commencement Date; Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, (Including but not limited to the obligations to pay Real Property Taxes and Insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. Initials ----------- NET PAGE 1 ----------- 3.3 Delay In Possession. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lesee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. 4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. Use. 6.1 Use. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessees assignees or subtenants, and by prospective assignees and subtenants of the Lessee, its assignees and subtenants, for a modification of said permitted purpose for which the premises may be used or occupied, so long as the same will not impair structural integrity of the improvements on the Premises, the mechanical or electrical systems therein, is not significantly more burdensome to the Premises and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days give a written notification of the same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in-compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) or reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground Lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 Lessee's Compliance with Law. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Law," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifest, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined in Paragraph 8,3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance; Repairs; Utility Installations; Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, structural and non-structural (whether or not such portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Initials [INITIALS APPEAR HERE] ---------------------- [INITIALS APPEAR HERE] ---------------------- PAGE 2 Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. If Lessee occupies the Premises for seven (7) years or more, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 7.2 Lessor's Obligations. Except for the warranties and agreements of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof, it is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of, any needed repairs. 7.3 Utility Installations; Trade Fixtures; Alterations. (a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on, or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this Lesse as extended does not exceed $25,000. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virture or Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall by done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as -built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 3C hereof. (c) Indemnification. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the fight to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim, in addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so . 7.4 Ownership; Removal; Surrender; and Restoration. (a) Ownership. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, eledt in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) Removal. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (c) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good practice. Lessee's Trade Fixtures shall remain the property of lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. 8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving and arising out of the ownership, use, occupancy or maintenance of the Premises and all area appurtenant thereto. Such Insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any extra insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried By Lessor. In the event Lessor is the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee, Lessee shall not be named as an additional insured therein. 8.3 Property Insurance-Building, Improvements and Rental Value. (a) Building and improvements. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lender(s)"), insuring loss or Initials [INITIALS APPEAR HERE] ---------------------- [INITIALS APPEAR HERE] ---------------------- PAGE 3 damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c). (b) Rental Value. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) Adjacent Premises. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) Tenant's Improvements. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancellable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 Indemnity. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgements, penalties, permits, attorney's and consulant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's party to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgement, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstance be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction 9.1 Definitions (a) "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "Insured Loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs, in the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonable possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. PAGE 4 Initials [INITIALS APPEAR HERE] ------------- ------------- 9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is not an insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13). Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (2) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("Exercise Period"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of damage described in Paragraph 9.2 (Partial Damage- Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commended within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 Hazardous Substance Condition. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required to Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in paragraph 9.6(a) for a period of not to exceed twelve (12) months. 9.8 Termination - Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect to any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provision of any present or future statute to the extent inconsistent herewith. 10. Real Property Taxes. 10.1 (a) Payment of Taxes. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) Advance Payment. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee either: (i) In a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds paid to Lessor under the provisions of the Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security Debt under Paragraph 5. 10.2 Definition of "Real Property Taxes." As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, genuine, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levey or tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therin, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 Joint Assessment. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the Lessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. NET PAGE 5 10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b). 11. Utilities. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of the execution by Lessor of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment of subletting as a noncurable Breach, Lessor shall have the right to either: (i) terminate the Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) after the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises. If any, togehter with a non-refundalbe deposit of $1,000 or ten percent (10%) of the current monthly Base Rent, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurrence of a transaction described in Paragraph 12.1(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased to an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the amount required to establish such Security Deposit a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment structure of the rent payable under this Lease be adjusted to what is then the market value and/or adjustment structure for property similar to the Premises as then constituted. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor or under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach, Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said Default. A "Default" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" is defined as the occurrence of any one or more of the following Defaults, and where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. PAGE 6 (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, than it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. (S)101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor's becoming insolvent or the subject of a bankruptcy filing (iv) a guarantor's refusal to honor the guaranty, or (v) a guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance of security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the tie of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii)the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses or reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1 (b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1 (b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture In Event Of Breach. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, not withstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent of the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Process. Accordingly, if any installment of rent or any other sum due form Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercises of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) PAGE 7 terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is taken on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. Broker's Fee. 15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers (or in the event there is no separate written agreement between Lessor and said Brokers, the sum of $19,842.00) for brokerage services rendered --------- by said Brokers to Lessor in this transaction. 15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor further agrees that: (a) if Lessee exercises any Option (as defined in Paragraph 39.1) or any Option subsequently granted which is substantially similar to an Option granted to Lessee in this Lease, or (b) if Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to Lessee been exercised, or (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of the term of this Lease after having failed to exercise an Option, or (d) if said Brokers are the procuring cause of any other lease or sale entered into between the Parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, or (e) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then as to any of said transactions, Lessor shall pay said Brokers a fee in accordance with the schedule of said Brokers in effect at the time of the execution of this Lease. 15.4 Any buyer or transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a third party beneficiary of the provisions of this Paragraph 15 to this Paragraph 15 to the extent of its interest in any commission arising from this Lease and may enforce that right directly against Lessor and its successors. 15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm and entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorney's fees reasonably incurred with respect thereto. 15.6 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 16. Tenancy Statement. 16.1 Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then more current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under the Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor or Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. 23. Notices. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served on delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies as law or in equity. PAGE 8 28. Covenants and Conditions. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. This lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements, and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-disturbance agreement") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. Attorney's Fees. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation of, such advertising signs on the Premises, including the roof, as do not unreasonably interfere with the conduct of Lessee's business. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgement that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. Guarantor. 37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessee under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. 37.2 It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signature of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. Options. 39.1 Definition. As used in this Paragraph 39 the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 Options Personal To Original Lessee. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart herefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any Multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. Initials [INITIALS APPEAR HERE] ---------------------- [INITIALS APPEAR HERE] ---------------------- PAGE 9 39.4 Effect of Default on Options (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of Default under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Multiple Buildings. If the Premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Offer. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. Multiple parties. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such Multiple Parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO, THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at Beverly Hills, CA Executed at Valencia, CA --------------------------- ------------------------------ on June 10, 1996 on June 4, 1996 ------------------------------------ --------------------------------------- by LESSOR: by LESSEE: SCOTT VALENCIA PROPERTY COMPANY TAITRON COMPONENTS INCORPORATED - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- By /s/ Thomas Schneider By /s/ Stewart Wang ------------------------------------ --------------------------------------- Name Printed: Thomas Schneider Name Printed: Stewart Wang ------------------------- ---------------------------- Title: General Partner Title: President -------------------------------- ----------------------------------- By /s/ Carmine J. Vito By ------------------------------------ --------------------------------------- Name Printed: Carmine Vito Name Printed: ------------------------- ---------------------------- Title: General Partner Title: -------------------------------- ----------------------------------- Address: 9908 Anthony Pl. Address: 25202 Anza Dr. ------------------------------ --------------------------------- Beverly Hills, CA 90210 Valencia, CA 91355 - -------------------------------------- ----------------------------------------- Tel. No. (310) 274-1044 Tel. No. (805) 257-6060 --- ---------- --- ---------- Fax No. (310) 274-2640 Fax No. ( ) --- ------------------ --- ---------------------- NET PAGE 10 NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777. Fax. No. (213) 687-8616. [C] Copyright 1990 By American Industrial Real Estate Association. All rights reserved. No part of these works may be reproduced in any form without permission in writing. FORM 204N-R-12/91 ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET DATED MAY 29, 1996 BETWEEN SCOTT VALENCIA PROPERTY COMPANY AS LESSOR AND TAITRON COMPONENTS INCORPORATED AS LESSEE - -------------------------------------------------------------------------------- 1.5 Cont'd. Notwithstanding any contrary provision hereof, the monthly rental to be paid hereunder for the period from July, 1997 through June 30, 1998 shall be the sum of $12,460.00, subject to adjustment, upward only, in the same percentage proportion that the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index for All Urban Consumers for U.S. Cities (All Items, 1982-84=100) ("Index") for the month of April, 1997 shall increase over that for the month of April, 1996, which is stipulated to be 156.3. In the event said Index shall have been discontinued, the most nearly comparable index shall be substituted therefor. 49. PERCENT TO TOTAL PROPERTY. For any purpose under this Lease for which a pro-ration of expenses applicable to the Premises is called for, the parties hereto acknowledge that the Premises constitute 24.23% of the total property of which the Premises are a part, and that Lessee shall be liable for any such expenses in that same percentage proportion. 50. AIR CONDITIONING MAINTENANCE. It is agreed by the Parties hereto that Lessee shall maintain during the term hereof or any extension thereof a regular full-service air conditioning maintenance contract with a qualified air conditioning contractor acceptable to Lessor, and shall furnish to Lessor a copy of the current maintenance contract at all times during the term hereof. Lessee shall furnish Lessor with copies of all amendments and supplements to such maintenance contract within ten (10) days after the execution of such amendments and supplements. Such maintenance contract shall include the changing of filters at the intervals recommended by the equipment manufacturer or maintenance contractor. It is expressly understood and agreed by and between the Parties hereto that the maintenance obligations of Lessee hereunder include the replacement of any components of such heating and air conditioning equipment which such contractor shall determine must be replaced from time to time during the term hereof or any extension thereof to maintain such equipment in good operating condition and repair. 51. LANDSCAPE MAINTENANCE. Notwithstanding any contrary provision hereof, the Parties hereto agree that, during the term hereof or any extension thereof, Lessor shall maintain all exterior landscaping on the Premises on behalf of Lessee, at Lessee's sole cost and expense. Lessor reserves the right to engage the services of any independent landscape contractor to do such work. Lessor shall bill Lessee periodically at Lessor's cost for such maintenance, and Lessee shall pay to Lessor the amounts so billed as additional rent hereunder as and when due. 52. COMMON DRIVEWAY. Lessor and Lessee acknowledge that the thirty (30) foot wide driveway highlighted in green on Exhibit A hereto is a common driveway for the mutual benefit of the Premises and tenant(s) of the balance of the building of which the Premises are a part ("Common Driveway"). Lessee agrees that at all times during the term hereof or any extension thereof it shall maintain the Common Driveway outlined on Exhibit A in an unobstructed condition for the purpose of ingress and egress by the occupant(s) of the balance of the subject building. - -------------------------------------------------------------------------------- /s/ ED /s/ LS ----------------- ----------------- Lessor's Initials Lessee's Initials Page 1 ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET DATED MAY 29, 1996 BETWEEN SCOTT VALENCIA PROPERTY COMPANY AS LESSOR AND TAITRON COMPONENTS INCORPORATED AS LESSEE - -------------------------------------------------------------------------------- 53. LESSOR'S OBLIGATIONS. Prior to the commencement of the term hereof, Lessor shall at Lessor's sole cost and expense, complete the following repairs and/or modifications to the Premises: (a) Paint the offices and the bathroom Premises. (b) Install new carpet in the offices at an installed cost of not less than $15.00 per sq. yd. including rubber top-set base. (c) Repair the t-bar suspended ceilings in the offices. (d) Replace the damaged sink in the coffee bar. (e) Clean all bathrooms. (f) Repair or replace any damaged or missing tile in the bathrooms. (g) Secure any unsafe lighting fixtures in the warehouse area. (h) Secure the Premises from the balance of the building of which the Premises are a part by constructing, at Lessor's option, either a chain link separation (providing the use in the portion of the building adjoining the Premises does not cause dust or dirt to enter the Premises) or a frame and drywall partition at the South side of the Premises. 54. NO OUTSIDE STORAGE. Lessee acknowledges that the governmental ordinances and/or Covenants, Conditions and Restrictions governing the Premises do not permit outside storage or other operations on any part of the Appurtenant Land and accordingly agrees to conduct its operations entirely within the building which constitutes the Premises during the term hereof or any extension thereof. 55. PARKING/TRUCKING AREAS. In connection with the use and occupancy of the Premises by Lessee, Lessor hereby grants to Lessee the irrevocable license to the exclusive use of fifty-nine (59) parking spaces at the front and rear) of the Premises as outlined in blue on Exhibit A hereto, and the trucking area at the rear of the Premises, together with all driveways, walkways and landscaped areas pertinent thereto ("Appurtenant Land") during the term hereof or any extension thereof, providing Lessee shall not be in Breach under any of the terms, covenants or conditions of this Lease. This license shall terminate at the expiration or earlier termination of this Lease. The applicable provisions of this Lease pertaining to Lessee's maintenance obligations, tax and insurance obligations, or any other applicable obligations of Lessee hereunder, shall apply to the Appurtenant Land as if it were part of the Premises. 56. TRASH DISPOSAL. Lessee understands and agrees that it shall be responsible for its own trash disposal at all times during the term hereof or any extension thereof. In that regard, in the event Lessee shall elect to have an outside dumpster, it shall use the trash enclosure at the rear of the Premises which Lessor shall designate for its use. Lessee shall not permit any dumpster to be located anywhere on the exterior of the Premises other than in the designated trash enclosure. - -------------------------------------------------------------------------------- [INITIALS APPEAR HERE] [INITIALS APPEAR HERE] ---------------------- ---------------------- Lessor's Initials Lessee's Initials Page 2 [DRAWING OF WAREHOUSE ON CORNER OF STANFORD & SCOTT APPEARS HERE] SINGLE-TENANT LEASE-NET DATED MAY 29, 1996 BETWEEN SCOTT VALENCIA-PROPERTY COMPANY AS LESSOR AND TAITRON COMPONENTS INCORPORATED AS LESSEE - -------------------------------------------------------------------------------- shall be to a Lessee Affiliate, provided that said assignee shall have assumed in full the obligations of Lessee under this Lease. 58.4 The terms, covenants and conditions for said extended term shall be the same as in this Lease, except that the monthly rental shall be the sum of $12,460.00, subject to adjustment, upward only, in the same percentage proportion that the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index for All Urban Consumers for U.S. Cities (All Items, 1982-84=100) ("Index") for the month of April, 1998 shall increase over that for the month of April, 1996, which is stipulated to be 156.3. In the event said Index shall have been discontinued, the most nearly comparable index shall be substituted therefor. 58.5 If this option is exercised by Lessee, the Security Deposit shall be increased by the same percentage as the upward adjustment of the monthly rental provided in this paragraph. In such event, Lessor is authorized to hold the Security Deposit from the immediately preceding period of this Lease as a portion of the Security Deposit for the term extended by the exercise of this option, and Lessee shall remit to Lessor the amount of the increase determined as a result of the increase in the monthly rental upon its notification in writing by Lessor of the amount of such increase. - -------------------------------------------------------------------------------- CGH B W - ------------------- ------------------- Lessor's Initials Lessee's Initials Page 4 SINGLE-TENANT LEASE-NET DATED MAY 29, 1996 BETWEEN SCOTT VALENCIA PROPERTY COMPANY AS LESSOR AND TAITRON COMPONENTS INCORPORATED AS LESSEE - -------------------------------------------------------------------------------- 57. NOTICE OF INDEPENDENCE. BY PLACING THEIR INITIALS WHERE INDICATED AT THE END OF THIS PARAGRAPH, LESSEE AND LESSOR ACKNOWLEDGE THAT GROUP 100/JIM McDONALD HAS REPRESENTED TO EACH OF THEM, AND THEY UNDERSTAND, THAT GROUP 100/JIM McDONALD IS AN INDIVIDUALLY LICENSED REAL ESTATE BROKER AND THAT GROUP 100/JIM McDONALD IS SOLELY RESPONSIBLE FOR ITS OWN ACTS AND OMISSIONS. LESSEE AND LESSOR ALSO UNDERSTAND, NOTWITHSTANDING GROUP 100/JIM McDONALD'S USE OF THE TERM "GROUP 100" IN ITS NAME, NO OTHER PERSON, ENTITY OR BROKER IS ANY WAY RESPONSIBLE FOR ANY ACTS OR OMISSIONS OF GROUP 100/JIM McDONALD REGARDLESS OF WHETHER SUCH OTHER PERSON, ENTITY OR BROKER ALSO USES THE TERM "GROUP 100" IN ITS NAME. [INITIALS APPEAR HERE] [INITIALS APPEAR HERE] -------------------- -------------------- Lessor's Initials Lessee's Initials 58. OPTION TO EXTEND. 58.1 If Lessee is not then and shall not previously have been in Breach under any of the terms, covenants and conditions of this Lease, and providing it shall deliver written notice to Lessor during the period from January 1, 1998 through February 28, 1998 of its election to extend the term hereof, then it shall have the option to extend the term of this Lease for an additional period of one (1) year. 58.2 It is the intent of the parties hereto that the option granted to Lessee herein shall not be exercisable by Lessee unless Lessee shall be in possession of the Premises as of the date of its exercise hereof. This option is being granted to Lessee with the express understanding that the option is personal to Lessee and is not assignable to any sublessee or assignee under this Lease other than to any corporation which controls, is controlled by or is under common control with Lessee. or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises ("Lessee Affiliate"), and is intended solely to enable Lessee to continue to occupy the Premises for the conduct of its own business for the period beyond the initial term hereof. 58.3 This option shall terminate and be of no further force and effect in the event Lessee shall either sublease or agree to sublease the Premises for all of the then current term of this Lease, or assign this Lease or agree to enter into such assignment, at any time prior to the exercise of this option or within ninety (90) days after the exercise of this option, except where such sublease or assignment - -------------------------------------------------------------------------------- [INITIALS APPEAR HERE] [INITIALS APPEAR HERE] -------------------- -------------------- Lessor's Initials Lessee's Initials Page 3 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 6-MOS DEC-31-1996 DEC-31-1996 APR-01-1996 JAN-01-1996 JUN-30-1996 JUN-30-1996 588 1,145 0 0 5,225 5,501 168 138 38,242 27,752 44,562 34,752 1,713 1,627 0 0 46,288 36,380 19,521 13,914 3,502 511 0 0 0 0 7 7 23,258 21,948 46,288 36,380 7,824 15,889 7,824 15,889 5,402 10,790 5,402 1,587 1,256 2,617 0 0 247 294 918 2,188 369 878 550 1,310 0 0 0 0 0 0 550 1,310 .08 .19 0 0
-----END PRIVACY-ENHANCED MESSAGE-----