-----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, T2Gj3V+MKyNzwx2BVwr5WSjsjjGZA834XJTrFPChvISNN2afBuGDMrz49nr3ALjm raKIEu27lE5d9JJWDTVyyg== 0000950147-96-000125.txt : 19960402 0000950147-96-000125.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950147-96-000125 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERFORMANCE INDUSTRIES INC/OH/ CENTRAL INDEX KEY: 0000724967 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 341334199 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11331 FILM NUMBER: 96543329 BUSINESS ADDRESS: STREET 1: 2425 E CAMELBACK RD STREET 2: STE 620 CITY: PHOENIX STATE: AZ ZIP: 85016 BUSINESS PHONE: 6029120100 MAIL ADDRESS: STREET 1: 2425 E CAMELBACK RD STE 620 STREET 2: 2425 E CAMELBACK RD STE 620 CITY: PHOENIX STATE: AZ ZIP: 85016 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1995 Commission File Number 0-11331 PERFORMANCE INDUSTRIES, INC. ---------------------------- (Exact name of Registrant as Specified in its Charter) Ohio 34-1334199 - ---------------------------------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2425 E. Camelback Road, Suite 620 Phoenix, Arizona 85016 (Address of principal executive offices and zip code) (602) 912-0100 (Registrant's telephone number including area code) Securities Registered Pursuant to Section 12(b) of the Act: Title of Each class Name of Each Exchange on Which Registered --------------------- ------------------------------------------ None None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, Without Par Value (Title of Class) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of Registrant's voting stock held by nonaffiliates as of March 29, 1996 (based upon closing price) was $769,000. At March 31, 1996, 9,958,115 shares of Registrant's Common Stock were outstanding. PART I ITEM 1. BUSINESS -------- The Company currently operates in three primary business segments for which it has formed the following subsidiaries; restaurants, factoring, and real estate development. Performance Restaurants Group, Inc. (Restaurants) - ------------------------------------------------- Restaurants was formed in 1993 to acquire six operating restaurants in California. Five of the restaurants operate under the trade name Bobby McGee's and are full service restaurants/nightclubs. The sixth was converted to a sports bar concept operating under the trade name McGee's Grill. In 1995, a seventh restaurant was acquired in Scottsdale, Arizona. It is a full service restaurant and bar operating under the trade name Buster's Restaurant Bar & Grill. The Bobby McGee's concept is a full service restaurant using costumed servers and a lounge offering music and dancing at the same location. The restaurant appeals to a wide range of diners as a special event restaurant. Diners come to the restaurant to celebrate birthdays, anniversaries, graduations, and other special occasions. The nightclub offers a dance floor with a disc jockey playing recorded music. It appeals to younger patrons who are out for a night of dancing and socializing. Buster's Restaurant Bar & Grill is a more upscale dining experience offering choice meats, seafood, and specialty dishes. The beverage offerings include a full line of liquors and wine, as well as ten micro brews and a wide assortment of domestic and imported beers. Buster's Restaurant Bar & Grill's business is more cyclical than the other restaurants with greater sales between November and April coinciding with the winter visitor season in Arizona and slower sales during the summer months. McGee's Grill was opened in 1994. It features pool tables and television screens for the viewing of sports events and a limited menu for dinner and lunch in the sports bar. The sports bar is combined with the more traditional nightclub offered at other Bobby McGee's restaurants. Restaurants has developed a franchising package for its concept domestically and internationally. The franchisees will pay a fee for each restaurant they develop, plus a royalty based upon gross sales of each location. Area Development Agreements will cover multi unit franchises in a specific geographic area. Restaurants will offer assistance to the franchisee in training employees, advertising, site selection, and operation of a franchised location. Restaurants has not actively marketed any franchises. Performance Funding Corp. (Funding) - ----------------------------------- This subsidiary was formed in Arizona and is engaged in the factoring business. Factoring is the purchase of accounts receivables at a discount from face value. All purchases are full recourse against the seller. This means that, after a predetermined period, the seller must either repurchase the invoice at full face value or substitute an invoice for the face value, plus accrued fees. At the time of purchase of the invoice, Funding purchases the invoice at a discount of the face value of the invoice. The discount is set at the maximum fees possible, plus a reserve for bad debt. Upon collection of the invoice, the seller is paid the difference between the fee holdback and earned fees to the date of payment. Funding receives a security interest in other receivables of the seller to further secure payment of fees and to secure performance of the recourse provision of the contract. Funding looks for sellers with annual sales between $250,000 and $15,000,000. The decision to purchase receivables is based upon the financial condition of the client, the profitability of the seller, payment terms of the receivable, and the credit worthiness of the account debtors. 2 Performance Development Corp. (Development) - ------------------------------------------- Camelback Plaza Development, L.C. - --------------------------------- Development was formed in Arizona in 1993 to act as managing member of Camelback Plaza Development, L.C., which was developing and leasing Camelback Plaza, a retail/restaurant development in Phoenix, Arizona. The retail phase of the project opened in late 1994 with Just for Feet and Blockbuster Music as its first tenants. The restaurant phase, consisting of a free standing building for the Hard Rock Cafe, was constructed in 1995. The Hard Rock Cafe opened for business in October 1995. The remaining space in the retail phase is under lease with tenant improvements having commenced in late 1995 with expected completion in the second quarter 1996. The lessee is a full service restaurant. Fabricaciones Metalicas Mexicanas, S.A.(FMMSA) - ---------------------------------------------- This is the Mexican subsidiary of the Company that previously operated as a Maquiladora plant in Mexicali, Mexico. Since the Company discontinued manufacturing, it has been the holder of the real property owned by the Company and has been the lessor of the property to other manufacturing concerns. At the present time, the enclosed property is 100% leased with lease terms of two to five years in duration. The Company has a real estate broker seeking a buyer for the property. Ixtapa - ------ The Company purchased land for development as a condominium complex. At the time of purchase, the seller had committed to construction financing for the project. As discussed further below, the Company has indefinitely delayed the project due to the continuing financial situation in Mexico. A. Implementation of Reorganization -------------------------------- On April 21, 1991, Mr. Gasket Company (excluding subsidiaries), (now known as Performance Industries, Inc., the "Company" herein) filed a petition for relief under Chapter 11 of the United Bankruptcy Code with the United States Bankruptcy Court for the Central District of California, Chapter 11 Case No. LA-91-72714-AA. The bankruptcy was prompted, in part, by the following events: 1) the March 21, 1991 entry of a judgment against Mr. Gasket Company in favor of Rally Manufacturing Company ("Rally"); 2) the inability of Mr. Gasket Company to make a principal reduction payment on certain Subordinated Notes owed by Mr. Gasket Company; 3) the refusal by Mr. Gasket Company's primary lender to extend further credit to Mr. Gasket Company as a result of the threat of execution on the Rally judgment; and 4) a decrease in sales of Mr. Gasket Company's products of 30% or $17 million in the first six months of 1991. On May 4, 1993, Mr. Gasket Company emerged from Chapter 11 proceedings and filed a Certificate of Reorganization with the Ohio Secretary of State's Office, along with Amended and Restated Articles of Incorporation which, among other things, changed the name of the Company from Mr. Gasket Company to Performance Industries, Inc. The Company now operates its business without Bankruptcy Court supervision. Under the Joint Plan, a cash reserve of approximately One Million Five Hundred Thousand Dollars was established for the purpose of satisfying disputed and unliquidated general unsecured claims which were expected to be liquidated subsequent to the Implementation Date. If the reserve is insufficient to satisfy all subsequently liquidated claims, the Company is required to deposit up to One Million Dollars per year into the Option A Cash Reserve until such time as all claims are paid pursuant to the Joint Plan. It is not anticipated that this requirement will have any effect on the Company's ability to meet its obligations. 3 B. Prior Business -------------- Wheel and Tire Division - ----------------------- On December 31, 1992, during the Chapter 11 proceeding, the wheel and tire business was sold. Under the terms of the sale agreement, Cragar Industries, Inc. purchased all inventory, intangible property, certain accounts receivable, and other assets of the wheel and tire business. The net sales price of the wheel and tire business was $11,348,000 consisting of $4,000,000 paid in January 1993, $4,000,000 paid by March 31, 1993 pursuant to the terms of a secured promissory note, and the balance to be paid by December 31, 1993 pursuant to the terms of a non-interest bearing cognovit promissory note. This note was renegotiated during the summer of 1993 and in December 1994. (See note to financial statements 5 for further details). In connection with this sale, the Company entered into a three year non-competition agreement. Performance Division - -------------------- On May 4, 1993, the Company sold the assets and certain liabilities of the Performance Division to an affiliate of Echlin, Inc. The buyer operates as Mr. Gasket, Inc. The assets sold included most of the assets of the Performance business and related activities in Cleveland, Ohio, excluding land and building. The sales price for the Performance business was $33,880,000 before adjustment in working capital, as defined in the Purchase Agreement. Cash and other consideration of $31,880,000 were paid at closing on May 4, 1993 and $175,000 was paid upon agreement on the working capital adjustment. An additional $2,000,000 was maintained in escrow for twelve months to provide for the payment of claims for indemnification under the initial Purchase Agreement. (See note 5 to financial statements for further information). The escrow was closed and all proceeds paid to the Company on May 4, 1994. In conjunction with the sale of Performance Division, the land and building used for the Performance Division was leased by an affiliate of Echlin, Inc. with an option to purchase. This option was exercised and the land and building sale closed on April 14, 1994. The net proceeds were approximately $2,180,000 after payment of the existing mortgage on the property. Exhaust Division - ---------------- The Company sold its Exhaust business to Walker Manufacturing, a division of Tennessee Gas Pipeline Company on December 3, 1993 after approval of the sale by shareholders on November 28, 1993. The sale included all machinery and equipment used by the Company to manufacture exhaust products, the exhaust finished goods inventory, selected raw material and work in process, patents and trademarks and account receivables related to the exhaust business. The sale price was $7,503,090, subject to later adjustment if the accounts receivable collections did not exceed the sum of approximately $2,500,000. $6,503,090 was paid on closing, $1,000,000 was paid upon the delivery of machinery and equipment from Mexico to the Buyer's factory in Mississippi. In connection with the sale, the Company and certain of its current and former officers and directors entered into a five year non-competition agreements with respect to the Exhaust business. In addition, the Company entered into a transition agreement with Walker whereby the Company agreed to provide warehousing for finished goods in Phoenix to Walker through March 31, 1994 at a cost basis. The transition agreement ended on March 31, 1994 when Walker closed its warehouse in Phoenix. C. Competition ----------- The factoring business is a niche market for financing. Funding competes with several companies that have greater financial resources than Funding. Funding competes on the basis of rates, service and market concentration. 4 The restaurant business is highly competitive. Restaurants competes in the restaurant business with a number of chains and restaurants owned by substantially larger companies with greater financial resources than Restaurants. Restaurants competes on the basis of name recognition, concept of restaurants, location, quality of product and other intangible elements. Restaurants believes that the costume concept, along with the adjoining nightclub, offers a unique experience for the consumer that has a broad appeal. Restaurants further believes its present locations offer a competitive advantage over other areas. The real estate development business is highly competitive. Development competes with several other development companies in the Phoenix market that are more experienced and have greater financial resources. However, Development feels the location of the development is highly desirable to the high volume tenants who have signed leases. D. Trademarks and Patents ---------------------- The Company's registered trademark for restaurants is an important factor in marketing for this group due to the high degree of name recognition in its geographical area and general market. The name Bobby McGee's is federally trademarked. E. Environmental Matters --------------------- An investigation of environmental matters related to facilities and property owned and leased by the Company was performed to determine contingencies that may have affected the Company's emergence from Chapter 11. Certain reports received by the Company have identified areas of environmental contamination and potential environmental contamination. Management believes that certain predecessors-in-interest may bear either full or partial liability for remediation of affected areas. Certain predecessors-in-interest and governmental agencies have been notified by the Company of the related possible liabilities. In addition, the Company notified its insurance carriers of potential claims under its general liability and property insurance coverage from prior years. a. Manufacturing Facility in California ------------------------------------ This facility housed the manufacturing plant of the Wheel business. All assets at this facility have been sold and the buyer has vacated the premises (See Notes 5 & 18 to the Consolidated Financial Statements). The Company filed a closure plan with the State of California for this facility. An environmental survey was conducted in the fall of 1991. Two areas for further investigation were identified. Further investigation in the Spring of 1992 disclosed ground contamination and possible seepage into groundwater. Management believes the contamination to have existed prior to its purchase of the business in 1982 and has notified its predecessor-in-interest. The Company has accrued the estimated minimum remediation cost. At this time, all appropriate county, state and federal agencies have been notified regarding contamination at this site. To management's knowledge, no response has yet been made by any notified governmental agency nor has the facility been inspected by any such agency. However, the Company may, at a later date, be ordered to undertake further testing and/or remediation at the location. The Richter Family Trust, the owner of this facility, filed an action against the Company and others in the U.S. District Court for the Central District of California and served it on the Company in April 1995. The Company responded to the complaint on its behalf and on behalf of Joe Hrudka as an officer of the Company. The complaint seeks damages of an unspecified amount for environmental contamination at the site under several theories. Currently, the action is stayed by stipulation of the parties, so that further testing to determine the extent of the contamination can be completed. The Company tendered defense of the action to several insurance carriers under policies in force for the periods when it owned and operated its wheel division at the site. Two insurers have agreed to pay some legal costs of defending the action under their policies, although they have reserved the right to ultimately deny coverage 5 for any contamination or the costs of remediation. b. Warehousing and Office Facility in Ohio --------------------------------------- In 1990, potential contamination was discovered at this location. Environmental studies performed to date have determined that the contamination is confined to the site with no evidence of migration to groundwater or surrounding properties. At the present time, analysis of the potential remediation alternatives has not been completed, nor has a proposed plan been submitted for approval by the Ohio EPA. As part of the sale of the Performance Division to Echlin, Inc., the Company entered into an indemnity agreement with a predecessor-in-interest at the site. The predecessor-in-interest and the buyer of the Performance division have agreed to pay for the remediation of the major known environmental contamination at the site. However, the Company was required to guarantee the obligations of the purchaser. The Company had agreed to remove two above ground storage tanks, an underground storage tank, and to submit a closure plan to the State for a drum storage area. In March, 1995 the State of Ohio EPA accepted the company's closure of the drum storage area as being in compliance with the previously filed closure plan. This was the last requirement for the release of the escrow funds held by Echlin, Inc. from the sale proceeds of the Brookpark Road facility. The Company had also completed the removal of an underground storage tank at the Brookpark Road facility in 1994. With this closure, the Company believes it has no further expense for environmental contamination related to the Brookpark Road facility. ITEM 2. PROPERTIES ---------- As of December 31, 1995, the Company and its subsidiaries owned and leased a total of approximately 363,308 square feet of manufacturing, warehousing, office, and other space for its principal facilities. Management believes that the Company's and its subsidiaries' facilities and equipment are modern and well maintained. The locations and general description of the principal properties owned and leased by the Company and its subsidiaries are as follows:
Approximate Area in Lease Location Primary Functions Square Feet Expiration - -------- ----------------- ----------- ---------- Phoenix, Office 6,314 Lease Arizona 07/31/97 Scottsdale, Buster's Restaurant Bar & Grill 9,123 04/31/2000 Arizona Brea, Restaurant/Nightclub 11,000 06/30/2005 California Burbank, Restaurant/Nightclub 11,000 06/30/2010 California Burlingame, Restaurant/Nightclub 9,000 12/31/1996 California Citrus Heights, Restaurant/Nightclub 10,600 09/14/2005 California San Bernardino, Restaurant/Nightclub 10,500 11/13/2002 California
6
Approximate Area in Lease Location Primary Functions Square Feet Expiration - -------- ----------------- ----------- ---------- San Ramon, Restaurant/Nightclub 9,980 06/30/2002 California Mexicali, Office, manufacturing, 277,000(1) Owned Mexico and warehousing Ixtapa Raw Land 8,748 sq. meters Owned Phoenix, Development Project 5 Acres(2) Land Lease Arizona 02/28/2052 Las Vegas, Restaurant/Nightclub 9,185 12/31/2005 Nevada
- -------------------------------------------------------------------------------- (1) Due to a change in the Mexican laws, this property has been transferred in fee to Fabricaciones Metalicas Mexicanas, SA, a wholly owned subsidiary of the Company. The Mexicali facility is currently being leased by several tenants. The lease commitments expire on various dates between 1996 and 1998. The Company's minimum annual rent for 1996 is approximately $700,000 from the property. (2) The real property of five (5) acres which is under development by the subsidiary is subject to a long term land lease. The subsidiary has the option to purchase the real property after the year 2015 at its fair market value without consideration of value added for any improvements on the property. ITEM 3. LEGAL PROCEEDINGS ----------------- A. On January 6th, 1994 the Company filed an action in the Superior Court of Arizona for the County of Maricopa to determine the fair cash value of its shares held by shareholders who dissented from the sale of the Exhaust business. The dissenting shareholders are as follows: Ecco Sales, Inc. Defined Benefit Plan and Mr. David E. Miller, its trustee; Murray & Murray Co., L.P.A. Profit-Sharing Plan and Trust and Dennis E. Murray, Sr., its trustee; and Murray and Murray Co. L.P.A. - Dennis Murray Voluntary Account and Dennis E. Murray, Sr., its trustee; Monumental Life Insurance Company, a Maryland corporation; Ince & Co., a foreign corporation; The Travelers Corporation, a foreign corporation; The Travelers Insurance Company, a Connecticut corporation; Provident Mutual Life Insurance Company of Philadelphia, a Pennsylvania corporation; Provident Mutual Life Insurance Company, a foreign corporation; New England Mutual Life Insurance Company, a Massachusetts corporation; Angelo M. Alesci, an individual; William R. Bagger, an individual: All of the dissenting shareholders, except Ecco Sales and Murray & Murray, LPA, agreed to accept and were paid $.75 per share, as the fair market value, for their stock. Two of the dissenting shareholders made a special appearance by Motion to Dismiss for lack of personal jurisdiction, Murray & Murray Co. L.P.A. Profit Sharing Plan, and Murray & Murray Co. L.P.A. After the remand from the Arizona Court of Appeals, the Maricopa County Superior Court held it had jurisdiction over the defendants in February, 1995. The defendants appealed the trial court decision to the Arizona Court of Appeals. The court again upheld the trial court decision. The defendants then appealed to the Arizona Supreme Court, which upheld the Court of Appeals' decision. The defendants sought review by the U.S. Supreme Court under a Writ of Certiorari. The Writ was 7 denied in February 1996. The matter will now proceed to establish the fair market value of the defendants' shares as of the date of their dissent. The Company expects the proceedings to take at least 90 days to be resolved. B. On January 26, 1994 an action filed by Murray & Murray in the Court of Common Pleas, County of Cuyahoga, State of Ohio, was served on the Company and three former or present officers and/or directors of the Company; Joe Hrudka, Tom Hrudka and Howard B. Gardner. The action against the Company seeks declaratory judgment holding that the fair cash value determination be heard in the State of Ohio. The action against the directors and officers alleges a breach of fiduciary duty involving the negotiation of consulting and non-competition agreements in connection with the Company's sale of its former businesses. The Company has filed a motion to dismiss the action which motion has not yet been decided. C. In April 1995, the Company was served with an action filed by the Richter Family Trust in the U.S. District Court for the Central District of California against the Company and others for unspecified damages for the remediation of the site of the Company's former wheel manufacturing plant. The Company responded to the suit on its own behalf and on behalf of Joe Hrudka, an officer and director of the Company, who was sued personally. Currently, the case has been stayed by stipulation of the parties, so that further testing can be conducted on site to determine the extent of the contamination. The Company is involved in various other claims and legal actions arising in the ordinary course of business, including product liability claims. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- None. PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER ----------------------------------------------------------------- MATTERS ------- The following table sets forth the range of high and low closing bid prices for the Company's common stock as reported by the NASDAQ National Market System for the past two calendar years: BID ASK --- --- 1995 - ---- Quarter ended March 31, 1995 9/16 3/ 4 Quarter ended June 30, 1995 1/ 2 9/16 Quarter ended September 30, 1995 3/ 8 1/ 2 Quarter ended December 31, 1995 3/16 5/16 1994 - ---- Quarter ended March 31, 1994 $ 1/2 $ 11/16 Quarter ended June 30, 1994 $ 1/2 $ 11/16 Quarter ended September 30, 1994 $ 5/8 $ 11/16 Quarter ended December 31, 1994 $ 9/16 $ 3/4 (1) All quotations represent inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual trades. As of March 26, 1996, there were 810 holders of record of the Company's common stock. No dividends have been declared since December 1984, nor does the Company anticipate that any dividends will be declared in the foreseeable future. 8 The Company's shares are traded over the counter. During 1994, the Company purchased approximately 2,234,000 shares of stock from dissenters due to the sale of the Company's Exhaust division to Walker Manufacturing. In addition, the Company purchased approximately 202,000 shares on the open market in 1994. ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data) ------------------------------------------------------------- The Company's selected consolidated financial data has been prepared in accordance with generally accepted accounting principles applicable to a going concern, which principles, except as otherwise disclosed, assume that assets will be realized and liabilities will be discharged in the normal course of business. The following table sets forth selected consolidated financial data of the Company for the five years ended December 31, 1991 through 1995. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes thereto included elsewhere herein. The selected consolidated financial data for the years ended December 31, 1991 through 1995 are derived from the audited financial statements of the Company. Year Ended December 31 ---------------------- OPERATING RESULTS: 1991 1992 1993 1994 1995 - ----------------- -------- -------- -------- -------- -------- Net revenues $ 71,200 $ 78,478 $ 360 $ 18,415 $ 20,253 Net income (loss) ($23,034) ($ 5,711) $ 27,623 $ 435 $ 294 Net income (loss) per common share ($ 2.19) ($ .54) $ 2.34 $.04 $ 0.03 Weighted average number of shares of common stock outstanding 10,525 10,525 11,789 10,407 9,958 Year Ended December 31 ---------------------- FINANCIAL POSITION: 1991 1992 1993 1994 1995 - ------------------ -------- -------- -------- -------- -------- Working capital (deficiency) ($37,743) ($35,609) $ 2,636 $ 574 $ 2,424 Total assets $ 85,214 $ 68,320 $ 23,126 $ 24,108 $ 24,878 Long-term debt, excluding current installments and amount subject to compromise $ 1,456 $ 955 $ 515 $ 5,962 $ 7,345 Shareholders' equity (deficiency) $(10,397) $(16,108) $ 12,824 $ 11,494 $ 13,061 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- 9 RESULTS OF OPERATIONS - --------------------- Consolidated - ------------ For the year ended December 31, 1995 the Company had a consolidated after tax loss from continuing operations of ($144,000), compared to a loss of ($289,000) for the same period in 1994. Net after tax income for 1995 was $294,000 compared to income of $435,000 for the year ending December 31, 1994. In 1995 the Company had income of $438,000 from discontinued operations primarily as a result of "changes in accounting estimates". Throughout the year the Company was able to settle claims for less than expected and to collect, or now expects to collect, more receivables than anticipated at December 31, 1994. The Company's selling, general, and administrative expenses were $659,000 less than in 1994. This is a 19% decrease. Interest expense was $533,000 in 1995 compared to $18,000 in 1994. This rise in interest is a result of the mini- permanent loan on the retail center and the Funding line of credit. In December 1995 the Company was able to sell a portion of securities it obtained in a private offering. The net proceeds from the sale was $387,000. The original investment made in 1994 was $250,000. The remaining shares, which are subject to restrictions on sale under Rule 144, have been written up to market value as of December 31, 1995 (see Note 6 to the Notes to Consolidated Financial Statements). During the year ended December 31, 1994, the Company purchased 2,436,455 of treasury stock at an average price of $.7244 per share. Most of these purchases were a result of dissenting shareholders rights exercised in 1993. The Company's book value per common share outstanding increased from $1.10 at December 31, 1994 to $1.31 at December 31, 1995. At December 31, 1995 the Company had only eight employees, two of which are devoted exclusively to management of the Funding subsidiary. Management has no plans to increase employment from this level. Performance Restaurants Group, Inc. (Restaurants) - ------------------------------------------------- Revenues - -------- Total revenues increased 11.6% to $19,357,000 for 1995 compared to $17,350,000 for 1994. The increase in revenue is a result of the acquisition of a new restaurant operating under the trade name Buster's Restaurant Bar & Grill. The year ended 1995 was a 53 week year as compared to 52 weeks in the year ended 1994. Excluding the extra week in 1995, same store sales were down approximately 2.3% as compared with 1994. Cost and Expenses - ----------------- Cost of sales, consisting of food and beverage cost, increased during 1995 to 27.6% of sales, as compared with 26.4% in 1994. The percentage increase is primarily attributable to the food items offered at Buster's Restaurant Bar & Grill. The restaurant sells primarily certified Black Angus beef and fresh seafood of the highest quality available. The menu yields a higher food cost percentage than a Bobby McGee's restaurant. Restaurant operating expenses include all other unit-level operating costs, the major components of which are labor cost, supplies, advertising and promotions, utilities, outside services, repairs and maintenance, depreciation, and occupancy cost. These costs as a percentage of sales increased slightly by .6% to 66.6% during 1995 as compared with 66.0% in 1994. The percentage increase is a result of increased advertising and an increase in depreciation expense. Same store depreciation increased $245,000 to $423,000 in 1995 from $178,000 in 1994. The increase is due to the extensive remodeling of the restaurants which was completed in April of 1995. Advertising expenditures have increased due to several aggressive advertising campaigns aimed at exposing customers to the newly remodeled "Bobby McGee's". 10 Administrative expenses as a percentage of sales declined by .4% in 1995 to 6.6%, compared with 7.0% in 1994. Substantially all of the decline is attributed to higher sales volume. Net Income - ---------- The restaurant division recorded a net loss of $165,534 for 1995 as compared to net income of $105,198 for 1994. The loss is attributable to higher depreciation charges, increased advertising and the seasonality of Buster's Restaurant Bar & Grill. Earnings Outlook - ---------------- In 1995, Restaurants signed a lease for a new Bobby McGee's restaurant in Las Vegas, Nevada. Renovations of the premises is proceeding and a grand opening is planned for May 1996. The new restaurant will operate under the familiar Bobby McGee's concept with an updated decor and will serve as a model for future expansion. Restaurants is looking at several locations throughout the south-west for expansion of all three of its restaurant concepts. Restaurants will concentrate on Arizona, California, and Nevada for company operated stores and offer franchises nationally. Bobby McGee's Franchises - ------------------------ Restaurants has developed a franchise package for domestic and international use because of interest in a possible franchise by a foreign investor. The domestic package was developed to meet certain regulatory policies before offering the franchises internationally. Restaurants has not actively sought franchisees and has no estimate of how many if any will be sold in the upcoming fiscal year. Performance Funding Corp. (Funding) - ----------------------------------- A customer representing approximately $360,000 of the 1994 fee revenue obtained other financing and paid off the Company in February of 1995. Funding was able to obtain additional business to offset some of this lost revenue. As a result, gross revenues for the year ended December 31, 1995 was $896,000 compared to $1,065,000 in 1994, a decrease of approximately 13%. Net earnings before taxes decreased from $895,000 in 1994 to $676,000 in 1995. Coupled with the gross revenue decrease, third party interest and financing costs associated with obtaining the new line of credit are responsible for most of the decrease in net earnings. At December 31, 1995, Funding had approximately $1,550,000 invested in assets of approximately $2,070,000 earning fees, compared to $3,500,000 and $4,400,000 at December 31, 1994. This is a 53% reduction in assets earning fees from 1994 to 1995. Increased competition for quality customers is the primary cause for most of the decline. As stated above, one of Funding's largest customers, representing $1,400,000 of the assets earning fees at December 31, 1994, was able to obtain alternative financing offering significantly lower interest rates. Quality clients of this size are difficult to replace. Most major banks, in the past year or two, have established divisions which are allowed to finance somewhat higher risk companies. These are the companies Funding seeks as clients. These are companies that almost qualify for conventional financing but may not have enough history or are experiencing fast paced growth. Funding cannot or will not compete with these divisions on interest rates. But Funding can and does compete by offering a close personal interest and understanding of the clients' business. The ability to quickly respond to the clients' changing financing needs has also been a good selling tool. In July 1995, Funding obtained a line of credit from a financial institution in the amount of $2,000,000. This has allowed the Company to lessen its cash investment in Funding while providing capital for future growth. Under the agreement, the Company must maintain an equity position in Funding of $1,000,000. The line of credit expires in 11 July 1997. Management believes, but there can be no assurance, that the line of credit will be renewed in 1997, if needed. Performance Development Corp. (Development) - ------------------------------------------- Gross rent received for the year ended December 31, 1995 was approximately $770,000 compared to approximately $50,000 for 1994. The development recorded a net loss of approximately $30,000 for the year ended December 31, 1995 compared to break even for 1994. This loss is attributed to unabsorbed common area maintenance expenses related to unoccupied space. Based upon signed leases, all space is to be occupied by the second quarter of 1996 and the minimum rents are expected to be over $1,000,000 in 1996. Development converted its construction loan of $4.9 million to a mini-permanent loan on January 1, 1996. The loan is amortized over a twenty year period with a balloon of the outstanding balance due in 40 months. The Company has contracted with a broker to obtain a buyer of the project. Ixtapa, Mexico - -------------- Development purchased land in Marina Ixtapa Mexico for development as a sixty unit condominium. Preliminary architectural work has been completed, including cost estimates. At the time of purchase, Development received a commitment for construction financing from the seller of the property. The commitment was not honored as a result of the financial crisis in Mexico. The Company planned to begin development of the project in the first quarter of 1995. These plans have been indefinitely put on hold by the financial crisis in Mexico. Fabricaciones Metalicas Mexicanas, S.A. (FMMSA) - ----------------------------------------------- FMMSA is a wholly owned foreign subsidiary of the Company. Its remaining assets, after the December, 1993 sale of the Exhaust Division, consists of land and buildings located in Mexicali, Mexico. Gross rent revenue was approximately $535,000 for the year ended December 31, 1995 compared to approximately $488,000 in 1994. Net after tax income was approximately $195,000 and $20,000 for these same years respectively. The 1994 net earnings were impacted by environmental cleanup expenses related to closing the exhaust division of the Company. While 1995 net earnings improved, the Company incurred some expenses related to making the property into an industrial park, as well as repairs to make the facility more suitable for additional tenants. Liquidity and Capital Resources - ------------------------------- Short Term - ---------- The Company's short term liquidity and capital resources have improved considerably during the year ended December 31, 1995. While cash and equivalents have decreased, $731,000, working capital has increased by $1,850,000. In addition, the Company, through its Funding subsidiary, obtained a two year, $2,000,000 line of credit. At December 31, 1995, the Company had used approximately $360,000 of the line of credit. The Company has negotiated a six month line of credit for $1,000,000, which is to be in effect by April 1, 1996. The line is secured by certain securities available for sale. The contract provides for one six month option to extend. 12 With the financing the Company has in place, and with most all of the business segments generating positive cash flows, management believes, but there can be no assurance, its short term cash requirements will be met. Long Term - --------- During 1995, the Company invested approximately $3,250,000 to complete its real estate development projects. The Company has made some progress in the marketing for sale of these real estate assets. The Company has signed a six month exclusive contract with Cushman & Wakefield to be the broker for a sale of the Camelback Plaza retail center. The Company has a purchase and sale agreement with one of its tenants in Mexicali, Mexico to sell the Company's foreign subsidiary, FMMSA. The sale, if completed, should take place in the 2nd or 3rd quarter of 1996. Additionally in 1995, the Company invested $1,410,000 into its restaurant subsidiary. The funds were used to add two new restaurants and finish remodeling existing restaurant stores. One of the restaurants purchased was in operation and its results for the approximate 9 1/2 months of the Company's ownership are included in the results of operations. The other restaurant, which is in Las Vegas, will not open until the 2nd quarter of 1996. With the opening of this restaurant, the Company will have eight restaurants total. Management believes it needs 10 - 12 restaurants to maximize absorption of its fixed operating expenses. The Company intends to use the proceeds from the sale of its real estate holdings to expand its restaurant operations. Inflation - --------- Management does not believe that inflation will have a material effect on the results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- The independent auditors' report on the Consolidated Financial Statements and Schedules listed in the accompanying index are filed as part of this report. See Index to Audited Consolidated Financial Statements and Schedules on page . ------ ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON -------------------------------------------------------------- ACCOUNTING AND FINANCIAL DISCLOSURE -------------------------------------- None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- The Directors and Executive Officers of the Company as of December 31, 1995 were as follows: Name Age Position - ---- --- -------- Joe Hrudka 57 Chief Executive Officer Edmund L. Fochtman, 58 President/Director Jr. (1) Allen L. Haire (1) 53 Director Jonathan Tratt 37 Director James W. Brown 47 Chief Financial Officer/Director 13 Robert A. Cassalia 43 Secretary All Directors are elected annually by the Company's shareholders and hold office until their successors are duly elected and qualified. - -------------------------------------------------------------------------------- (1) Member of the Audit Committee. Joe Hrudka is the founder and principal shareholder of the Company. Since 1981 he has served as the Chairman of the Board and a Director. Mr. Hrudka has served as Chief Executive Officer of the Company since November, 1993. In 1964, Mr. Hrudka founded the original Mr. Gasket Company and served as Chairman of the Board and President until the Company was purchased by W. R. Grace in 1971. He was then employed as a Vice President of the Automotive Division of W. R. Grace from 1972 to 1974 and as a consultant to W. R. Grace during 1975 and 1976. From 1977 until the formation of the Company in 1981, Mr. Hrudka was a private investor. Mr. Hrudka has served as a director of Action Products, Inc. from 1987, and served as Secretary of Action Products, Inc. from October 1990 to May 1992. In November 1991, a receiver was appointed by the Maricopa County Superior Court, State of Arizona, to manage the assets of Action Products, Inc. at the request of a secured party. Action's assets were sold in May 1992 by the receiver. Mr. Hrudka has served as a Director of each of the subsidiaries since they have been formed. Edmund L. Fochtman, Jr. has been President of the Company since May, 1993. He was an executive Vice President of the Company since January, 1992. He was Chairman of the Board of Directors and Chief Executive Officer of Action Products, Inc., a company engaged in the manufacture and sale of fiberglass bodied mini-cars and sales of other promotional products from October 1986 until January 1992. From 1984 to 1986, Mr. Fochtman was a private investor. From 1976 to 1984, he served as Vice President of F. W. & Associates, Inc. In November 1991, a receiver was appointed by the Maricopa County Superior Court, State of Arizona, to manage the assets of Action Products, Inc. at the request of a secured party. Action's assets were sold in May 1992 by the receiver. Mr. Fochtman was elected a Director of the Company in June 1988 and as a director of each of the subsidiaries since 1993. Allen L. Haire has been chairman and Chief Executive Officer of Enerco Technical Products, a manufacturer of gas-fired infra-red heating equipment, since July 1984. He was a manufacturer's representative from 1977 to 1984. Mr. Haire was elected a Director in June 1988. Jonathan Tratt has been President and Director of Industrial Brokerage, Inc., an investment and commercial real estate brokerage company since 1992. Prior to 1992, Jonathan Tratt was a general investor and real estate agent in Phoenix, Arizona. Jonathan Tratt is also a director of Gulp Investments, Inc., a real estate and general investment company, and was elected a director of the Company in May, 1993. James W. Brown, a certified public accountant, has been Chief Financial Officer and Director since December 1993. From 1989 until joining the Company in May, 1993, Mr. Brown was CFO of RACAM Amusement Group. From 1985 to 1988 he was the Chief Operating Officer of American Educational Computers, Inc., a publicly traded software and video publisher. Prior to 1985 he was Vice President of Finance of National Zinc Company, a primary metals manufacturer. Mr. Brown has served as a Director of the subsidiaries since 1993. Robert A. Cassalia was hired by the Company as Assistant Secretary, In-House Counsel in January of 1991. On May 4, 1993, he was elected Secretary. Before joining the Company Mr. Cassalia was General Counsel of Action Products, Inc., a manufacturer of fiberglass bodied mini-cars since October, 1986. Prior to 1986, he was in private practice in Phoenix, Arizona and Syracuse, New York. ITEM 11. EXECUTIVE COMPENSATION ---------------------- The information required by this item is incorporated herein from the Company's proxy statement to be filed pursuant to Regulation 14(a) under the Securities Exchange Act of 1934, within 120 days from December 31, 1994. 14 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- PRINCIPAL SHAREHOLDERS The following table sets forth the number and percentage of the outstanding shares of common stock beneficially owned as of March 29, 1995 by the only persons known to the Company to own beneficially more than 5% of the outstanding shares of common stock. Name and Address Number of Shares Percent of Beneficial Owner Beneficially Owned of Class - ------------------- ------------------ -------- Joe Hrudka 9716 N. 71st Street, Paradise Valley, AZ 85253 6,756,966(1) 69% - -------------------------------------------------------------------------------- (1) Certificates representing 795,973 shares are in the possession of a bank which claims a security interest in the same in connection with loan arrangements. The net result of future actions taken in connection therewith cannot be predicted by the Company at this time. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- Reference is made to the information contained in Note 19 to the Consolidated Financial Statements herein, which Information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,...AND REPORTS ON FORM 10-K ----------------------------------------------------------------------- (1) Index to Consolidated Financial Statements: Independent Auditors' Reports Consolidated Balance Sheets - December 31, 1995 and 1994 Consolidated Statements of Operations - Years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Shareholders' Equity - Years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows - Years ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements - Years ended December 31, 1995, 1994 and 1993 (2) Index to Consolidated Financial Statement Schedules: All schedules have been omitted because the material is not applicable or is not required as permitted by the rules and regulations of the Commission, or the required information is included in Notes to the Consolidated Financial Statements. (3) Exhibits: 15 Exhibit No. - ----------- 2.1 Disclosure Statement and Plan of Reorganization filed on July 21, 1992 by the Official Creditors' Committee. Incorporated by reference to the Company's Report on Form 10-Q filed on August 12, 1992. 2.2 Amended Plan of Reorganization filed by the Company on August 3, 1992. Incorporated by reference to the Company's Report on Form 1O-Q filed on August 12, 1992. 2.3 Amended Disclosure Statement including a Joint Plan of Reorganization approved by the Court to be distributed to interested parties on October 27, 1992. Incorporated by reference to the Company's Report on Form 10-Q filed on November 10, 1992. 2.4 The Confirmed Joint Plan of Reorganization, approved by the United States Bankruptcy Court, Central District of California on April 21, 1993, as filed with the Company's report on Form 10- Q for the period ended March 31, 1993. 2.5 Notice of satisfaction to all conditions precedent to implementation of Option "A" of the Joint Plan of Reorganization dated September 30, 1992, as filed with the Company's report on Form 10-Q for the period ended March 31, 1993. 3.3 Amended and Restated Articles of Incorporation of the Company. Incorporated by reference to Exhibit 3.3 of the Company's Annual Report on Form 10-K, dated March 29, 1988. 3. 4 Revised Code of Regulations, as amended, of the Company. Incorporated by reference to Exhibit 3.4 of the Company's Annual Report on Form 10-K, dated March 29, 1988. 10.39 Month-To-Month Lease by and between F. W. Investments, an Ohio General Partnership, and the company for the premises known as 2401 W. First Street, Tempe, Arizona. Incorporated by reference to the Company's Form 10-K filed April 14, 1991. 10.44 Sale Escrow Instructions Promissory Note and Security Agreement between Calico Light Weapon Systems and the Company concerning the sale of the Company's gun division dated December 10, 1990. Incorporated by reference to the Company's Form 8 filed September 27, 1991. 10.45 Asset purchase agreements relating to the sale of the Wheel and Tire business dated December 31, 1992 by and between Cragar Industries, Inc. and the Company. Incorporated by reference to the Company's report on Form 8-K filed on January 12, 1993. 10.46 The following exhibits relate to the sale of the Performance business on May 4, 1993 as filed with the Company's report on Form 10-Q for the period ended March 31, 1995 and incorporated herein by reference: 10.47 The following documents related to the sale of the Company's Exhaust Division to Walker Manufacturing Company as filed with Notice of Annual Meeting of shareholders dated November 8, 1994 and incorporated herein by reference. 10.48 1993 Stock Option Plan of Performance Industries, Inc. filed with the Company's Notice of Annual Meeting of shareholders dated November 8, 1993 and incorporated herein by reference. 10.49 Documents relating to its purchase of operating assets from Bobby McGee's USA, Inc. effective December 20, 1993, which were filed with the Company's report on Form 10-K for the period ended December 31, 1993, and are incorporated herein by reference. 10.50 The following documents relating to the purchase of the ground lease for 2671 E. Camelback 16 Road, Phoenix, Arizona effective December 30, 1993 as filed with the Company's report on Form 10-K for the year ended December 31, 1993 and are incorporated herein by reference: 10.51 Lease dated May 9, 1994 by and between Just for Feet, Inc. (Lessee) and Camelback Development L.C. (Lessor) dated May 9, 1994. 10.52 Lease dated June 30, 1994 by and between Blockbuster Music Retail, Inc. (Lessee) and Camelback Plaza Development L.C. (Lessor). 10.53 Lease dated January 17, 1995 by and between Restaurants of America, Inc. (Lessee) and Camelback Plaza Development, L.C. (Lessor). 10.54 Design Build Lease Agreement dated December 18, 1992 by and between Hard Rock Cafe Investors, Ltd. XIV (Lessee) and Imprimis Partners II (Lessor) and amendment thereto dated September 26, 1994. 10.55 Offer to purchase Buster's Restaurant Bar and Grill dated February 25, 1995 including a first assignment and Assumption of Lease and landlord's consent dated March 15, 1995 by and between Mercado Del Lago, L.L.C., Buster's & Company, Inc. and Performance Restaurants Group, Inc., and lease dated the 20th of November 1989 by and between Mercado Project Limited (Lessor) and Buster's & Company, Inc. (Lessee), and Bill of Sale dated March 15, 1995. 10.56 Documents from the Caliber Bank loan dated June 24, 1994 as amended September 21, 1994. - Restaurant Phase Construction Agreement, dated June 24, 1994. - Restaurant Phase Promissory Note. - Irrevocable Letter of Credit - $1,900,000. - Environmental Indemnification Agreement.. - Amendment to Restaurant Phase Construction Loan Agreement, Restaurant Phase Promissory Note, and Restaurant Phase Deed of Trust, dated September 21, 1994. - Restaurant Phase Leasehold Construction Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing. - Assignment of Hard Rock Cafe Lease. - Retail Phase Construction Loan Agreement, dated June 24, 1994. - Retail Phase Promissory Note. - Amendment to Retail Phase Construction Loan Agreement, Retail Phase Promissory note, and Retail Phase Deed of Trust, dated September 21, 1994. - Retail Phase Leasehold Construction Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing. - Assignment of Retail Leases. 10.57 Line of Credit Agreement dated July 19, 1995 by and between Performance Funding Corp. and Capital Factors, Inc. and Guarantee of Performance Industries, Inc. 10.58 Lease dated September 1, 1995 between Performance Restaurants of Nevada, Inc. and 1030 East Flamingo, L.L.C. 17 10.59 Second Amendment to Retail Phase Construction Loan Agreement dated October 31, 1995 by and between Camelback Plaza Development, L.C. and Norwest Bank. 10.60 Tenth Amendment to Restaurant Phase Construction Loan Agreement dated October 31, 1995 by and between Camelback Plaza Development, L.C. and Norwest Bank. 10.61. Cash Collateral Agreement by and between Performance Industries, Inc. and Norwest Bank dated October 31, 1995. 22 Subsidiaries of the Registrant. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 29, 1996 Performance Industries, Inc. By: /s/ Edmund L. Fochtman, Jr. ---------------------------- Edmund L. Fochtman, Jr. President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 29th day of March, 1996 by the following persons on behalf of the Registrant in the capacities indicated: /s/ Joe Hrudka Chairman of the Board and Director - -------------------------- (Chief Executive Officer) Joe Hrudka /s/ Edmund L. Fochtman, Jr. President and Director - -------------------------- Edmund L. Fochtman, Jr. /s/ Allen L. Haire Director - -------------------------- Allen L. Haire /s/ Jonathan Tratt Director - -------------------------- Jonathan Tratt /s/ James W. Brown Chief Financial Officer and Director - -------------------------- (principal Accounting Officer) James W. Brown /s/ Robert A. Cassalia Secretary - -------------------------- Robert A. Cassalia 19 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 CONTENTS Page Independent auditor's report 21 Consolidated financial statements: Balance sheets 22 Statements of operations 23 Statements of shareholders' equity 24 Statements of cash flows 25 Notes to financial statements 27 20 Board of Directors and Shareholders Performance Industries, Inc. Phoenix, Arizona INDEPENDENT AUDITOR'S REPORT ---------------------------- We have audited the accompanying consolidated balance sheets of Performance Industries, Inc. and subsidiaries as of December 31, 1995 and 1994 and the related consolidated statements of operations, shareholders' equity and cash flows for the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Performance Industries, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. TOBACK CPAs, P.C. Phoenix, Arizona March 20, 1996 21 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994 -------------- ------------ Current assets: Cash and cash equivalents $ 411 $ 1,142 Restricted cash (Note 11) 1,267 2,900 Securities available for sale (Note 6) 1,783 - Accounts and other receivables, less allowance for doubtful accounts of $25 and $143, respectively (Note 21) 416 584 Current portion of receivables from sale of businesses, net of allowance (Notes 5, 7 and 21) 480 1,024 Factored accounts receivable, net of allowance for doubtful accounts of $201 and $113, respectively (Note 21) 1,868 4,311 Inventories 293 276 Prepaid expenses and other current assets 322 201 Other assets held for sale 212 231 Deferred income taxes (Note 14) - 254 -------------- ------------- Total current assets 7,052 10,923 Receivables from sale of businesses, less current portion, net of allowance (Notes 5, 7 and 21) 520 - Investment in real estate (Note 8) 11,073 7,573 Deferred income taxes (Note 14) 1,734 1,829 Property and equipment, net (Note 9) 3,578 2,706 Other assets (Note 10) 921 1,077 -------------- ------------- Total assets $ 24,878 $ 24,108 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations (Note 11) $ 594 $ 4,394 Accounts payable 1,260 1,208 Accrued employment costs 288 401 Accrued product liability costs (Note 16) 350 902 Accrued expenses and other current liabilities (Note 12) 1,016 982 Factored receivables reserve 390 889 Liabilities subject to compromise (Note 3) 754 1,573 -------------- ------------- Total current liabilities 4,652 10,349 Long-term debt and capital lease obligations, less current portion (Note 11) 6,751 1,849 Commitments and contingencies (Notes 13, 16, 17 and 18) Minority interest (Notes 8 and 13) 414 416 Shareholders' equity: Preferred stock, par value $1.00 per share; authorized 100,000 shares; none issued - - Common stock, no par value; authorized 20,000,000 shares; issued 12,629,326 shares 31,202 31,202 Accumulated deficit (16,416) (16,710) Unrealized appreciation on securities available for sale, net of income taxes (Note 6) 1,226 - -------------- ------------- 16,012 14,492 Treasury stock at cost (2,671,211 shares) (2,951) (2,998) -------------- ------------- Total shareholders' equity 13,061 11,494 -------------- ------------- Total liabilities and shareholders' equity $ 24,878 $ 24,108 ============== =============
The accompanying notes are an integral part of these consolidated financial statements. 21 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993 ------------ ------------ ----------- Revenues from continuing operations $ 20,253 $ 18,415 $ 360 Cost of revenues (18,279) (16,058) (82) Selling, general and administrative expenses (2,841) (3,500) (3,029) Interest expense (533) (18) (87) Other income, net 1,233 711 480 ------------ ------------ ----------- Loss from continuing operations before reorganization items (167) (450) (2,358) Reorganization items (Note 4) -- -- (1,878) ------------ ------------ ----------- Loss from continuing operations before income taxes (167) (450) (4,236) Income tax benefit (Note 14) 21 161 2,400 ------------ ------------ ----------- Loss from continuing operations before minority interest (146) (289) (1,836) Minority interest in loss from subsidiary 2 -- -- ------------ ------------ ----------- Loss from continuing operations (144) (289) (1,836) Income from discontinued operations (Notes 3 and 5) 438 724 13,443 ------------ ------------ ----------- Income before extraordinary gain 294 435 11,607 Extraordinary gain on forgiveness of debt (Note 3) -- -- 16,016 ------------ ------------ ----------- Net income $ 294 $ 435 $ 27,623 ============ ============ ============ Income (loss) per common share: Continuing operations $ (.02) $(.03) $ (.16) Discontinued operations .05 .07 1.14 ------------ ------------ ----------- Income before extraordinary gain .03 .04 .98 Gain on forgiveness of debt -- -- 1.36 ------------ ------------ ----------- Net income per common share $ .03 $ .04 $ 2.34 ============ ============ =========== Average number of shares outstanding 9,958,115 10,406,958 11,789,453 ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. 22 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
Common Treasury Unrealized Stock Stock appreciation ---------------------- -------------------------- of securities Number Number Accumulated available for Amount of shares Amount of shares Deficit sale ------ --------- ------ --------- ------------- ------------ Balance, January 1, 1993 $ 29,702 10,629,326 $ (1,042) 104,156 $ (44,768) $ - Net income - - - - 27,623 - Common stock issued 1,500 2,000,000 - - - - Treasury stock purchased - - (191) 255,600 - - ---------- ------------ ---------- ----------- ------------- ------------ Balance, December 31, 1993 31,202 12,629,326 (1,233) 359,756 (17,145) - Net income - - - - 435 - Treasury stock purchased - - (1,765) 2,436,455 - - ---------- ------------ ---------- ----------- ------------ ------------ Balance, December 31, 1994 31,202 12,629,326 (2,998) 2,796,211 (16,710) - Net income - - - - 294 - Adjustment to treasury stock purchased - - 47 (125,000) - - Appreciation of securities available for sale, net of income taxes (Note 6) - - - - 1,226 ---------- ------------ ---------- ----------- ------------ ----------- Balance, December 31, 1995 $ 31,202 12,629,326 $ (2,951) 2,671,211 $ (16,416) $ 1,226 ========== ============ =========== =========== ============= ===========
The accompanying notes are an integral part of these consolidated financial statements. 23 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 ------------- ------------- ---------- Cash flows from operating activities: Net income $ 294 $ 435 $ 27,623 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 788 348 1,510 Gain on sale of securities available for sale (343) - - Minority interest in earnings (2) - - Net gain on disposals of divisions - - (7,559) Gain on litigation settlement - - (8,639) Provisions for doubtful receivables related to previously discontinued businesses - - 2,233 Gain on debt forgiveness - - (16,016) Adjustments and changes in estimates related to previously discontinued businesses (480) (1,225) - Amortization of intangibles and other assets - - 116 (Gain) loss on sale of property and equipment - (93) 671 Provision for allowance for doubtful accounts 133 113 270 (Increase) decrease in accounts receivable (62) 258 626 Decrease in refundable income taxes - 100 6 Increase in inventories (17) (35) (466) (Increase) decrease in prepaid and other current assets (121) 114 304 (Increase) decrease in other assets (94) 57 (184) Decrease (increase) in other assets held for sale 19 - (180) (Decrease) increase in accounts payable (214) 366 (409) Decrease in other current liabilities, net (1,450) (1,408) (327) Decrease in other noncurrent liabilities - - (500) Deferred income taxes 3 317 (2,648) --------------- -------------- --------------- Net cash used in operating activities (1,546) (653) (3,569) --------------- -------------- ---------------
The accompanying notes are an integral part of these consolidated financial statements. 24 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 --------------- -------------- --------------- Cash flows from investing activities: Decrease (increase) in restricted cash $ 1,633 $ (2,900) $ - Payments received on other receivables and receivables from sale of businesses 709 4,153 8,500 Proceeds from sale of securities available for sale 387 - - Decrease (increase) in factored receivables, net 1,836 (3,310) (1,114) Investment in real estate held for sale (3,250) (3,684) (1,050) Purchase of property and equipment (960) (1,666) (1,379) Proceeds from sale of: Noncash assets of Exhaust division - - 6,503 Noncash assets of Performance division - - 31,880 Property and equipment, other - 2,206 223 Other assets held for sale - 34 250 Payment for purchase of restaurant assets (450) - (1,000) Other, net (5) (250) - --------------- -------------- --------------- Net cash (used in) provided by investing activities (100) (5,417) 42,813 --------------- -------------- --------------- Cash flows from financing activities: Proceeds from borrowings 1,115 4,151 - Repayments of debt (247) (185) (459) Repayments of debt subject to compromise - - (46,894) (Increase) decrease in treasury stock 47 (1,765) (191) --------------- -------------- --------------- Net cash provided by (used in) financing activities 915 2,201 (47,544) --------------- -------------- --------------- Net decrease in cash and cash equivalents (731) (3,869) (8,300) Cash and cash equivalents, beginning of period 1,142 5,011 13,311 --------------- -------------- --------------- Cash and cash equivalents, end of period $ 411 $ 1,142 $ 5,011 =============== ============== ===============
Supplemental Disclosure of Noncash Investing and Financing Activities See notes to financial statements for noncash investing and financing activities. The accompanying notes are an integral part of these consolidated financial statements. 25 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and summary of significant accounting policies: Business: Performance Industries, Inc. has three primary subsidiaries: o Performance Restaurants Group, Inc. (restaurant operations) o Performance Funding Corp. (receivable factoring) o Performance Camelback Development Corp. (real estate development) These subsidiaries conduct business primarily in Arizona and California. Prior to 1994, Performance Industries, Inc. operated in the general and specialty automotive parts and accessory businesses as Mr. Gasket Company. During 1993, the Company completed the disposition of those operations and has accounted for those businesses as discontinued operations (see Note 5). The Company also owns and leases certain real estate formerly used by the automotive businesses. One of the buildings being leased is owned by the Company's Mexican subsidiary, Fabricaciones Metalicas Mexicanas, S.A. (FMMSA). Performance Camelback Development Corp. has a 72% ownership interest in Camelback Plaza Development Corp. L.C., an Arizona limited liability company. Principles of consolidation: The consolidated financial statements include the accounts of Performance Industries, Inc., its wholly-owned subsidiaries and its majority owned real estate limited liability company. All significant intercompany balances and transactions are eliminated in consolidation. Basis of presentation: The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which principles, except as otherwise disclosed, assume that assets will be realized and liabilities will be discharged in the normal course of business. The Company (excluding its subsidiaries) filed a petition for relief under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the Central District of California ("the Bankruptcy Court") on April 21, 1991 (the "Filing Date"). On May 4, 1993, the Company's Plan of Reorganization was confirmed. See Note 2 for discussion of the bankruptcy proceedings. 26 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Organization and summary of significant accounting policies, continued: Cash equivalents: The Company considers all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. Fair value of financial instruments: The carrying amount of cash values and cash equivalents approximates fair value because of the short maturity of those instruments. The carrying amount of other financial instruments including accounts receivable, receivables from sale of business, factored receivables and current liabilities approximate the fair value of these instruments because of the short-term nature of the instruments. The carrying amount of long-term debt approximates fair value because the interest rates on the debt are comparable to current market rates on debt with similar terms. Advertising: Advertising costs are charged to operations as incurred. Accounting estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's significant estimates relate to realizability of certain receivables, valuation of net deferred tax assets, estimates of future liabilities resulting from discontinued operations, estimates of liabilities subject to compromise from the remaining bankruptcy claims, and certain litigation contingencies. Inventory: Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventory consists of food and beverages at restaurant locations. 27 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Organization and summary of significant accounting policies, continued: Property and equipment: Property and equipment are stated at cost and depreciated using the straight-line method over the following estimated useful lives; buildings, 35 years; machinery and equipment, furniture and fixtures and vehicles, 5 to 10 years; land improvements, 10 years. Leasehold improvements are depreciated over the term of the related lease. Securities available for sale: Securities available for sale are reported at fair value. Unrealized appreciation, net of tax, on securities available for sale are reported as a net amount in a separate component of shareholders' equity until realized. Gains and losses on the sale of securities available for sale are determined using the specific identification method. Fair values for securities available for sale are determined using quoted market prices. Income taxes: Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax benefit (expense) is the tax receivable (payable) for the period and the change during the period in deferred tax assets and liabilities. Factoring operations: The Company recognizes fees based upon a percentage of the gross factored receivables. The Company makes advances of up to 80% of the face amount of factored receivables. The remaining balance is held as a reserve for fees and charge-backs for uncollected receivables. Management's policy is to obtain a security interest in all borrower's receivables and obtain personal guarantees, when deemed necessary. Rental real estate: Rental real estate cost represents principally land lease costs, capitalized carrying costs, offsite improvements and building construction costs. Rental real estate is being depreciated using the straight-line method over the estimated useful life of the properties of approximately 35 years. 28 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Organization and summary of significant accounting policies, continued: Rental real estate, continued: Rental income is recognized on the straight-line basis over the life of the related leases. Lease incentives are recognized as reductions of rental income over the terms of the related leases. Reorganization items: Reorganization items include professional fees incurred as a result of reorganization, losses on executory contracts, and interest income earned as a result of suspending payments on liabilities subject to compromise. Income (loss) per common share: Income (loss) per common share is based upon the weighted average number of shares outstanding. The assumed exercise of employee stock options does not result in material dilution. 2. Bankruptcy proceedings and Plan of Reorganization: From April 21, 1991 through May 4, 1993, Performance Industries, Inc. (formerly Mr. Gasket Company) operated as debtor-in-possession under the supervision of the Bankruptcy Court. In Chapter 11, the shareholders' interests and substantially all liabilities as of the filing date were subject to compromise (see Note 3). The Plan of Reorganization (the "Plan"), which was implemented on May 4, 1993, called for the Company to raise cash from operations, new financing, or asset sales sufficient to pay the senior lender and the subordinated debt holders approximately $42,600,000 at the implementation date and the general unsecured trade creditors approximately 66% of their allowed claims over several years. The existing shareholders retained their equity interest subject to dilution by the issuance of approximately 16% of new equity to certain creditors as specified in the Plan. In December, 1992, the Company sold the assets of the Wheel and Tire business for approximately $11,348,000. On May 4, 1993, the Company sold the assets of its Performance business for approximately $34,000,000 (see Note 5). The funds from both of these sales were used to meet the requirements of the Plan. 29 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. Liabilities subject to compromise: During 1995, the Company negotiated settlement of a claim subject to compromise at December 31, 1994. The remaining liability for this claim of $173,000 is included in accrued expenses and other current liabilities on the accompanying consolidated balance sheet at December 31, 1995. Other liabilities subject to compromise at December 31, 1995 are approximately $750,000. Gain on forgiveness of debt on the statement of operations for 1993 includes $15,477,000 of liabilities subject to compromise and approximately $539,000 of other liabilities forgiven. The debt forgiveness was not subject to income tax. As a result of the bankruptcy filing, the Company did not accrue interest on unsecured debt from April 21, 1991 through May 4, 1993. Contractual interest on unsecured obligations for the period of the bankruptcy proceedings exceeded reported interest expense by $2,180,000 during 1993. Additions or deletions to the claims (liabilities subject to compromise) may arise from the determination by the Bankruptcy Court or agreement by parties in interest of allowed claims for contingencies and disputed collateral and amounts. The Company is in the process of negotiating settlements of the final claims outstanding. 4. Reorganization items: Reorganization items for 1993 consist of the following (in thousands): Professional fees $ (1,662) Rejection of executory contracts (350) Interest income 134 --------------- $ (1,878) =============== Cash flows from operating activities include the reorganization interest income and cash payments of $1,662,000 for reorganization professional fees for the year ended December 31, 1993. 30 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Discontinued operations: In December, 1993, the Company sold its remaining operations in the automotive aftermarket segment. Consequently, net sales, cost of sales, income and expenses related to all businesses in that segment were reclassified to discontinued operations in the accompanying statements of operations for 1993. Income from discontinued operations for 1995 and 1994 consists of adjustments to estimates in prior years. Net sales of the discontinued operations were approximately $28,000,000 for 1993. The sales of the automotive aftermarket businesses are described below. Wheel and Tire Business: During 1992, the Company sold its Wheel and Tire business in connection with its proposed plan of reorganization. Thenet sales price of the Wheel and Tire business was $11,348,000, consisting of $4,000,000 paid in January, 1993, $4,000,000 paid in March, 1993 pursuant to the terms of a secured promissory note and the balance was to be paid by December 31, 1993 pursuant to the terms of the purchase agreement. In September, 1993 in consideration of the immediate payment of $500,000, the Company renegotiated the remaining balance of $3,348,000 to $2,000,000, evidenced by an unsecured promissory note. During 1994, the Company renegotiated the remaining balance of its unsecured promissory note after receiving a principal payment of $360,000. The Company accepted a new note for $1,340,000 (see Note 7). Performance business: In connection with its Plan of reorganization, on May 4, 1993, the Company sold to Echlin Acquisitions, Inc. (Echlin), substantially all of the net assets of its Performance business, including most of its accounts receivable, inventory, manufacturing equipment and intangible assets from its manufacturing operation in Cleveland, Ohio. The Performance business manufactured a number of high performance automotive products, including gaskets and transmissions. As part of the sale agreement, the Company leased its Cleveland manufacturing facility to the purchaser. The lease contained an option to purchase the property for $3,500,000. During 1993, management anticipated that the option would be exercised and reduced the carrying value of the building by approximately $3,000,000 to its net realizable value of $3,500,000. The adjustment is included in income from discontinued operations for 1993. The option was exercised in 1994. 31 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Discontinued operations, continued: Performance business, continued: The net sales price of the Performance business was $31,880,000 in cash and a holdback receivable of approximately $2,000,000 held in escrow for any losses incurred subsequent to the acquisition date. The holdback was paid in full during 1994. The terms of the agreement for the sale of the Performance business provide that the Company will not engage in any business of manufacturing or selling high performance custom products in the automotive aftermarket for a period of four years. In addition, Echlin entered into non-compete agreements with certain Company executives (see Note 19). Exhaust business: In July, 1993, the Company adopted a formal plan to sell its Exhaust business. On December 3, 1993, the Company completed the sale of the Exhaust business. The assets sold consisted primarily of accounts receivable, inventories, and property, plant and equipment. The aggregate selling price of the Exhaust business was approximately $7,500,000. The terms of the agreement for the sale of the Exhaust business provide that the Company will not engage in any business of manufacturing or selling exhaust systems products for five years. In addition, the buyer entered into noncompetition agreements with certain Company executives (see Note 19). Litigation settlement: On March 21, 1991, a jury verdict was rendered against the Company in the U.S. District Court for the Southern District of Florida in the sum of $10,013,500. The plaintiff, Rally Manufacturing, Inc., was awarded damages for Trade Dress and Trademark infringement, and unfair competition. The Company accrued the entire award as a liability subject to compromise. During 1993, the Company settled the lawsuit for $1,375,000. A gain on the settlement of approximately $8,639,000 has been included in income from discontinued operations in the accompanying statements of operation for 1993. 32 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Discontinued operations, continued: Thecaption "Income from discontinued operations" in the accompanying consolidated statement of operations for the years ended December 31 consists of the following (in thousands):
1995 1994 1993 ------------- ------------ -------- Loss from operations of general and specialty automotive parts and accessory divisions $ - $ - $ (997) Gain on the sale of general and specialty automotive parts and accessory divisions net of income taxes - - 8,034 Litigation settlement - - 8,639 Adjustments for estimated allowances and reserves on receivables and liabilities of discontinued operations, net of income taxes 438 724 (2,233) ------------- ------------ ------------- $ 438 $ 724 $ 13,443 ============= ============ =============
The gain on sale for 1993 includes a deferred tax benefit of approximately $248,000 as a result of reversing deferred tax liabilities established in previous years related to the assets and liabilities of the divisions sold. 6. Securities available for sale: During 1995, the Company implemented SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, related to the Company's investment in certain equity securities. The securities did not have readily determinable market value and were restricted from sale at December 31, 1994 and, therefore, were recorded as "other assets" on the 1994 balance sheet. In 1995, a portion of the securities became marketable as a result of a public stock offering, and were sold for a gain of approximately $343,000. The remaining securities become available for sale in May, 1996 subject to certain SEC limitations. As a result, the Company considers its investments in equity securities to be available for sale as of December 31, 1995. At December 31, 1995, the aggregate fair value of securities available for sale was approximately $1,783,000 with unrealized gains of approximately $1,572,000 and a cost basis of approximately $211,000. 33 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. Receivables from sale of businesses: Receivables from sale of businesses at December 31, 1995 and 1994 consist of the following (in thousands):
1995 1994 ------ ------ Unsecured note receivable, interest at approximately 8%, principal and interest payments due in 8 installments per year of approximately $60,000 through May, 1998 $ 956 $1,340 Unsecured note receivable, interest at 8%, principal and interest payments due in monthly installments of $5,000 through June, 1998 135 179 Note receivable, interest at 12.5%, principal and interest payments due in monthly installments of approximately $6,600 through July, 1997, secured by equipment 126 172 Other 63 93 ---- ---- 1,280 1,784 Less allowance for doubtful accounts (280) (760) ---- ---- $1,000 $1,024 ====== ======
Approximate future maturities on receivables from sale of businesses for the next five years at December 31, 1995 are as follows (in thousands): 1996 $ 580 1997 582 1998 118 1999 - 2000 - 34 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Investment in real estate: Investment in real estate consists of the following at December 31, 1995 and 1994: 1995 1994 --------------- -------------- Rental real estate $ 10,980 $ 2,421 Less accumulated depreciation (1,076) (862) --------------- -------------- 9,904 1,559 Real estate under development - 4,896 Undeveloped real estate 1,169 1,118 --------------- -------------- $ 11,073 $ 7,573 =============== ============== The Company's development subsidiary owns a retail and restaurant project in Phoenix, Arizona. The development company completed the project in 1995. The subsidiary has entered into lease agreements with the current and future tenants of the project (see Note 13). During 1994, the results of operations for the subsidiary were minimal and were capitalized as incidental operations to the project cost. Certain rental property was reclassified from "property and equipment" to "investment in real estate" in the accompanying consolidated balance sheet for 1994. 9. Property and equipment, net: The components of property and equipment consist of the following (in thousands): 1995 1994 -------------- --------------- Machinery and equipment $ 1,222 $ 808 Furniture and fixtures 684 548 Transportation equipment 493 493 Leasehold improvements 1,958 1,295 Equipment held under capital leases 134 - -------------- --------------- 4,491 3,144 Less accumulated depreciation (913) (438) -------------- --------------- $ 3,578 $ 2,706 ============== =============== 35 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. Other assets: Other assets consist of the following (in thousands):
1995 1994 -------------- --------------- Restaurant small wares $ 427 $ 412 Liquor licenses 183 181 Deposits and other 311 484 -------------- --------------- $ 921 $ 1,077 ============== =============== 11. Long-term debt and capital lease obligations: Long-term debt and capital lease obligations consist of the following (in thousands): 1995 1994 -------------- -------------- Notepayable, bank, with interest at 8.81%, principal and interest due in 40 monthly installments of approximately $43,500 with the remaining principal and interest balance due May 1, 1999, secured by deed of trust on rental real estate. $ 4,900 $ - Notepayable, Mexico corporation, with interest at prime plus 3-7/8%, with monthly principal payments of $6,000 plus interest through December, 2006, secured by undeveloped real estate. 792 864 Revolving line of credit, finance company, with interest at prime plus 4% (12.75% at December 31, 1995), payable monthly, maturing July, 1997, secured by factored receivables and a personal guarantee of the Company's principal shareholder. 367 - Unsecured note payable, State of California, with interest at 6%, with monthly principal payments of $25,000 plus interest through June, 1999 1,050 1,200 Notepayable, unrelated corporation, non-interest bearing, paid in a single payment in January, 1996, secured by restaurant equipment and leasehold deed of trust. 100 - Capital lease obligations, with interest at approximately 10%, payable in aggregate monthly payments of approximately $2,900 through November, 2000. 130 -
36 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. Long-term debt and capital lease obligations, continued: 1995 1994 ----------- ----------- Other $ 6 $ 28 Construction loans refinanced as long-term debt during 1995 - 4,151 ----------- ----------- 7,345 6,243 Less current portion (594) (4,394) -------- ----------- $ 6,751 $ 1,849 =========== =========== Cash paid for interest was approximately $700,000, $70,000 and $77,000 during 1995, 1994 and 1993, respectively. Approximately $273,000 and $48,000 of interest costs were capitalized as construction period interest on the real estate project during 1995 and 1994, respectively. Approximate future maturities of long-term debt, excluding capital lease obligations, for the next five years as of December 31, 1995 are as follows (in thousands): 1996 $ 573 1997 841 1998 484 1999 4,814 2000 72 Direct financing costs associated with obtaining a new line of credit are included in other assets and is being amortized over the term of the agreement. At December 31,1995, direct financing costs totalled approximately $79,000, net of accumulated amortization of $27,000. 37 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. Accrued expenses and other current liabilities: At December 31, 1995 and 1994, the components of accrued expenses and other current liabilities consist of the following (in thousands): 1995 1994 -------------- --------------- Deferred rental income $ 150 $ - Reserve for environmental remediation and property restoration 261 358 Gift certificates 83 74 Legal matters 60 38 Accrued worker's compensation insurance liability - 224 Sales taxes payable 156 110 Other accruals 306 178 -------------- --------------- $ 1,016 $ 982 ============== =============== 13. Leases: As lessee: ---------- The Company's restaurant subsidiary leases eight restaurant locations under operating leases including a restaurant currently under construction. These leases expire at various dates through 2010 and require aggregate annual payments of approximately $1,300,000. The leases also contain provisions for contingent rental payments ranging from 5% to 10% of sales. During 1995 and 1994, the restaurants paid contingent rent of approximately $332,000 and $350,000, respectively. The Company's restaurant subsidiary also leases certain equipment under capital leases. The leases require aggregate monthly payments of approximately $2,900 through November, 2000. The Company's development subsidiary leases land under an operating lease. The lease requires annual payments of approximately $200,000 through 2052. During 1995 and 1994, rent payments of approximately $48,000 and $150,000, respectively, were capitalized as construction period costs and are included with real estate held for sale. The Company and its subsidiaries also lease their office space and two warehouse facilities under operating leases. These leases require aggregate monthly payments of approximately $15,000 and expire at various dates through 1998. 38 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. Leases, continued: As lessee, continued: Future minimum lease payments for capital and noncancellable operating leases as of December 31, 1995 are as follows (in thousands): Capital Operating leases leases ------------- --------------- 1996 $ 37 $ 1,818 1997 34 1,622 1998 34 1,534 1999 34 1,440 2000 26 1,542 Thereafter - 16,065 -------------- --------------- 165 $ 24,021 =============== Less amount representing interest (35) -------------- Present value of minimum lease payments on capital leases $ 130 ============== Rent expense for operating leases was approximately $1,723,000, $1,398,000 and $689,000 for 1995, 1994 and 1993, respectively. As lessor: The Company leases to others certain land and buildings in Mexico owned by the Company. The lease agreements are through January, 1997 and are renewable at the option of the lessees through January, 2000. Rental income related to these leases was approximately $536,000, $488,000 and $278,000 for 1995, 1994 and 1993, respectively. The Company's development subsidiary has entered into operating leases for its development project with five primary tenants. The leases call for aggregate monthly rental payments of approximately $94,000. The leases are for periods of 5 to 25 years and include rent escalation clauses every 3 to 5 years tied to the consumer price index. Certain leases also include percentage rent charges based on gross revenues of the tenants. 39 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. Leases, continued: Aggregate minimum future rentals under the lease agreements as of December 31, 1995 are as follows (in thousands): 1996 $ 1,677 1997 1,566 1998 1,239 1999 1,146 2000 1,223 Thereafter 15,219 $ 22,070 14. Income taxes: The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" as of January 1, 1994. There was no cumulative effect on prior years from the change in accounting for income taxes. Income tax benefit (expense) consists of the following (in thousands):
1995 1994 1993 --------------- -------------- ---------- Federal: Current $ - $ - $ - Deferred (349) (317) 2,648 Foreign (16) (23) - State and local (2) - - --------------- -------------- --------------- $ (367) $ (340) $ 2,648 =============== ============== =============== Allocated to: Continuing operations $ 21 $ 161 $ 2,400 Discontinued operations (42) (501) 248 Unrealized appreciation on securities available for sale (346) - - --------------- -------------- --------------- $ (367) $ (340) $ 2,648 =============== ============== ===============
40 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. Income taxes, continued: Thefollowing is a reconciliation between the income tax benefit from continuing operations and income taxes calculated at the statutory federal income tax rate for continuing operations, 35% for 1995 and 1994 and 34% for 1993 (in thousands):
1995 1994 1993 ------------- ------------- --------- Income tax benefit at statutory rate $ 58 $ 158 $ 1,440 Foreign and state income taxes (18) (23) - Tax effect of valuation allowance on deferred tax assets (25) 26 960 Other 6 - - ------------- ------------- ------------- Income tax benefit from continuing operations $ 21 $ 161 $ 2,400 ============= ============= =============
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss and tax credit carryforwards. Significant components of the Company's net deferred tax assets as of December 31, 1995 and 1994 are as follows (in thousands):
1995 1994 --------------- ---------- Current deferred tax assets and liabilities: Reserves not currently deductible $ 552 $ 1,200 Unrealized gain on investment (346) - Valuation allowance (206) (946) --------------- --------------- Net current deferred tax asset $ - $ 254 =============== =============== Non-current deferred tax assets and liabilities: Difference between book and tax basis of assets $ (144) $ - Capital loss and contribution carryforwards 9 - Net operating loss carryforwards 8,662 7,861 General business credit carryforwards 444 385 --------------- --------------- 8,971 8,246 Valuation allowance (7,237) (6,417) --------------- --------------- Net non-current deferred tax asset $ 1,734 $ 1,829 =============== ===============
41 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. Income taxes, continued: The Company has recorded a net deferred tax asset of $1,734,000 primarily reflecting the benefit of net operating loss carryforwards. Realization is dependent upon generating sufficient taxable income prior to the expiration of the carryforwards. Although realization is not assured, management believes it is more likely than not that all of the net deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. The Company has available at December 31, 1995, federal net operating loss carryforwards and unused general business credits, which may provide future tax benefits as follows (in thousands): Unused Unused federal federal net general Year of operating loss business expiration carryforwards credits ---------- ------------- ------- 1997 $ - $ 348 1998 1,151 - 2003 - 37 2005 2,585 - 2006 3,866 - 2007 7,015 - 2008 2,997 - 2009 3,257 29 2010 2,272 30 --------------------- -------------------- $ 23,143 $ 444 ===================== ==================== The Company has net operating carryforwards for state income tax purposes of approximately $11,000,000 which expire through 2000. 15. Stock option plans: The Company has a stock option plan which provides for a maximum of 2,000,000 shares of common stock that may be issued to employees, directors, or consultants of the Company and its subsidiaries. The option price for options granted to eligible employees must be at least 100% of the fair market value of the stock at the time the options are granted. The option price for options granted to non-employees is determined by the Board of Directors. Options granted to employees are not exercisable after ten years. Restrictions on the time to exercise options given to non-employees are set forth in the options agreements. 42 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. Stock option plans, continued: At December 31, 1995, all outstanding options were exercisable and 245,000 shares were available for future grant. All outstanding options expire through 2005. A summary of transactions with respect to the current stock option plans follows: Number Option price of shares per share --------- --------- Balance at January 1, 1995 1,480,000 $.5625 to $.75 Issued in 1995 1,755,000 $.219 to $.241 Cancelled in 1995 (1,480,000) $.5625 to $.75 ------------- Balance at December 31, 1995 1,755,000 $.219 to $.241 ============= 16. Litigation: In November, 1993, certain shareholders dissented from the sale of the Company's exhaust products business. As a result, the company filed an action to obtain a determination of the "fair cash value" of shares held by those shareholders as of November 28, 1993, as if the sale had not occurred. The Company settled with the majority of the dissenting shareholders during 1994 for $.75 a share. The remaining defendants, who hold 461,500 shares, are entitled to payment of "fair cash value" of the shares within 30 days of the determination of the value by the court. Two of the remaining dissenting shareholders have filed an action against the Company and certain current and former directors, alleging that certain actions taken by the Company and management have lowered the value of the Company's stock. Management is aggressively defending this action and does not currently expect to incur any material liability at its conclusion. In another matter, an insurance carrier has filed an action against the Company alleging that Company representatives failed to notify the insurance carrier of a product liability claim in a timely manner. The carrier voluntarily paid out approximately $1,700,000 in benefits to settle the claim. Management believes the action to be without merit and intends to vigorously defend the suit. 43 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. Litigation, continued: The Company is involved in various other claims and legal actions arising in the ordinary course of business, including product liability and environmental remediation claims from discontinued operations. During 1995, the Company settled certain product liability claims for approximately $550,000. Accrued reserves remaining for potential losses as a result of product liability claims are approximately $350,000 at December 31, 1995. Included in other current liabilities (Note 12) are accrued reserves for environmental remediation claims. In the opinion of management, any additional liabilities related to legal actions will not have a material adverse effect on the Company's consolidated financial condition. 17. Commitments: During 1993, Performance Restaurant Group, Inc. (PRG) entered into a consulting agreement with the previous owner of the six restaurants in California whereby PRG pays $90,000 annually through December, 1999. The agreement restricts disclosure of information and also includes restrictive competition clauses. 18. Contingencies: An investigation of environmental matters related to facilities and property owned and leased by the Company was performed during 1992 to determine contingencies that would affect the Company's emergence from Chapter 11. Certain reports received by the Company identified areas of environmental contamination and potential environmental contamination. Management believes that certain predecessors-in-interest may bear either full or partial liability for remediation of affected areas. Certain predecessors-in-interest and governmental agencies were notified by the Company of the related possible liabilities. In addition, the Company notified its insurance carriers of potential claims under its general liability and property insurance coverage from prior years. Locations reviewed for potential environmental liability included the following: Manufacturing facility in California: This facility housed the manufacturing plant of the Wheel business. All assets at this facility were sold and the buyer vacated the premises (Note 5). 44 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. Contingencies, continued: An environmental survey was conducted in the fall of 1991. Two areas for further investigation were identified. Further investigation in the spring of 1992 disclosed ground contamination and possible seepage into groundwater. Management believed the contamination to have existed prior to its purchase of the business in 1982 and has notified its predecessor-in-interest. The Company has accrued the estimated minimum remediation costs. These costs are included as liabilities subject to compromise in the accompanying consolidated balance sheets. All appropriate county, state and federal agencies were notified regarding contamination at this site. To management's knowledge, no response was made by any notified governmental agency nor was the facility inspected by any such agency. However, the Company may, at a later date, be ordered to undertake further testing and/or remediation at the location. Warehousing and office facility in Ohio: In 1990, potential contamination was discovered at this location. Consultants were retained to perform testing and investigation of the site to determine the extent of the contamination. In compliance with bankruptcy statutes, rules and regulations regarding the dischargeability of claims, in January, 1993, the Company notified the Ohio Environmental Protection Agency (EPA) of contamination at the site. Environmental studies performed determined that the contamination is confined to the site with no evidence of migration to groundwater or surrounding properties. Management estimated the costs of remediation to be as much as $5,600,000. The Company believed that a former owner/operator of the site, which is a Fortune 500 company, caused the contamination. The Company negotiated an agreement with the former owner/operator regarding indemnification for the costs of remediation. The agreement required that remediation costs be shared by the Company, the Fortune 500 company and Echlin. The Company's responsibility with respect to the agreement was to pay remediation costs and to guarantee payment of costs by Echlin related to specific clean-up areas pursuant to a "Final Closure Plan" approved by the Ohio EPA. The "Closure Plan" was approved by Ohio EPA in February, 1995. The Company incurred approximately $170,000 of costs related to this clean-up in 1994. 45 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. Related party transactions: The Company leased two buildings in Cleveland, Ohio, used predominately for manufacturing, from Joe Hrudka, the Company's principal shareholder and Chairman of the Board, as successor in interest to Hrudka Realty Company. The buildings were vacated as of May, 1992. Under the lease, the Company was required to return the building in essentially the same state of repair as the building was in upon the signing of the lease. The Company expended approximately $137,000 and $40,000 for repairs in 1994 and 1993, respectively. During 1993, the Company had a month-to-month lease with F.W. Investments for 35,000 square feet of warehouse and office space in Tempe, Arizona. Edmund L. Fochtman, Jr., a Director and Officer of the Company, is a general partner in F.W. Investments. The rental agreement required monthly payments of $11,500. This lease expired in January, 1994. Rockside Consultants received $50,000 in 1993 from the Company for consulting services on financial and general business matters. Howard B. Gardner, formerly an officer and director, is the principal of Rockside Consultants. The agreement for the sale of the Company's Performance business included several Consulting Services and Non-competition agreements with directors and officers of the Company who are also shareholders. The agreements have terms of four years with initial cash payments and monthly installments over either a 12 or a 48-month term. The total amount to be paid to the directors and officers under the three agreements is $2,800,000, including $500,000 which was paid upon closing of the sale. The agreement for the sale of the Company's Exhaust business also included consulting and noncompetition agreements with three individuals who are directors, former directors or officers of the Company and who are also shareholders. The agreements have terms of five years for consulting services and fifteen years for noncompetition. The total amount paid to the directors and officers under the three agreements was $2,000,000, which was paid upon closing of the sale. During 1993, the Company financed the sale of certain assets for approximately $238,000 to the former plant manager of the Exhaust facility in Mexico. The agreement calls for monthly payments of approximately $6,600 through February, 1997. In December, 1993, the Company signed an exclusive broker agreement with Industrial Brokerage, Inc., which is owned by Jonathan Tratt, a director of the Company, to sell its facility in Mexicali, Mexico. 46 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 20. Principal business segments: The Company has three primary business segments, its restaurant, factoring, and real estate operations. Operating income by segment represents revenues less costs of revenues, selling, general and administrative expenses, interest expense, plus other income, net before allocation of corporate general and administrative expense, interest and other corporate income, net.
1995 1994 1993 --------------- -------------- ---------- Revenues and other income: Restaurants $ 19,357 $ 17,350 $ 274 Factoring 896 1,065 86 Real estate 1,345 589 506 --------------- -------------- --------------- $ 21,598 $ 19,004 $ 866 =============== ============== =============== Operating income (loss): Restaurants $ (166) $ 105 $ (41) Factoring 676 895 43 Real estate 221 291 349 --------------- -------------- --------------- Total principal business segments 731 1,291 351 Unallocated corporate general and administrative expenses and other income, net (898) (1,741) (2,709) --------------- -------------- --------------- $ (167) $ (450) $ (2,358) =============== ============== =============== Depreciation: Restaurants $ 506 $ 194 $ 5 Factoring - - - Real estate 214 67 255 Corporate and other 68 87 1,250 --------------- -------------- --------------- $ 788 $ 348 $ 1,510 =============== ============== ===============
47 PERFORMANCE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 20. Principal business segments, continued:
1995 1994 1993 --------------- -------------- --------------- Capital expenditures: Restaurants $ 1,441 $ 1,652 $ 811 Factoring - - - Real estate 3,448 4,548 - Corporate and other 5 14 1,379 --------------- -------------- --------------- $ 4,894 $ 6,214 $ 2,190 =============== ============== =============== Identifiable assets: Restaurants $ 4,932 $ 3,890 Factoring 1,978 4,571 Real estate 12,418 7,662 Corporate and other 5,550 7,985 --------------- -------------- $ 24,878 $ 24,108 =============== ==============
The Company's restaurant subsidiary incurred approximately $425,000, $334,000 and $14,000 of advertising expense in 1995, 1994 and 1993, respectively. 21. Allowances for doubtful accounts: The changes in allowances for doubtful accounts are as follows:
1995 1994 1993 ------------ ------------ ------------ Balance at beginning of year $ 1,016 $ 4,186 $ 2,603 Additions charged to cost and expenses 133 113 3,373 Reduction of estimated allowances from discontinued operations (480) (1,225) - Accounts written off (163) (2,058) (1,790) ------------ ------------ ------------ Balance at end of year $ 506 $ 1,016 $ 4,186 ============ ============ ============
48 EX-10.57 2 LOAN AND SECURITY AGREEMENT LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT, dated as of July 19, 1995, is entered into between CAPITAL FACTORS, INC., a Florida corporation ("Capital"), and PERFORMANCE FUNDING CORP., an Arizona corporation ("Borrower"). The parties agree as follows: 1. DEFINITIONS In addition to the defined terms contained in the first paragraph above, as used herein, the following terms shall have the following definitions: 1.1 The term "Accounts" means all presently existing and hereafter arising accounts, instruments, notes, drafts, chattel paper and all other forms of obligations owing to Borrower arising out of the sale or lease of goods or the rendition of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties and other security therefor, as well as all merchandise returned to or reclaimed by Borrower. 1.2 The term "this Agreement" means this Loan and Security Agreement, any concurrent or subsequent riders or exhibits to this Loan and Security Agreement, and any extensions, supplements, amendments or modifications to or in connection with this Loan and Security Agreement and/or to any such riders or exhibits. 1.3 The term "Borrower's Books" means all of Borrower's books and records including, but not limited to: minute books; ledgers; records indicating, summarizing or evidencing Borrower's assets and liabilities; all information relating to Borrower's business operations or financial condition; and all computer programs, disc or tape files, printouts, runs, and other computer prepared information and the equipment containing such information. 1.4 The term "Borrowing Base Certificate" means the certificate, substantially in the form of Exhibit 1.4, with appropriate insertions, to be submitted to Capital by Borrower pursuant to this Agreement and certified as true and correct by the Chief Executive Officer or the Chief Financial Officer of Borrower or such other employee or agent of Borrower who may have specific knowledge of the matters set forth therein. 1.5 The term "Business Day" means any day other than a Saturday, Sunday or holiday on which banks in the State of California are authorized by law to close. 1.6 The term "Capital Expenses" means all of the following: (i) costs or expenses (including, without limitation, taxes and insurance premiums) required to be paid by Borrower under this Agreement or any of the other Loan Documents which are paid or advanced by Capital; (ii) filing, recording, publication and search fees paid or incurred by Capital; and (iii) costs, fees (including reasonable attorneys' and paralegals' fees) and expenses incurred by or charged to Capital: (a) to audit the Collateral; (b) to correct any default or enforce any provision of this Agreement or any of the other Loan Documents whether or not litigation is commenced; (c) in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale and/or advertising to sell the Collateral, whether or not a sale is consummated; (d) in the event that the Security Documents are being foreclosed, in collecting the Contracts, with or without suit, or gaining possession of, maintaining, storing, selling, or preparing for sale and advertising to sell the Property; and (e) in structuring, drafting, reviewing, amending, defending or concerning this Agreement or any of the other Loan Documents. 1.7 The term "the Code" means the California Uniform Commercial Code, and any and all terms used in this Agreement which are not defined herein but which are defined in the Code shall be construed under this Agreement in accordance with the definition ascribed to such terms under the Code. 1.8 The term "Collateral" means all of the following: A. The Accounts; B. The Contracts and all of Borrower's rights and benefits under the Contracts, including, but not limited to, Borrower's right to receive payment in full of the indebtedness owing to Borrower thereunder, whether now or hereafter existing, together with any and all guarantees and/or security therefor, as well as all of Borrower's Books relating thereto; C. The Security Documents, together with any and all of Borrower's rights in and to the Property covered thereby and in and to any policies of insurance relative to such Property; D. The Equipment; E. The General Intangibles; F. Any money, deposit accounts or other assets of Borrower in which Capital receives a security interest or which hereafter come into the possession, custody or control of Capital; and G. The proceeds of any of the foregoing, including, but not limited to, proceeds of insurance covering the Collateral, or any portion thereof, and any and all accounts, 2 equipment, General Intangibles, inventory, money, deposit accounts or other tangible and intangible property resulting from the sale or other disposition of the Collateral, or any portion thereof or interest therein, and the proceeds thereof. 1.9 The term "Contract Debtor" means each person or entity which is obligated to Borrower to perform any duty under or to make any payment pursuant to the terms of a Contract. 1.10 The term "Contract(s)" means all of Borrower's right, title and interest in and to each presently existing and hereafter arising agreement to purchase accounts, factoring agreement, loan agreement, contract right, instrument, note, chattel paper, and any other agreement creating or evidencing obligations owing to Borrower, all rights of Borrower to receive payment pursuant to the terms of each of the foregoing, together with all guarantees and other rights of Borrower obtained in connection therewith, and any collateral therefor. 1.11 The term "Daily Balance" means the amount determined by taking the amount of the Obligations owed at the beginning of a given day, adding any new Obligations advanced or incurred on such date, and subtracting any payments or collections which are deemed to be paid on that date under the provisions of this Agreement. 1.12 The term "Eligible Contract(s)" means each of those Contracts which satisfy all of the following conditions: (i) pursuant to which Borrower has loaned or advanced monies to a Contract Debtor, (ii) which, along with all loans, advances and collateral therefor, have been validly assigned to Capital, (iii) which strictly comply with all of Borrower's warranties and representations to Capital contained herein; (iv) with respect to which the Contract Debtor is not more than sixty (60) days delinquent in the making of any scheduled payment thereunder; (v) are not subject to any defense, counterclaim, offset, discount or allowance; (vi) the outstanding advances made by Borrower under such Contract do not exceed more than thirty five percent (35%) of Borrower's Tangible Effective Net Worth; and (vii) not more than twenty five percent (25%) of the outstanding accounts assigned to Borrower under such Contract are subject to a dispute by the account debtors thereunder. 1.13 The term "Eligible Underlying Collateral" means, with respect to each Eligible Contract, those accounts owing to a Contract Debtor which have been validly assigned to Borrower pursuant to the Contract, contain payment terms of net sixty (60) days, or less, from the date of the invoice, are not past due more than ninety (90) days from the date of the invoice, and strictly comply with all of the Contract Debtor's warranties and representations to Borrower contained in the Contracts and Security Documents; but excluding the following: (i) accounts which remain unpaid in whole or in part more than ninety (90) days following the date of the invoice corresponding to such account; (ii) accounts 3 with respect to which the goods are placed on consignment, guaranteed sale or other terms by reason of which the payment by the customer may be conditional; (iii) accounts with respect to which the customer is not a resident of the United States; (iv) accounts as to which the account debtor has disputed its obligation to make payment thereof; (v) accounts with respect to which the customer is the United States or any department, agency or instrumentality of the United States; (vi) accounts with respect to which the customer is a subsidiary of, related to, affiliated with, or has common shareholders, officers or directors with the Contract Debtor; (vii) accounts with respect to which the Contract Debtor is or may become liable to the customer for goods sold or services rendered by the customer to the Contract Debtor; (viii) with respect to any given Contract Debtor, that portion of the accounts owed by a customer which exceed forty percent (40%) of all Eligible Underlying Collateral owing to that Contract Debtor; (ix) all of the accounts owed by a customer of a Contract Debtor where twenty-five percent (25%) or more of all of the accounts owed by that customer are past due more than sixty (60) days from the date of the invoice; and (x) all accounts owed to a Contract Debtor by a customer that is the subject of an Insolvency Proceeding. 1.14 The term "Equipment" means all of Borrower's present and hereafter acquired machinery, computers, equipment, furniture, furnishings, fixtures, motor vehicles, tools, goods and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions and improvements thereto, wherever located. 1.15 The term "Event of Default" means the occurrence of any one of the events set forth in Section 9. 1.16 The term "Facility Fee" shall have the meaning set forth in Section 2.9B. 1.17 The term "General Intangibles" means all of Borrower's present and future general intangibles and all other presently owned or hereafter acquired intangible personal property of Borrower (including, without limitation, any and all choses or things in action, goodwill, patents, trade names, trademarks, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, infringement claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, deposit accounts, tax refunds and tax refund claims) other than goods and accounts, as well as Borrower's Books relating to any of the foregoing. 1.18 The term "Guaranties" means the following general continuing guaranties: A. That certain General Continuing Guaranty, of even date herewith, executed by Joseph Hrudka in favor of Capital with respect to the present and future Obligations. 4 B. That certain General Continuing Guaranty, of even date herewith, executed by PII in favor of Capital with respect to the present and future Obligations. 1.19 The term "Initial Term" shall have the meaning set forth in Section 3.1A. 1.20 The term "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the federal Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including, but not limited to, assignments for the benefit of creditors, formal or informal moratoriums, compositions or extensions generally with its creditors. 1.21 The term "Judicial Officer or Assignee" means any trustee, receiver, controller, custodian, assignee for the benefit of creditors or any other person or entity having powers or duties like or similar to the powers and duties of a trustee, receiver, controller, custodian or assignee for the benefit of creditors. 1.22 The term "Loan Documents" means collectively this Agreement and any other agreements entered into between Borrower and Capital in connection with this Agreement. 1.23 The term "Maximum Credit Line" means Two Million and 00/100 Dollars ($2,000,000.00). 1.24 The term "Obligations" means any and all loans, advances, debts, liabilities (including, without limitation, any and all amounts charged to Borrower's account pursuant to any agreement authorizing Capital to charge Borrower's account), obligations, lease payments, guaranties, covenants and duties owing by Borrower to Capital of any kind and description (whether advanced pursuant to or evidenced by this Agreement, any of the other Loan Documents, or any other instrument, or by any other agreement between Capital and Borrower and whether or not for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including, without limitation, any debt, liability or obligation owing from Borrower to others which Capital may have obtained by assignment or otherwise, and further including, without limitation, all interest not paid when due and all Capital Expenses which Borrower is required to pay or reimburse by this Agreement, by law, or otherwise. 1.25 The term "Over Advance" shall have the meaning set forth in Section 2.2. 1.26 The term "PII" means Performance Industries, Inc., an Arizona corporation. 5 1.27 The term "Potential Event of Default" means an event which with the passage of time or the giving of notice or both would constitute an Event of Default under this Agreement. 1.28 The term "Prime Rate" means the variable rate of interest, per annum, most recently announced by the Reference Bank as its "prime rate," with the understanding that the Reference Bank's "prime rate" is one of its index rates and merely serves as a basis upon which effective rates of interest are calculated for loans making reference thereto and may not be the lowest or best rate at which the Reference Bank calculates interest or extends credit. 1.29 The term "Property" means all of the personal and real property collateral described in the Security Documents. 1.30 The term "Reference Bank" means Citibank, N.A., and if at any time during the term of this Agreement such bank shall no longer publish a prime rate of interest or shall otherwise cease to exist, Capital shall be entitled to designate as the "Reference Bank" any bank whose prime rate of interest is published from time to time in the Wall Street Journal. 1.31 The term "Renewal Term" shall have the meaning set forth in Section 3.1. 1.32 The term "Security Document(s)" means all security agreements, chattel mortgages, leases, deeds of trust, mortgages, or other security instruments or agreements of every type and nature securing the obligations of a Contract Debtor under a Contract. 1.33 The term "Tangible Effective Net Worth" means net worth as determined in accordance with generally accepted accounting principles consistently applied, increased by debt subordinated to Capital and decreased by the following: patents, licenses, leasehold improvements, goodwill, subscription lists, organization expenses, monies due from affiliates (including officers, directors and shareholders), security deposits, and prepaid costs and expenses. 1.34 "Unused Line Fee" shall have the meaning set forth in Section 2.9A. 1.35 Other Definitional Provisions. References to "Sections", "subsections", and "Exhibits" shall be to Sections, subsections, and Exhibits, respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in Section 1 may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. In this Agreement, words importing any gender include the other genders; the words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation"; references to agreements and other contractual instruments shall be deemed to 6 include subsequent amendments, assignments, and other modifications thereto, but only to the extent such amendments, assignments and other modifications are not prohibited by the terms of this Agreement; references to any person includes their respective permitted successors and assigns or people succeeding to the relevant functions of such persons; and all references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. 2. LOANS AND TERMS OF PAYMENT 2.1 Credit Facility. Subject to the provisions contained in Section 2.4, upon the request of Borrower, made at any time and from time to time during the term of this Agreement, and so long as no Event of Default or Potential Event of Default has occurred, Capital shall lend to Borrower with respect to each Eligible Contract the lesser of: (i) eighty percent (80%) of the aggregate amount of all advances made by Borrower pursuant to such Eligible Contract; or (ii) sixty five percent (65%) of the amount of the Eligible Underlying Collateral assigned by the Contract Debtor to Borrower pursuant to such Eligible Contract; provided, however, that in no event shall Capital be obligated to make advances to Borrower under this Section 2.1 whenever the aggregate amount of the outstanding advances made pursuant to this Section 2.1, or the amount that would be outstanding if Capital made a requested advance, exceeds, at any one time, the Maximum Credit Limit. 2.2 Over Advances. All of the advances made pursuant to Section 2.1 shall be added to and deemed part of the Obligations when made. If, at any time and for any reason, the aggregate amount of advances made pursuant to Section 2.1 exceeds the above percentage or dollar limitations, or if all of Borrower's Obligations, at any time and for any reason, exceed the Maximum Credit Limit (an "Over Advance"), then Borrower, upon Capital's election and demand, shall immediately pay to Capital, in cash, the amount of such excess. 2.3 Authorizations. Capital is hereby authorized to make the loan and the extensions of credit provided for in this Agreement based upon telephonic or other instructions received from any one of the authorized personnel of Borrower identified on Exhibit 2.3, or, at the discretion of Capital, if such extensions of credit are necessary to satisfy any Obligations of Borrower to Capital. Although Capital shall make a reasonable effort to determine the person's identity, Capital shall not be responsible for determining the exact identity of the person calling and Capital may act on the instructions of anyone it perceives to be one of the authorized personnel. 2.4 Borrowing Base Certificate and Required Documentation. 7 A. Concurrent with the execution of this Agreement by Borrower and with the request for each advance pursuant to Section 2.1, and, in any event on the fifteenth (15th) day of each month during the term of this Agreement, Borrower shall deliver to Capital a fully completed Borrowing Base Certificate certified by Chief Executive Officer of Borrower, the Chief Financial Officer of Borrower or such other employee or agent of Borrower who may have specific knowledge of the matters set forth therein as being true and correct as of the date thereof and certifying that to the best of such officer's, employee's or agent's knowledge, after reasonable inquiry, Borrower is in full compliance with all of the terms and conditions of this Agreement and that no Event of Default or Potential Event of Default currently exists under this Agreement. If Borrower fails to deliver to Capital the Borrowing Base Certificate on the date when due, then notwithstanding any of the provisions contained in Section 2.1, Capital shall have no obligation to make any advances to Borrower until such item is delivered to Capital. B. Prior to the Borrower's request pursuant to Section 2.1 for the first advance to be made in connection with a Contract Debtor, Borrower shall deliver to and/or insure that Capital has each of the following documents, in form and content satisfactory to Capital and its counsel: (1) A true and correct copy of any credit application, financial statements, and other documents and information normally obtained by Borrower and supplied by each of the Contract Debtors; (2) A true and correct copy of the Contract executed by the Contract Debtor; (3) A true and correct copy of the financing statement(s) (Form UCC-1) executed by the Contract Debtor, together with a UCC-2 assignment thereof executed by Borrower as secured party and reflecting Capital as the assignee of secured party; (4) A copy of the UCC and tax lien search conducted by Borrower with respect to the Contract Debtor, and all other documents that Capital may reasonably request, in form satisfactory to Capital, to perfect and maintain perfected Capital's security interest in the Collateral and in order to fully consummate all of the transactions contemplated under this Agreement. C. As a condition for each subsequent advance requested by Borrower pursuant to Section 2.1 in connection with a Contract Debtor, Borrower shall deliver to and/or insure that Capital has a true and correct copy of each schedule of Eligible Underlying Collateral assigned by the Contract Debtor to Borrower, along with a copy of each invoice assigned to Borrower, a copy of proofs of delivery or signed acknowledgments of service executed by 8 the customer of such Contract Debtor and any other information which Capital may require, each in form and content satisfactory to Capital. In addition, Borrower shall immediately deliver to Capital any documentation or information which is supplemental or an update of the items listed in Section 2.4B. D. Immediately after each advance has been made by Borrower to a Contract Debtor, and in any event not more that one (1) Business Day after such advance has been made, Borrower shall provide evidence satisfactory to Capital, in Capital's sole discretion, of the advance, including evidence of the amount of the advance and the Contract Debtor to whom the advance was made. 2.5 Interest Rates. The Obligations owed by Borrower to Capital shall bear interest, on the average Daily Balance owing, at a rate four (4) percentage points above the Prime Rate. Notwithstanding the foregoing, at no time during the term of this Agreement shall the rate of interest be less than nine percent (9%), per annum. All Obligations owed by Borrower to Capital shall bear interest, from and after the occurrence of an Event of Default, and without constituting a waiver of any such Event of Default, on the average Daily Balance owing, at a rate nine (9) percentage points above the Prime Rate. All interest chargeable under this Agreement shall be computed on the basis of a three hundred sixty (360) day year for actual days elapsed. 2.6 Payment of Interest. A. The Prime Rate as of the date of this Agreement is eight and three quarters percent (8.75%) per annum. In the event that the Prime Rate announced is, from time to time hereafter, changed, adjustment in the rate of interest payable by Borrower shall be made as of 12:01 a.m. on the first day of the calendar month following such change and shall be based on the Prime Rate prevailing on the last day of the month in which such change occurred. All interest on the Obligations shall be due and payable on the first (1st) day of each calendar month during the term of this Agreement and Capital shall, at its option, charge such interest and any and all Capital Expenses to Borrower's loan account with Capital, which amounts shall thereupon constitute Obligations hereunder and shall thereafter accrue interest at the rate then provided under Section 2.5. B. Notwithstanding any provision to the contrary contained in this Agreement or the other Loan Documents, Borrower shall not be required to pay, and Capital shall not be permitted to collect, any amount of interest in excess of the maximum amount of interest permitted by law which parties may agree to in a written contract ("Excess Interest"). If any Excess Interest is provided for or determined by a court of competent jurisdiction to have been provided for in this Agreement or in any of the other Loan Documents, then in such event: (1) the provisions of this subsection shall govern and control; (2) neither Borrower 9 nor any guarantor shall be obligated to pay any Excess Interest; (3) any Excess Interest that Capital may have received hereunder shall be, at Capital's option, (a) applied as a credit against the outstanding principal balance of the Obligations of Borrower or accrued and unpaid interest (not to exceed the maximum amount permitted by law), (b) refunded to the payor thereof, or (c) any combination of the foregoing; (4) the interest rate(s) provided for herein shall be automatically reduced to the maximum lawful rate allowed from time to time under applicable law (the "Maximum Rate"), and this Agreement and the other Loan Documents shall be deemed to have been and shall be, reformed and modified to reflect such reduction; and (5) neither Borrower nor any guarantor shall have any action against Capital for any damages arising out of the payment or collection of any Excess Interest. Notwithstanding the foregoing, if for any period of time interest on any Obligations of Borrower is calculated at the Maximum Rate rather than the applicable rate under this Agreement, and thereafter such applicable rate becomes less than the Maximum Rate, the rate of interest payable on such Obligations of Borrower shall remain at the Maximum Rate until Capital shall have received the amount of interest which Capital would have received during such period on such Obligations of Borrower had the rate of interest not been limited to the Maximum Rate during such period. 2.7 Collections. Unless and until Capital shall instruct Borrower to the contrary, Borrower shall direct all of the Contract Debtors and their customers to make payments to a post office box established in the name of Capital at a post office box in Phoenix, Arizona. The terms of the post office box rental arrangement shall include a provision that will allow Borrower to have access to the post office box, but Capital shall have the right at any time to restrict access to the post office to only personnel and agents of Capital. Borrower shall remove all payments made to the post office box on a daily basis. Upon the occurrence of an Event of Default, Capital or Capital's designee may, at any time, notify Contract Debtors and their customers or account debtors that the Accounts and the Property have been assigned to Capital and that Capital has a security interest therein, collect them directly, and charge the collection costs and expenses to Borrower's loan account, but, unless and until Capital does so or gives Borrower other written instructions, Borrower shall be entitled to collect the Accounts and Property, and upon receipt, Borrower shall immediately deliver to Capital the proceeds of such Accounts and Property, together with a fully completed Collection Report in the form of Exhibit 2.7. Borrower agrees that all payments received by Borrower in connection with the Accounts, Property and any other Collateral shall be held in trust for Capital as Capital's trustee. The receipt of any wire transfer of funds, check, or other item of payment by Capital shall be applied to conditionally reduce Borrower's Obligations, but shall not be considered a payment on account unless such wire transfer is of immediately available federal funds and is made to the appropriate deposit account of Capital or unless and until such check or other item of payment is honored when presented for payment. The receipt 10 of any wire transfer, check or other item of payment by Capital shall be deemed to have been paid to Capital one (1) business day after the date Capital actually receives possession of such wire transfer of funds, check or other item of payment. 2.8 Monthly Statements. Capital shall render monthly statements of the Obligations owing by Borrower to Capital, including statements of all principal, interest, and Capital Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and Capital unless, within thirty (30) days after receipt thereof by Borrower, Borrower shall deliver to Capital, by registered or certified mail, at Capital's address indicated in Section 13, written objection thereto specifying the error or errors, if any, contained in any such statement. 2.9 Fees. A. Unused Line Fee. As of the last day of each month during the term of this Agreement, Borrower shall pay to Capital a monthly unused line fee (the "Unused Line Fee") equal to one fifteenth of one percent (.15%) of the average daily unused portion of the Maximum Credit Line during that month. Payment of the Unused Line Fee shall be made as of the due date by charging Borrower's account with the amount of the Unused Line Fee. The Unused Line Fee shall represent an unconditional payment to Capital in consideration of Capital's agreement to extend financial accommodations to Borrower pursuant to this Agreement and shall not reduce or be a deposit on account of the Obligations. B. Facility Fee. On the effective date of this Agreement, Borrower shall pay to Capital a facility fee (the "Facility Fee") in an amount equal to one percent (1%) of the Maximum Credit Line. In the event Borrower requests Capital to increase the Maximum Credit Line and if Capital, in its sole and absolute discretion, agrees to such request, then on the effective date of such increase, Borrower shall pay to Capital an amount equal to one percent (1%) of the amount of such increase. Payment of the Facility Fee shall be made as of the due date by charging Borrower's account with the amount of the Facility Fee. The Facility Fee shall represent an unconditional payment to Capital in consideration of Capital's agreement to extend financial accommodations to Borrower pursuant to this Agreement and shall not reduce or be a deposit on account of the Obligations. 2.10 Payment on Non-Business Days. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day. Interest shall continue to accrue on such payments until the date such payments are deemed received by Capital. 11 3. TERM AND PREPAYMENT 3.1 Term. A. This Agreement shall have an initial term (the "Initial Term") of two (2) years commencing on the date hereof and shall thereafter be automatically renewed (a "Renewal Term") for successive periods of one (1) year unless terminated by either party as set forth below. Notice of such termination shall be effectuated by the mailing of a certified letter, return receipt requested, not less than sixty (60) days immediately prior to the effective date of such termination, which date shall be an anniversary date of this Agreement, addressed to the other party in the manner and the address set forth in Section 13. B. Notwithstanding such term, upon the occurrence of an Event of Default and during the continuation thereof, Capital may terminate this Agreement without notice. In addition, should either Capital or Borrower become insolvent or is unable to meet its debts as they mature, then the other party shall have the right to terminate this Agreement at any time without notice. On the date of a termination by Borrower or Capital, all Obligations shall become immediately due and payable without notice or demand and shall be paid to Capital in cash or by a wire transfer of immediately available funds. C. When Capital has received payment and performance in full of all Obligations (whether pursuant to this Section 3.1 or Section 3.2) and an acknowledgment from Borrower that it is no longer entitled to request any advances from Capital under this Agreement, Capital shall execute a termination of all security interests given by Borrower to Capital, upon the execution and delivery of mutual general releases by Borrower, any guarantor or surety of Borrower's Obligations, and Capital. 3.2 Prepayment. Borrower may at any time on thirty (30) days prior written notice, prepay the Obligations and terminate this Agreement by paying to Capital in cash or by a wire transfer of immediately available federal funds, the Obligations together with an amount equal to the following: (a) if prepayment occurs during the first year of the Initial Term, an amount equal to three percent (3%) of the then Maximum Credit Limit; and (b) if prepayment occurs at any time after the first year of the Initial Term, an amount equal to one and one-half percent (1 1/2%) of the then Maximum Credit Limit. When prepaying the Obligations, Borrower shall also pay the interest accrued on the principal amount being prepaid to the date of such prepayment. 4. CREATION OF SECURITY INTEREST 4.1 Grant of Security Interest. Borrower hereby grants to Capital a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations owed by Borrower 12 to Capital and in order to secure prompt performance by Borrower of each and all of its covenants and obligations under this Agreement and otherwise created. Capital's security interest in the Collateral shall attach to all Collateral without further act on the part of Capital or Borrower. 4.2 Right to Audit and Inspect. In order to verify the validity of any Borrowing Base Certificate, Borrower shall, upon the request of Capital, promptly furnish Capital with copies of Borrower's financial and business records, as well as any information which has been provided by Contract Debtors to Borrower, and Borrower shall warrant the genuineness thereof. For each twelve (12) month period commencing on the date of this Agreement, Capital shall have the right to conduct four (4) periodic audits of the Collateral and Borrower's financial condition at Borrower's expense; provided, however, that Capital may conduct additional audits, at Capital's own expense so long as no Event of Default shall have occurred, during each such twelve (12) month period. Borrower shall pay to Capital as an audit fee Six Hundred Dollars ($600) per auditor, per day for each audit in connection with the first four (4) audits during each twelve (12) month period, up to a maximum of twelve (12) days for all of such four (4) audits, as well as in connection with any audits conducted following an Event of Default and the amount charged shall be deemed included in the "Obligations" when incurred. Capital will invoice Borrower for such audit charges and Borrower shall pay to Capital the full amount of such costs and expenses within fifteen (15) calendar days from the date of invoice. 4.3 Continuation of Security Interest. Until all Obligations, contingent or otherwise, have been fully repaid and performed, Capital shall retain its security interest in all existing Collateral and Collateral arising thereafter. 4.4 Perfection of Security Interest. Borrower shall execute and deliver to Capital, concurrent with Borrower's execution of this Agreement, and at any time or times hereafter at the request of Capital, all financing statements, continuation financing statements, fixture filings, security agreements, chattel mortgages, assignments, endorsements of certificates of title, applications for titles, affidavits, reports, notices, schedules of accounts, letters of authority and all other documents that Capital may reasonably request, in form satisfactory to Capital, to perfect and maintain perfected Capital's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under this Agreement. In connection with the foregoing, Borrower agrees to cause to be delivered to Capital the consent on any computer software licensor to the assignment by Borrower to Capital of those rights of Borrower in such software in order to enable Capital to obtain any computer information which Capital requires which is accessible utilizing such software. 4.5 Access to Borrower's Books. Capital (through any of its officers, employees or agents) shall have the right, at 13 any time or times hereafter, during Borrower's usual business hours, or during the usual business hours of any third party having control over the records of Borrower, to inspect and verify Borrower's Books in order to verify the amount or condition of, or any other matter relating to, the Collateral and Borrower's financial condition. Capital (through any of its officers, employees or agents) shall also have the right, at any time or times hereafter, to confirm with the Contract Debtors the amount of their indebtedness owing to Borrower, the assignment of all or any of the Property to Borrower, the value and amount of the Property (including contacting any customers or account debtors thereunder), and any other information relating to the Collateral. Capital agrees that in connection with any communications with any Contract Debtors and their customers and account debtors, Capital shall comply with any requests of Borrower which Capital, in its sole discretion, determines to be reasonable. 4.6 Additional Documentation. With each assignment of Collateral hereunder Borrower shall deliver to and/or insure that Capital has, in form satisfactory to Capital and its counsel, such other instruments, financing statements, continuation financing statements, fixture filings, security agreements, mortgages, assignments, certificates of title, affidavits, reports, documents, notices, schedules of Contracts, letters of authority and all other documents that Capital may reasonably request, in form satisfactory to Capital, to perfect and maintain perfected Capital's security interest in the Collateral and in order to fully consummate all of the transactions contemplated under this Agreement. 4.7 Retention of Security Interest. Capital shall retain its security interest in all Collateral until all of Borrower's Obligations have been fully repaid as required hereunder and this Agreement has been terminated. Capital may, after the occurrence of an Event of Default, settle or adjust disputes and claims directly with Contract Debtors and customers of Contract Debtors for such amounts and upon such terms as Capital considers advisable, and in such cases, Capital will credit Borrower's account with only the net amounts received by Capital in payment of such disputed Contracts or Property, after deducting all Capital Expenses incurred or expended in connection therewith. 4.8 Power of Attorney. Borrower hereby irrevocably makes, constitutes and appoints Capital (and any of Capital's officers, employees or agents designated by Capital) as Borrower's true and lawful attorney with power: A. Upon Borrower's failure or refusal to comply with its undertakings contained in Section 4.4, to sign the name of Borrower on any of the documents described in that section or on any other similar documents which need to be executed, recorded and/or filed in order to perfect or continue perfected Capital's security interest in the Collateral; 14 B. To endorse Borrower's name on any checks, notes, acceptances, money orders, drafts or other forms of payment or security that may come into Capital's possession; C. After the occurrence of an Event of Default, to notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Capital, to receive and open all mail addressed to Borrower, and to retain all mail relating to the Collateral and forward, within two (2) business days of Capital's receipt thereof, all other mail to Borrower; D. To do all things necessary to carry out this Agreement. The appointment of Capital as Borrower's attorney, and each and every one of Capital's rights and powers, being coupled with an interest, are irrevocable until all of the Obligations have been fully paid and performed and payments received by Capital are no longer subject to avoidance. Borrower ratifies and approves all acts of Capital as Borrower's attorney taken in connection with the transactions contemplated by this Agreement and neither Capital nor its employees, officers or agents shall be liable for any acts or omissions or for any error in judgment or mistake of fact or law made in good faith except for gross negligence or willful misconduct. 5. CONDITIONS PRECEDENT As conditions precedent to Capital's obligation to make the advances and extend the financial accommodations hereunder, Borrower shall execute and deliver, or cause to be executed and delivered, to Capital, in form and substance satisfactory to Capital and its counsel, the following: A. Financing statements (form UCC-1) and fixture filings in form satisfactory for filing and recording with the appropriate governmental authorities; B. Certified extracts from the minutes of the meetings of Borrower's board of directors authorizing the borrowings and the granting of the security interest provided for herein and authorizing specific officers to execute and deliver the agreements provided for herein; C. A certified copy of Borrower's Articles of Incorporation and any amendments thereto, a certificate of good standing showing that Borrower is in good standing under the laws of the State of Arizona and certificates indicating that Borrower has qualified to transact business and is in good standing in any other state in which the conduct of its business or its ownership of property requires that it be so qualified; 15 D. UCC searches, tax lien and litigation searches, fictitious business statement filings, insurance certificates, notices or other similar documents which Capital may require and in such form as Capital may require, in order to reflect, perfect or protect the priority of Capital's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under this Agreement; E. Evidence satisfactory to Capital that Borrower has obtained insurance policies or binders, with such insurers and in such amounts as may be acceptable to Capital, respecting the Equipment and any other tangible personal property comprising the Collateral and naming Capital as a loss payee on a 438-BFU endorsement; F. The Annual Fee; G. The Loan Documents; H. A fully completed Borrowing Base Certificate, dated as of the effective date of this Agreement; I. The original Contracts properly endorsed in favor of and assigned to Capital; J. The Guaranties prepared on Capital's standard form and duly executed; K. Certified extracts from the minutes of the meetings of PII's board of directors authorizing the execution of its General Continuing Guaranty of the Obligations and authorizing specific officers to execute and deliver such agreements; L. A disbursement letter from Borrower authorizing and directing Capital to make the initial advances hereunder. 6. BORROWER'S REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties which shall be deemed to be continuing representations and warranties so long as any credit hereunder shall be available and until the Obligations have been repaid in full: 6.1 Existence and Rights. A. The chief executive office of Borrower is located at 2425 E. Camelback Road, Suite 620, Phoenix, Arizona 85016; B. Borrower is duly organized and existing under the laws of the State of Arizona and is qualified and licensed to do business and is in good standing in any state in 16 which the conduct of its business or its ownership of property requires that it be so qualified; C. Borrower has the right and power to enter into this Agreement and each of the other Loan Documents; D. Borrower has the power, authority, rights and franchises to own its property and to carry on its business as now conducted; E. Borrower has no investment in any business entity except as previously disclosed to Capital in writing. 6.2 Agreement Authorized. The execution, delivery and performance by Borrower of this Agreement and each of the other Loan Documents: (a) have been duly authorized and do not require the consent or approval of any governmental body or other regulatory authority; and (b) shall not constitute a breach of any provision contained in Borrower's Articles of Incorporation or Bylaws. 6.3 Binding Agreement. This Agreement is the valid, binding and legally enforceable obligation of Borrower in accordance with its terms. 6.4 No Conflict. The execution, delivery and performance by Borrower of this Agreement and each of the other Loan Documents: (a) shall not constitute an event of default under any agreement, indenture or undertakings to which Borrower is a party or by which it or any of its property may be bound or affected; (b) are not in contravention of or in conflict with any law or regulation; and (c) do not cause any lien, charge or other encumbrance to be created or imposed upon any such property by reason thereof. 6.5 Litigation. Except as set forth on Exhibit 6.5, to Borrower's knowledge there are no actions or proceedings pending by or against Borrower or any guarantor of Borrower before any court or administrative agency, and Borrower has no knowledge or belief of any pending, threatened or imminent litigation, governmental investigations or claims, complaints, actions or prosecutions involving Borrower or any guarantor of Borrower, except for ongoing collection matters in which Borrower is the plaintiff and except as heretofore disclosed, in writing, to Capital. Borrower is not in default with respect to any order, writ, injunction, decree or demand of any court or any governmental or regulatory authority. 6.6 Financial Condition. All financial statements and information relating to Borrower which have been delivered by Borrower to Capital have been prepared in accordance with generally accepted accounting principles consistently applied, unless otherwise stated therein, and fairly and reasonably present Borrower's financial condition. There has been no material adverse 17 change in the financial condition of Borrower since the date of the most recent of such financial statements submitted to Capital. Borrower has no knowledge of any liabilities, contingent or otherwise, which are not reflected in such financial statements and information, and Borrower has not entered into any special commitments or contracts which are not reflected in such financial statements or information which may have a materially adverse effect upon Borrower's financial condition, operations or business as now conducted. 6.7 Tax Status. Borrower has no liability nor have any claims been asserted against Borrower for any delinquent state, local or federal taxes. 6.8 Title to Assets. Borrower has good title to its assets and the same are not subject to any liens or encumbrances other than those permitted by Sections 6.11B. 6.9 Trademarks and Patents. Borrower, as of the date hereof, possesses all necessary trademarks, trade names, copyrights, patents, patent rights and licenses to conduct its business as now operated, without any known conflict with the valid trademarks, trade names, copyrights, patents and license rights of others. 6.10 Environmental Quality. Borrower has in the past and is currently in compliance with any and all federal, state and local statutes, laws and regulations concerning the preservation of the environment and the use and disposal of hazardous and toxic materials and substances. Borrower is not aware that it is under investigation by any state or federal agency designed to enforce any of such laws or regulations. 6.11 Equipment. A. All of the Equipment is currently located at Borrower's address set forth in Section 6.1A; B. The Equipment is and shall remain free from all liens, claims, encumbrances, and security interests (except as held by Capital, except for the lease to Borrower, and except as may be specifically consented to, in advance and in writing, by Capital). 6.12 Contracts and Security Documents. A. Each Contract is a bona fide, good, valid, enforceable and subsisting obligation of the Contract Debtor thereunder, and Borrower does not know of any fact which impairs or will impair the validity of any such Contract. B. Each Contract and the Security Documents are free of any claim for credit, deduction, discount, allowance, 18 defense (including the defense of usury), dispute, counter-claim or setoff. C. Each Contract is wholly free of any prior assignment, superior security interest, lien, claim or encumbrance in favor of any person other than Capital. D. The Security Documents properly and reasonably describe the subject personal property collateral. E. Each Contract correctly sets forth the terms between Borrower and the Contract Debtor, including, without limitation, the interest rate and/or fees applicable thereto. F. All state and federal laws have been complied with in conjunction with the Contracts and Security Documents, the non-compliance with which would have an adverse impact on the value, enforceability or collectability of the Contracts or Security Documents. G. Borrower has good and valid title to, and full right and authority to pledge and assign the Contracts and Security Documents to Capital and no payment is past due under any Contract. H. The signatures of officers of the Contract Debtor on each Contract and Security Documents related thereto are genuine, and, to the best knowledge of Borrower, such officers were authorized and had the legal capacity to enter into and execute such documents on the date thereof. 7. BORROWER'S AFFIRMATIVE COVENANTS Borrower covenants and agrees that so long as any credit hereunder shall be available and until the Obligations have been repaid in full, unless Capital shall otherwise consent in writing, Borrower shall do all of the following: 7.1 Rights and Facilities. Borrower shall maintain and preserve all rights, franchises and other authority adequate for the conduct of its business. Borrower shall also maintain its properties, equipment and facilities in good order and repair and conduct its business in an orderly manner without voluntary interruption and maintain and preserve its existence. 7.2 Records and Servicing of Contracts. A. Borrower shall keep or will cause to be kept in a safe place, at its chief executive office, copies (or the originals if Capital determines in its sole discretion to allow Borrower to retain such originals) of the Contracts and Security Documents, all necessary, proper and accurate books, records, ledgers, correspondence and other documents or instruments related to or concerning the Contracts and the Security Documents. Capital 19 shall, at all reasonable times, have the right to inspect, verify, check, make abstracts from and photocopies of Borrower's Books, and any correspondence and other papers pertaining to the Contracts and Security Documents. B. In consideration of the advances to be made by Capital pursuant hereto, and at no expense to Capital, Borrower covenants and agrees to diligently and faithfully perform the following services relating to the Contracts and Security Documents, unless and until notified by Capital that it does not desire Borrower to continue to perform any or all such services: (1) Borrower will use commercially reasonable efforts to collect all payments due under the Contracts. Borrower shall immediately provide Capital with written notification of any Contract under which scheduled payments are thirty (30) days or more past due and shall inform Capital, in writing, of all decisions regarding collection efforts concerning any Contract and concerning repossession of Property. (2) Borrower will perform customary insurance follow-up with respect to each policy of insurance covering the Property, if any. If required or prudent insurance on any Property is canceled, terminated or lapses, Borrower shall immediately, and at its sole cost and expense, obtain replacement insurance coverage. (3) Borrower will promptly notify Capital if and when any of the following shall come to its attention: (a) if any material default arises under the terms of a Contract and/or Security Document, which default shall not be waived by Borrower without the prior written consent of Capital; (b) if any material item of Property should be damaged, lost, destroyed or stolen, and such item or items of Property shall not have been repaired, replaced or cured by the Contract Debtor within a reasonable time; or (c) if any Property is moved from the location or locations where it is required to be kept under the terms of the Security Document. (4) Borrower acknowledges that it is not authorized or empowered to waive or vary the terms of any Contract or Security Document in a way that would be adverse to Capital's interests, and Borrower agrees that it will not, at any time, waive or consent to a postponement of strict compliance on the part of a Contract Debtor with respect to any material term, provision or covenant contained in any Contract or Security Document, nor forbear or grant any material indulgence to a Contract Debtor, without the prior written consent of Capital. 7.3 Location of Equipment. The Equipment shall be located only at Borrower's chief executive office or such other locations as shall have been approved by Capital, which approval shall not be unreasonably withheld. 20 7.4 Insurance. A. Borrower, at its expense, shall insure the Equipment against loss or damage by fire, theft, explosion, sprinklers and all other hazards and risks ordinarily insured against by other owners who use such properties in similar businesses for the full insurable value thereof. Borrower shall deliver to Capital certified copies of such policies of insurance and evidence of the payments of all premiums therefor. Borrower shall also keep and maintain business interruption, public liability, and property damage insurance relating to Borrower's ownership and use of the Equipment and its other assets. All such policies of insurance shall be in such form, with such companies, and in such amounts as may be satisfactory to Capital. All such policies of insurance (except those of public liability and property damage) shall contain an endorsement in a form satisfactory to Capital showing Capital as a loss payee thereof, with a waiver of warranties on a 438-BFU endorsement, and all proceeds payable thereunder shall be payable to Capital and, upon receipt by Capital, shall be applied on account of the Obligations owing to Capital. To secure the payment of the Obligations, Borrower grants Capital a security interest in and to all such policies of insurance (except those of public liability and property damage) and the proceeds thereof, and Borrower shall direct all insurers under such policies of insurance to pay all proceeds thereof directly to Capital. B. Prior to an Event of Default under this Agreement, Borrower shall have the exclusive right to make, settle and adjust any and all claims under such policies of insurance; provided, however, that Borrower shall not legally conclude the settlement or adjustment of any claim in excess of Ten Thousand and 00/100 Dollars ($10,000.00) without first obtaining the written consent of Capital. C. Borrower hereby irrevocably appoints Capital (and any of Capital's officers, employees or agents designated by Capital) as Borrower's attorney following the occurrence of an Event of Default for the purpose of making, settling and adjusting all claims under such policies of insurance, endorsing the name of Borrower on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance, and for making all determinations and decisions with respect to such policies of insurance. D. Borrower will not cancel any of such policies without Capital's prior written consent. Each such insurer shall agree by endorsement upon the policy or policies of insurance issued by it to Borrower as required above, or by independent instruments furnished to Capital, that it will give Capital at least ten (10) days written notice before any such policy or policies of insurance will be altered or canceled, and that no act or default of Borrower, or any other person, shall affect the right of Capital to recover under such policy or policies of insurance or 21 to pay any premium in whole or in part relating thereto. If Borrower fails to comply with its covenants contained in this Section 7.4, Capital may, but shall have no obligation to, obtain and maintain such policies of insurance and pay such premiums and take such other action with respect to such policies which Capital deems prudent. 7.5 Notice of Litigation. If at any time during the term of this Agreement any litigation, governmental investigations or claims, complaints, actions or prosecutions involving Borrower or any guarantor of Borrower shall be commenced or threatened, Borrower shall immediately notify Capital in writing of such event. 7.6 Submission of Records and Reports. A. Borrower agrees to use its best efforts to deliver to Capital, on a daily basis, a collateral and loan status report summarizing the status of each Contract by indicating, with respect to each Contract, the amount of outstanding advances made by Borrower under such Contract, the amount of rebates payable to the Contract Debtor thereunder, the amount of all outstanding accounts and other Property assigned to Borrower thereunder, the amount of loan availability under the Contract, the amount of collections received since the last report, the date of the last accounts receivable aging with respect to such Contract Debtor, a copy of each invoice assigned to Borrower (together with a copy of proofs of delivery or signed acknowledgments of service executed by the customer of such Contract Debtor), and any other information required by Capital. B. Borrower shall execute and deliver to Capital by the fifteenth (15th) day of each month during the term of this Agreement, a report containing the following information regarding each Contract: (i) a statement reflecting all of the advances, repayments, other loan activity, and the status of the Property securing the obligations of the Contract Debtor under that Contract; (ii) an accounts receivable status report setting forth, among other information, an aging of the accounts receivable, the amount of the Eligible Underlying Collateral, the amount of the ineligible accounts receivable, and the percentage determined by dividing the total amount of all obligations of a Contract Debtor arising under the Contract by the aggregate amount of all obligations owing to Borrower from all of its Contract Debtors; and (iii) a summary of the Contracts which shall set forth, among other things, the delinquency rate of the obligations arising under the Contracts and indicating under which Contracts, if any, Property is in foreclosure; C. Borrower shall promptly supply Capital with such other information concerning its affairs as Capital may request from time to time hereafter, and shall promptly notify Capital of any material adverse change in Borrower's financial condition and of any condition or event which constitutes a breach 22 of, or an event which constitutes an Event of Default or Potential Event of Default under, this Agreement. 7.7 Acquisition of Assets. Borrower shall promptly notify Capital in writing of its acquisition by purchase, lease or otherwise of any after-acquired tangible property having a value greater than Ten Thousand and 00/100 Dollars ($10,000.00) and of the type included in the Collateral. 7.8 Taxes. All assessments and taxes, whether real, personal or otherwise, due or payable by, or imposed, levied or assessed against Borrower or any of its property shall be paid in full, before delinquency or before the expiration of any extension period. Borrower shall make due and timely payment or deposit of all federal, state and local taxes, assessments or contributions required of it by law, and will execute and deliver to Capital, on demand, appropriate certificates attesting to the payment or deposit thereof. Borrower will make timely payment or deposit of all F.I.C.A. payments and withholding taxes required of it by applicable laws, and will, upon request, furnish Capital with proof satisfactory to Capital indicating that Borrower has made such payments or deposits. 7.9 Financial Statements. A. Borrower shall maintain a standard and modern system of accounting in accordance with generally accepted accounting principles consistently applied with ledger and account cards and/or computer tapes, discs, printouts, and records pertaining to the Collateral which contain information as may from time to time be requested by Capital. Borrower shall not modify or change its method of accounting or enter into, modify or terminate any agreement presently existing, or at any time hereafter entered into with any third party accounting firm and/or service bureau for the preparation and/or storage of Borrower's accounting records without said accounting firm and/or service bureau agreeing to provide to Capital information regarding the Collateral and Borrower's financial condition. Borrower agrees to permit Capital and any of its employees, officers or agents, upon twenty four (24) hours prior notice or without any notice following the occurrence of an Event of Default or Potential Event of Default, during Borrower's usual business hours, or the usual business hours of third persons having control thereof, to have access to and examine all of Borrower's Books relating to the Collateral, the Obligations, Borrower's financial condition and the results of Borrower's operations, and, in connection therewith, permit Capital or any of its agents, employees or officers to copy and make extracts therefrom. B. Borrower shall deliver to Capital: (1) within thirty (30) days after the end of each month, a company prepared consolidated and consolidating statement of the financial condition of Borrower and its affiliates 23 for such monthly period, including, but not limited to, a balance sheet, a profit and loss statement, and a cash flow statement, and any other report requested by Capital relating to the Collateral and the financial condition of Borrower, and a certificate signed by the Chief Executive Officer or Chief Operating Officer of Borrower, to the effect that all statements and reports delivered or caused to be delivered to Capital under this subsection, fairly and thoroughly present the financial condition of Borrower and its affiliates and that there exists on the date of delivery to Capital no condition or event which constitutes an Event of Default or Potential Event of Default; (2) within sixty (60) days after the end of the first three (3) fiscal quarters of Borrower's fiscal years, a company prepared consolidated and consolidating statement of the financial condition of Borrower and its affiliates for each such quarterly period, including, but not limited to, a balance sheet, a profit and loss statement, and a cash flow statement, and any other report requested by Capital relating to the Collateral and the financial condition of Borrower and its affiliates, together with a copy of the quarterly 10Q filed with the Securities and Exchange Commission regarding Borrower and its affiliates, and a certificate signed by the Chief Executive Officer or Chief Operating Officer of Borrower, to the effect that all reports, statements, computer disc or tape files, printouts, runs, or other computer prepared information of any kind or nature relating to the foregoing or documents delivered or caused to be delivered to Capital under this subsection, fairly and thoroughly present the financial condition of Borrower and its affiliates and that there exists on the date of delivery to Capital no condition or event which constitutes an Event of Default or Potential Event of Default; (3) within ninety (90) days after the end of each of Borrower's fiscal years, an audited consolidated and consolidating statement of the financial condition of Borrower and its affiliates for such fiscal year, prepared by independent certified public accountants acceptable to Capital, including, but not limited to, a balance sheet, a profit and loss statement, and a cash flow statement, and any other report requested by Capital relating to the Collateral and the financial condition of Borrower, together with a copy of the annual 10K filed with the Securities and Exchange Commission regarding Borrower and its affiliates, and a certificate signed by the Chief Executive Officer or Chief Operating Officer of Borrower, to the effect that all reports, statements, computer disc or tape files, printouts, runs, or other computer prepared information of any kind or nature relating to the foregoing or documents delivered or caused to be delivered to Capital under this subsection, fairly and thoroughly present the financial condition of Borrower and its affiliates and that there exists on the date of delivery to Capital no condition or event which constitutes an Event of Default or Potential Event of Default. 24 7.10 Tax Returns. Borrower shall deliver to Capital copies of each of Borrower's future federal income tax returns, and any amendments thereto, within thirty (30) calendar days following the filing thereof. Borrower further agrees to promptly deliver to Capital copies of all receipts issued to Borrower for the payment of federal withholding taxes required of it. 7.11 Payment of Debts. Borrower shall be at all times hereafter solvent and able to pay its debts (including trade debts) as they mature. 7.12 Financial Covenant. Borrower shall maintain at all times during the term of this Agreement a ratio of Obligations to Tangible Effective Net Worth Ratio of not more than 2.0 to 1.0. 7.13 Compliance with Environmental Laws. Borrower shall comply with any and all federal, state and local statutes, laws and regulations concerning the preservation of the environment and the use and disposal of hazardous and toxic materials and substances. 7.14 Notice of Reportable Event. Borrower shall furnish to Capital: (a) as soon as possible, but in no event later than thirty (30) days after Borrower knows or has reason to know that any reportable event with respect to any deferred compensation plan has occurred, a statement of the Chief Financial Officer or Managing Partner of Borrower setting forth the details concerning such reportable event and the action which Borrower proposes to take with respect thereto, together with a copy of the notice of such reportable event given to the Pension Benefit Guaranty Corporation, if a copy of such notice is available to Borrower; (b) promptly after the filing thereof with the Internal Revenue Service, the United States Secretary of Labor or the Pension Benefit Guaranty Corporation, copies of each annual report with respect to each deferred compensation plan together with certified financial statements and actuarial statements for such plan; (c) promptly after receipt thereof, a copy of any notice Borrower may receive from the Pension Benefit Guaranty Corporation or the Internal Revenue Service with respect to any deferred compensation plan; provided, however, this subparagraph shall not apply to notice of general application issued by the Pension Benefit Guaranty Corporation or the Internal Revenue Service; (d) at least ten (10) days prior to the filing by the Borrower or the administrator of any deferred compensation plan of a notice of intent to terminate such plan, a copy of such notice; (e) when the same is made available to participants in the deferred compensation plan, all notices and other forms of information from time to time disseminated to the participants by the administrator of the deferred compensation plan; and (f) promptly and in no event more than ten (10) days after receipt thereof by Borrower, each notice received by Borrower concerning the imposition of any withdrawal liability under Section 4202 of the Employee Retirement Income Security Act ("ERISA") of 1974, as amended. 25 7.15 Reimbursement for Capital Expenses. Upon the demand of Capital, Borrower shall immediately reimburse Capital for all sums expended by Capital which constitute Capital Expenses, and Borrower hereby authorizes and approves all advances and payments by Capital for items constituting Capital Expenses. 8. BORROWER'S NEGATIVE COVENANTS Borrower covenants and agrees that so long as any credit hereunder shall be available and until the Obligations have been repaid in full, unless Capital shall otherwise consent in writing, Borrower shall not do any of the following: 8.1 Relocate of Chief Executive Office. Borrower will not, without thirty (30) days prior written notification to Capital, relocate its chief executive office. 8.2 Business Structure and Operations. Borrower shall not, without Capital's prior written consent: A. Sell, lease, or otherwise dispose of, move, relocate (except in connection with a relocation of Borrower's business facility) or transfer, whether by sale or otherwise, any of Borrower's assets; B. Change Borrower's name or form of entity, or add any new fictitious name; C. Acquire, merge or consolidate with or into any other business organization; D. Enter into any transaction not in the ordinary and usual course of Borrower's business; E. Guarantee or otherwise become in any way liable with respect to the obligations of any third party except by endorsement of instruments or items of payment for deposit to the general account of Borrower or which are transmitted or turned over to Capital; F. Make any change in the Borrower's financial structure or in any of its business objectives, purposes or operations which could adversely affect the ability of Borrower to repay the Obligations; G. Incur any debts outside the ordinary and usual course of Borrower's business, except for renewals or extensions of existing debts; H. Make any advance or loan except in the ordinary course of business; I. Prepay any existing indebtedness owing to any third party; 26 J. Cause, permit or suffer any change, direct or indirect, in Borrower's capital ownership; K. Make any advance to any Contract Debtor where the making of such advance would cause the total amount of the outstanding indebtedness of such Contract Debtor to exceed thirty five percent (35%) of the Borrower's Tangible Effective Net Worth; provided, however, that in order to avoid violating this subsection, Borrower may participate with PII in connection with such a Contract Debtor whereby PII would advance all amounts which Borrower would otherwise be prohibited from advancing so long as the rights of PII to be repaid, together with any rights of PII in the related Contract and Security Documents, are subordinated to the rights of Capital on terms and conditions acceptable to Capital, in its sole discretion; L. Borrower will not, without Capital's prior written consent, make any distribution or declare or pay any dividends (in cash or in stock) on, or purchase, acquire, redeem or retire any of its capital stock or partnership interests, of any class, whether now or hereafter outstanding; or M. Suspend or go out of business. 8.3 ERISA. A. Borrower shall not withdraw from partici- pation in, permit the termination or partial termination of, or permit the occurrence of any other event with respect to any deferred compensation plan maintained for the benefit of Borrower's employees under circumstances that could result in liability to the Pension Benefit Guaranty Corporation, or any of its successors or assigns, or to any entity which provides funds for such deferred compensation plan. B. Borrower shall not withdraw from any multi-employer plan described in Section 4001(a)(3) of ERISA which covers Borrower's employees. 9. EVENTS OF DEFAULT Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 9.1 Failure to Pay Obligations. If Borrower fails to pay when due and payable or when declared due and payable all or any portion of the Obligations owing to Capital (whether of principal, interest, taxes, reimbursement of Capital Expenses, or otherwise); 9.2 Failure to Perform. If Borrower fails or neglects to perform, keep or observe any term, provision, condition, covenant, agreement, warranty or representation contained in this Agreement, in any of the other Loan Documents, or 27 in any other present or future agreement between Borrower and Capital and such failure continues for ten (10) calendar days after written notice thereof from Capital to Borrower; 9.3 Inaccurate Information. If any material representation, statement, report, or certificate made or delivered by Borrower, or any of its officers, employees or agents, to Capital is not true and correct; 9.4 Third Party Claim. If any or a material portion of Borrower's assets are attached, seized, subjected to a writ or distress warrant, or are levied upon, or come into the possession of any Judicial Officer or Assignee; 9.5 Impairment. If there is a material impairment of the prospect of repayment of all or any portion of the Obligations owing to Capital or a material impairment of the value or priority of Capital's security interests in the Collateral; 9.6 Voluntary Insolvency Proceeding. If an Insolvency Proceeding is commenced by Borrower; 9.7 Involuntary Insolvency Proceeding. If an Insolvency Proceeding is commenced against Borrower; 9.8 Interruption of Business. If Borrower is enjoined, restrained or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; 9.9 Governmental Lien. If a notice of lien, levy or assessment is filed of record with respect to any or all of Borrower's assets by the United States Government, or any department, agency or instrumentality thereof, or by any state, county, municipal or other governmental agency, or if any tax or debt owing at any time hereafter to any one or more of such entities becomes a lien, whether choate or otherwise, upon any or all of the Borrower's assets and the same is not paid on the payment date thereof; 9.10 Liens. If a judgment or other claim becomes a lien or encumbrance upon all or a material portion of Borrower's assets; 9.11 Default in Agreement with Third Party. If there is a default in any loan agreement, mortgage, indenture or other agreement to which Borrower is a party with third parties; 9.12 Payment on Subordinated Debt. If Borrower makes any payment to any third party which would violate the terms of any agreement pursuant to which such third party has subordinated indebtedness owed to him, her or it to Borrower's Obligations to Capital; 28 9.13 Misrepresentation. If any misrepresentation exists now or hereafter in any warranty or representation made to Capital by Borrower or any officer or director of Borrower, or if any such warranty or representation is withdrawn by Borrower or by any officer or director of Borrower; 9.14 Impairment of Guaranty. If any guarantor of Borrower's indebtedness to Capital dies, terminates its guaranty, defaults in the payment or performance of any obligations of guarantor owing to Capital, or becomes the subject of an Insolvency Proceeding; 9.15 Reportable Event Under ERISA. If any reportable event, which Capital determines will have a material adverse effect on the financial condition of Borrower or which Capital determines constitutes grounds for the termination of any deferred compensation plan by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United States District Court of a trustee to administer any such plan, shall have occurred and be continuing thirty (30) days after written notice of such determination shall have been given to Borrower by Capital, or any such Plan shall be terminated within the meaning of Title IV of ERISA, or a trustee shall be appointed by the appropriate United States District Court to administer any such plan, or the Pension Benefit Guaranty Corporation shall institute proceedings to terminate any plan and in case of any event described in this Section 9.15, the aggregate amount of the Borrower's liability to the Pension Benefit Guaranty Corporation under Sections 4062, 4063 or 4064 of ERISA shall exceed five percent (5%) of Borrower's tangible net worth. 9.16 Withdrawal from Multi-Employer Plan. Borrower shall have withdrawn from a multi-employer plan described in Section 4001(a)(3) of ERISA and Capital determines that such withdrawal would have a material adverse effect on the financial condition of Borrower; or 9.17 Cure Periods. Notwithstanding anything contained in this Section 9 to the contrary, Capital shall refrain from exercising its rights and remedies and an Event of Default shall not be deemed to have occurred by reason of the occurrence of: (i) an event set forth in Section 9.7 if, within thirty (30) calendar days from the date thereof, the same is discharged or dismissed, or (ii) any of the events set forth in Sections 9.4 or 9.10 if, within ten (10) calendar days from the date thereof, the same is released, discharged, dismissed, bonded against or satisfied; provided, however, if the event is the institution of Insolvency Proceedings against Borrower, Capital shall not be obligated to make advances to Borrower during such cure period. 10. CAPITAL'S RIGHTS AND REMEDIES 10.1 Remedies. Upon the occurrence of an Event of Default by Borrower under this Agreement, Capital may, at its 29 election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: A. Declare all Obligations, whether evidenced by this Agreement or otherwise, immediately due and payable; B. Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Capital; C. Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of Capital, but without affecting Capital's rights and security interest in the Collateral and without affecting the Obligations owing by Borrower to Capital; D. Capital or Capital's designee may notify each Contract Debtor that its Contract, Security Documents and all rights thereunder have been assigned to Capital and that Capital has a security interest therein, collect the indebtedness of such Contract Debtor owing to Borrower directly if Capital has not already been authorized to do so, and charge the collection costs and expenses to Borrower's loan account. E. Without notice to or demand upon Borrower or any guarantor, make such payments and do such acts as Capital considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Capital so requires, and to make the Collateral available to Capital as Capital may designate. Borrower authorizes Capital to enter the premises where the Collateral is located, take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest or compromise any encumbrance, charge or lien which in the opinion of Capital appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith; F. Capital is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale and selling any Collateral and Borrower's rights under all licenses, and all franchise agreements shall insure to Capital's benefit; G. Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale and sell (in the manner provided for herein) the Collateral; H. Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such 30 places (including Borrower's premises) as is commercially reasonable in the opinion of Capital. It is not necessary that the Collateral be present at any such sale; I. Capital shall give notice of the disposition of the Collateral as follows: (1) Capital shall give Borrower and each holder of a security interest in the Collateral who has filed with Capital a written request for notice, a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Collateral, the time on or after which the private sale or other disposition is to be made; (2) The notice shall be personally delivered or mailed, postage prepaid, to Borrower as provided in Section 13, at least ten (10) calendar days before the date fixed for the sale, or at least ten (10) calendar days before the date on or after which the private sale or other disposition is to be made, unless the Collateral is perishable or threatens to decline speedily in value. Notice to persons other than Borrower claiming an interest in the Collateral shall be sent to such addresses as they have furnished to Capital; (3) If the sale is to be a public sale, Capital shall also give notice of the time and place by publishing a notice one time at least ten (10) calendar days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held; J. Capital may credit bid and purchase at any public sale; K. Borrower shall pay all Capital Expenses incurred in connection with Capital's enforcement and exercise of any of its rights and remedies as herein provided, whether or not suit is commenced by Capital; L. Any deficiency which exists after disposition of the Collateral as provided above will be paid immediately by Borrower. Any excess will be returned, without interest and subject to the rights of third parties, to Borrower by Capital. 10.2 Cumulative Rights. Capital's rights and remedies under this Agreement and all other agreements shall be cumulative. Capital shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Capital of one right or remedy shall be deemed an election, and no waiver by Capital of any default on Borrower's part shall be deemed a continuing waiver. No delay by Capital shall constitute a waiver, election or acquiescence by it. 31 11. TAXES AND EXPENSES REGARDING THE COLLATERAL If Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or otherwise) due to third persons or entities, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then Capital may, to the extent that it determines that such failure by Borrower could have a material adverse change on Capital's interests in the Collateral, in its discretion and without prior notice to Borrower, (i) make payment of the same or any part thereof; (ii) set up such reserves in Borrower's loan account as Capital deems necessary to protect Capital from the exposure created by such failure; or (iii) both. Any amounts paid or deposited by Capital shall constitute Capital Expenses, shall be immediately charged to Borrower's loan account and become additional Obligations owing to Capital, shall bear interest at the applicable rate set forth in Section 2.5, and shall be secured by the Collateral. Any payments made by Capital shall not constitute: (i) an agreement by Capital to make similar payments in the future, or (ii) a waiver by Capital of any Event of Default under this Agreement. Capital need not inquire as to, or contest the validity of, any such expense, tax, security interest, encumbrance or lien, and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 12. WAIVERS 12.1 Application of Payments. Borrower waives the right to direct the application of any and all payments at any time or times hereafter received by Capital on account of any Obligations owed by Borrower to Capital, and Borrower agrees that Capital shall have the continuing exclusive right to apply and reapply such payments in any manner as Capital may deem advisable, notwithstanding any entry by Capital upon its books. 12.2 Demand, Protest, Default, Etc. Except as otherwise provided herein, Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, documents, instruments, chattel paper, and guarantees at any time held by Capital on which Borrower may in any way be liable. 12.3 Confidential Relationship. Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm and/or service bureau in connection with any information requested by Capital pursuant to or in accordance with this Agreement, and agrees that Capital may contact directly any such accounting firm and/or service bureau in order to obtain such information. 32 13. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement shall be in writing and either personally served or sent by regular United States mail, postage prepaid, to Borrower or to Capital, as the case may be, at their address set forth below: If to Borrower: PERFORMANCE FUNDING CORP. 2425 E. Camelback Road Suite 620 Phoenix, Arizona 85016 Attn: James Brown, Chief Financial Officer Telecopier Number (602) 912-0480 If to Capital: CAPITAL FACTORS, INC. 3435 Wilshire Boulevard Suite 2800 Los Angeles, California 90010 Attn: Frank A. Williams Telecopier Number (213) 480-0810 With a Copy to: KATZ, HOYT, SEIGEL & KAPOR 11111 Santa Monica Boulevard Suite 820 Los Angeles, California 90025-3342 Attn: William Schoenholz, Esq. Telecopier Number (310) 473-7138 The parties hereto may change the address at which they are to receive notices and the telecopier number at which they are to receive telecopies hereunder, by notice in writing in the foregoing manner given to the other. All notices or demands sent in accordance with this Section 13 shall be deemed received on the earlier of the date of actual receipt or five (5) days after the deposit thereof in the mail. 14. DESTRUCTION OF BORROWER'S DOCUMENTS Any documents, schedules, invoices or other papers delivered to Capital, other than the original Contracts and Security Documents, may be destroyed or otherwise disposed of by Capital four (4) months after they are delivered to or received by Capital, unless Borrower requests, in writing, the return of the said documents, schedules, invoices or other papers and makes arrangements, at Borrower's expense, for their return. 15. CHOICE OF LAW The validity of this Agreement, its construction, interpretation and enforcement, and the rights of the parties hereunder shall be determined under, governed by, and construed in accordance with the laws of the State of California. The parties agree that all arbitration proceedings shall be conducted in County 33 of Los Angeles, State of California, and all other actions or proceedings arising in connection with this Agreement shall be tried and litigated only in the state and federal courts located in the County of Los Angeles, State of California. Borrower waives any right it may have to assert the doctrine of forum non conveniens or to object to such venue and hereby consents to any court ordered relief. 16. GENERAL PROVISIONS 16.1 Representations and Warranties. Each representation, warranty and agreement contained in this Agreement shall be conclusively presumed to have been relied on by Capital regardless of any investigation made or information possessed by Capital. The warranties, representations and agreements set forth herein shall be cumulative and in addition to any and all other warranties, representations and agreements which Borrower shall give, or cause to be given, to Capital, either now or hereafter. 16.2 Binding Agreement. This Agreement shall be binding and deemed effective when executed by Borrower and accepted and executed by Capital. 16.3 Right to Grant Participations. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however , that Borrower may not assign this Agreement or any rights hereunder without Capital's prior written consent and any prohibited assignment shall be absolutely void. No consent to an assignment by Capital shall release Borrower from its Obligations to Capital. Capital may assign this Agreement and its rights and duties hereunder. Capital reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Capital's rights and benefits hereunder. In connection therewith, Capital may disclose all documents and information which Capital now or hereafter may have relating to Borrower or Borrower's business. 16.4 Section Headings. Section headings and section numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each section applies equally to this entire Agreement. 16.5 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Capital or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 16.6 Severability. Each provision of this Agreement shall be severable from every other provision of this Agreement for 34 the purpose of determining the legal enforceability of any specific provision. 16.7 Modification and Merger. This Agreement cannot be changed or terminated orally. All prior agreements, understandings, representations, warranties and negotiations, if any, are merged into this Agreement. 16.8 Good Faith Requirement. The parties intend and agree that their respective rights, duties, powers, liabilities, obligations and discretions shall be performed, carried out, discharged and exercised reasonably and in good faith. 16.9 No Solicitations. Capital agrees that during the term of this Agreement and for a period of six (6) months following the termination of this Agreement, Capital will not solicit any of the Contract Debtors without the prior written consent of Borrower, which consent shall not be unreasonably withheld. 16.10 WAIVER OF JURY TRIAL. BORROWER AND CAPITAL EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS. IN WITNESS WHEREOF, Capital and Borrower have executed this Agreement as of the date first set forth above. PERFORMANCE FUNDING CORP., an Arizona corporation By /s/ Joe Hrudka ------------------------- Name Joe Hrudka Title: Chairman of the Board By /s/ James Brown ------------------------- Name James Brown Title: Assistant Secretary CAPITAL FACTORS, INC., a Florida corporation By /s/ Frank Williams ------------------------- Name Frank Williams Title: Senior Vice President 35 GUARANTY BY CORPORATION DATE July 7, 1995 Gentlemen:: Performance Funding Corp., A corporation organized under the laws of the state of Arizona (herein called "Debtor") is (a) engaged in business as a corporate affiliate of the undersigned, or (b) engaged in selling, marketing, using, or otherwise dealing in merchandise, supplies, products, equipment or other articles supplied to it by the undersigned, or (c) because of our inter-corporate or business relations, it will be our direct interest and advantage to assist the Debtor to procure funds, credit or other financial assistance from you in order to further its business and sales. Accordingly, in order to induce you to purchase or otherwise acquire from the Debtor accounts receivable, conditional sales or lease agreements, chattel mortgages, drafts, notes, bills, acceptances, trust receipts, contracts or other obligations or choses-in-action (herein collectively called "receivables"), or to advance moneys or extend credit to the Debtor thereon, or to factor the sales or finance the accounts of the Debtor (either according to any present or future agreements or according to any changes in any such agreements or on any other terms and arrangements from time to time agreed upon with the Debtor, the undersigned hereby consenting to and waiving notice of any and all such agreements, terms and arrangements and changes thereof) or to otherwise directly or indirectly advance money to or give or extend faith and credit to the Debtor, or otherwise assist the Debtor in financing its business or sales (without obligating you to do any of the foregoing), we, the undersigned, for value received, do hereby unconditionally guarantee to you and your assigns the prompt payment in full at maturity and all times thereafter (waiving notice of non-payment) of any and all indebtedness, obligations and liabilities of every kind or nature (both principal and interest) now, or at any time hereafter owing to you by the Debtor, and of any and all receivables heretofore or hereafter acquired by you from said Debtor in respect of which the Debtor has or may become in any way liable, and the prompt, full and faithful performance and discharge by the Debtor of all the terms, conditions, agreements, representations, warranties, guaranties and provisions on the part of the Debtor contained in any such agreement or arrangement or in any modification or addenda thereto or substitution thereof, or contained in any schedule or other instrument heretofore or hereafter given by or on behalf of said Debtor in connection with the sale or assignment of any such receivables to you, or contained in any other agreements, undertakings or obligations of the Debtor with or to you, of any kind or nature, and we also hereby agree on demand to reimburse you and your assigns for all expenses, collection charges, court costs and attorney's fees incurred in endeavoring to collect or enforce any of the foregoing against the Debtor and/or undersigned or any other person or concern liable thereon; for all of which, with interest at the highest lawful contract rate after due until paid, we hereby agree to be directly, unconditionally and primarily liable jointly and severally with the Debtor and agree that the same may be recovered in the same or separate actions brought to recover the principal indebtedness. Notice of acceptance of this guaranty, the giving or extension of credit to the Debtor, the purchase or acquisition of receivables, or the ad vancement of money or credit thereon, and presentment, demand, notices of default, non-payment or partial payments and protest, notice of protest and all other notices or formalities to which the Debtor might otherwise be entitled, prosecution of collection or remedies against the Debtor or against the makers, endorsers, or other person liable on any such receivables or against any security or collateral thereto appertaining, are hereby waived. The undersigned also waives notice of any consents to the granting of indulgences or extensions of time payment, the taking and releasing of security in respect of any said receivable agreements, obligations, indebtedness or liabilities so guaranteed hereunder, or your accepting partial payments thereon or your settling, compromising or compounding any of the same in such manner and at such times as you may deem advisable, without in any way impairing or affecting our liability for the full amount thereof; and you shall not be required to prosecute collection, enforcement or other remedies against the Debtor or against any person liable on any said receivables, agreements, obligations, indebtedness or liabilities so guaranteed, or to enforce or resort to any security, liens, collateral or other rights or remedies thereto appertaining, before calling on us for payment; nor shall our liability in any way be released or affected by reason of any failure or delay on your part so to do. This guaranty is absolute, unconditional and continuing and payment of the sums for which the undersigned become liable shall be made to you at your office from time to time on demand as the same become or are declared due, notwithstanding that you hold reserves, credits, collateral or security against which you may be entitled to resort for payment, and one or more and successive or concurrent actions may be brought hereon against the undersigned, either in the same action in which the Debtor is sued or in separate actions, as often as deemed advisable. We expressly waive and bar ourselves from any right to set-off, recoup or counterclaim any claim or demand against said Debtor, or against any other person or concern liable on said receivables, and, as further security to you, any and all debts or liabilities now or hereafter owing to us by the Debtor or by such other person or concern are hereby subordinated to your claims and are hereby assigned to you. In case bankruptcy or insolvency proceedings, or proceedings for reorganization, or for the appointment of a receiver, trustee or custodian for us or the Debtor or over our or its property or any substantial portion thereof, be instituted by or against either us or the Debtor, or if we or the Debtor become insolvent or make an assignment for the benefit of creditors, or attempt to effect a composition with creditors, or encumber or dispose of all or a substantial portion of our or its property or if we or the Debtor default in the payment or repurchase of any such receivables or indebtedness as the same falls due, or fail promptly to make good any default in respect of any undertakings, then the liability of the undersigned hereunder shall at your option and without notice become immediately fixed and be enforceable for the full amount thereof, whether then due or not, the same as though all said receivables, debts and liabilities had become past due. This guaranty shall inure to the benefit of yourself, your successors and assigns. It shall be binding on the undersigned, its successors and assigns, and shall continue in full force and effect until notice of termination is given and received as hereinbefore provided and all of said indebtedness, liabilities or obligations created or assumed are fully paid. Attest: Performance Industries, Inc. --------------------------- /S/ Robert A. Cassalia By /S/ Edmund L. Fochtman, Jr. - ---------------------- --------------------------- Robert A. Cassalia, Secretary Edmund L. Fochtman, Jr., President (AFFIX CORPORATE SEAL) ACKNOWLEDGEMENT MUST BE COMPLETED ON REVERSE SIDE CERTIFICATION I, Robert A. Cassalia, do hereby certify that i am the duly elected and qualified Secretary of Performance Industries, Inc., A Arizona corporation, the guarantor named in the foregoing Guaranty; that a (special) (regular) meeting of the Board of Directors of said Corporation held on July 7th, 1995, at which meeting a quorum was present and acting throughout, the foregoing Guaranty was submitted to, and approved by, the Board of Directors of said Corporation, and that the officer that executed the Guaranty for and on behalf of the Corporation was so authorized by the Board of Directors of the Corporation. In witness whereof, I have hereunto set my hand this 7th day of July, 1995. /s/ Robert A. Cassalia ---------------------------------------- Robert A. Cassalia, Secretary (CORPORATE SEAL) EX-10.58 3 RESTAURANT LEASE RESTAURANT LEASE PARTIES. This Lease, dated September 1, 1995, is made by and between Flamingo Restaurant Joint Venture, an Arizona joint venture, by and between 1030 East Flamingo, L.L.C., an Arizona limited liability company, and Las Vegas Garcia's Restaurant Limited Partnership, an Arizona limited partnership (such joint venture called "'Lessor" herein), and Performance Restaurants of Nevada, Inc., a Nevada corporation (herein called "Lessee"). 1. DEFINITIONS. 1.1 As used in this Lease, the following terms have the following meanings: 1.1.1 Lessor's Mailing Address: c/o Sam Nocifera Arbitare Realty Corporation 5080 North 40th Street, Suite 100 Phoenix, Arizona 85018 1.1.2 Lessee's Mailing Address: Performance Restaurants of Nevada, Inc. 2425 East Camelback Road, Suite 620 Phoenix, Arizona 85016 1.1.3 Premises - The real property generally located at 1030 East Flamingo, Las Vegas, Nevada, and more specifically described in Exhibit "A" hereto ('the Property"), together with the restaurant building and improvements constructed thereon ('the Premises") but excluding the furniture, fixtures, and equipment described in Exhibit "B" hereto. 1.1.4 Broker(s) a. Lessor's Broker: Arbitare Realty Corporation, an Arizona Real Estate Brokerage corporation ("Arbitare"). b. Lessee's Broker: Paragon Commercial Real Estate, a Nevada Real Estate Brokerage corporation ("Paragon"). c. Lessor's Broker has disclosed to Lessor and Lessee that Lessor's Broker is acting in this transaction as the agent of: [X] Lessor [ ] both Lessor and Lessee. Lessor and Lessee each consent to such representation. 1.1.5 Commencement Date - The Term shall commence on September 1, 1995. 1.1.6 Term - The Term shall commence as of the Commencement Date and shall continue thereafter for a period of ten (10) years and four (4) months. There shall be two (2) option periods of five (5) years each, subject to the terms and conditions set forth In Section 3.2. 1.1.7 Base Rent - Commencing January 1, 1996, Base Rent shall be payable in the following amounts: January 1, 1996 - December 31, 1998: $14,000,00 per month. January 1, 1999 - December 31, 2005: $15,000.00 per month. Base Rent shall accrue at the rate of $14,000.00 per month but not be payable during the four-month period prior to January 1, 1996. Base Rent accruing during the four-month period prior to January 1, 1996 shall be deemed waived 1 on January 1, 1997 if Lessee is not then in default. If Lessee defaults at any time prior to January 1, 1997, and such default is not cured within the applicable cure period, all Base Rent accrued during the period prior to January 1, 1996 shall become immediately due and payable. 1.1.8 Annual Percentage Rental Rate - Six percent (6%). 1.1.9 Index - The United States Department of Labor Bureau of Consumer Price Index for All Urban Consumers, U.S. City Average, Subgroup "all items" (1982-84 = 100). 1.1.10 Rental Adjustment Dates - The Base Rent shall be adjusted on the first day of the first Option Period and the first day of the second Option Period ('the Rental Adjustment Dates") as set forth in Section 4.3. 1.1.11 Security Deposit - Twenty-Nine Thousand and No/100 Dollars ($29,000.00). 1.1.12 Use - Lessee shall use the Premises for the purpose of conducting a restaurant business, and for no other purpose without the prior written consent of Lessor, and shall operate its business on the Premises at all times under the trade name of "Bobby McGee's." Lessee shall, at Lessee's sole cost, comply with all requirements of municipal, state, and federal authorities now in force or which hereafter may be in force pertaining to the use of the Premises. Lessee shall not perform any acts or carry on any practices which may injure the building or be a nuisance and shall prevent the emission of foul or unpleasant odors from the Premises. Lessee shall commence its restaurant business on the Premises no later than January 1, 1995. Lessee shall not abandon, vacate, or surrender the Premises during the term hereof and shall, upon commencement of the restaurant business, use the Premises during the entire term with due diligence and efficiency, except while the Premises are untenantable by reason of fire or other casualty, so as to produce all of the gross sales which may be produced by such manner of operation. Subject to inability by reason of strikes or labor disputes, Lessee shall carry at all times a stock of food and beverages of such size, character, and quality as shall be reasonably dispensed in the ordinary course of the restaurant and bar business in the Las Vegas metropolitan area to produce the maximum return to Lessor and Lessee. Lessee agrees that, commencing with the date Base Rent is first due and payable hereunder and for the remainder of the Term, Lessee shall keep the restaurant and bar open and available for business continuously during the usual business hours of restaurants in the Las Vegas metropolitan area, except while the Premises are untenantable by reason of fire or other casualty. Lessee shall not conduct or permit to be conducted any auction, distress, or bankruptcy sales upon the Premises without the prior written consent of Lessor. 2. PREMISES. 2.1 PREMISES. Lessor hereby leases to Lessee and Lessee leases from Lessor the Premises. 3. TERM AND POSSESSION. 3.1 TERM. The Lease shall be for the Term specified in Section 1.1.6, unless sooner terminated pursuant to any provision hereof. 3.2 OPTION PERIODS. If Lessee has fully and faithfully performed all of its obligations under this Lease and is not then in default and if Lessee is in possession of the Premises and has not assigned all of its rights under this Lease, Lessee shall have the right and option to extend the Term of this Lease for one (1) additional period of five (5) years ("the First Option Period") by giving written notice to Lessor not less than six (6) months prior to the end of the initial term. Provided Lessee has fully and faithfully performed all of its obligations under this Lease and is not then in default and if Lessee is in possession of the Premises and has not assigned all of its rights under this Lease, Lessee shall also have the right and option to extend the Term of this Lease for a second period of five (5) years ("the Second Option Period") by giving written notice to Lessor not less than six (6) months prior to the end of the First Option Period. During any such option period, all of the terms and provisions hereof shall be applicable and shall remain in full force 2 and effect, except that the Base Rent shall be adjusted as set forth in Section 4.3. 3.3 DELAY IN POSSESSION. If, for any reason, Lessor cannot deliver possession of the Premises to Lessee on 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 be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the premises is tendered to Lessee (provided, however, that if Lessor shall not have delivered possession of the premises within sixty (60) days from said Commencement Date, Lessor or Lessee may cancel this Lease by giving notice of such cancellation to the other in which event the parties shall be discharged from all obligations hereunder). 3.4 EARLY POSSESSION. If Lessee occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not advance the termination date, and Lessee shall pay rent for such period at the initial monthly rates set forth above. 4. RENT. 4.1 BASE RENT. Lessee shall pay to Lessor the Base Rent as specified in Section 1.1.7 without any offset deduction except as may otherwise by expressly provided in this Lease (i.e., Section 5) on the first day of each month of the Term. Rent for any period during the Term which is for less than one month shall be a pro rata portion of the Base Rent. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 4.2 PERCENTAGE RENT. In additional to the Base Rent, Lessee shall pay to Lessor at such time and in the manner hereinafter specified additional rent in an amount equal to the Percentage Rental Rate multiplied by the amount of gross sales made in, upon, or from the Premises during each six-month period described below, less the aggregate amount of the Base Rent previously paid by Lessee for said six-month period. 4.2.1 Within thirty (30) days after the end of each calendar month commencing January 1, 1996, Lessee shall furnish to Lessor a statement in writing, certified by Lessee to be correct, showing the total gross sales made in, upon, or from the Premises during the preceding calendar month. Within thirty (30) days after the end of each successive six (6) month period commencing January 1, and July 1 throughout the Term of this Lease, Lessee shall tender a payment to Lessor equal to said hereinabove stated percentage of the total monthly gross sales made in, upon, or from the Premises during such six (6) month period, less the Base Rent for such six (6) month period, if previously paid. Said statement and payment shall be made with the succeeding month's regular rental payment. 4.2.2 The term "gross sales" as used in this Lease shall mean gross sales as determined in accordance with this paragraph. Gross sales shall include the dollar aggregate of: (a) the sales price of all food, beverages, goods, wares and merchandise sold, and the charges for all services performed, by Lessee or any licensees, concessionaires, and subtenants of Lessee from all business conducted on, in, at or from the Premises, whether such sales or charges are made for cash, by check, on credit or otherwise, without reserve or deduction for inability or failure to collect for the same, including, but not limited to, sales and service (i) where the orders therefor originate at and are accepted in the Premises, but delivery or performance thereof is made from or at any other place; (ii) made pursuant to mail, telegraph, telephone or other similar orders received or billed at or from the Premises; (iii) made by means of mechanical or other vending devices located on the Premises, but only to the extent that the proceeds from such sales are retained by Lessee and not paid over to the owner of any leased vending machines as rental therefor; or (iv) made as a result of transactions originating from whatever source which in the normal and customary course of operations would be credited or attributed to business at the Premises; (b) all moneys or other things of value received by Lessee or its licensees, concessionaires or subtenants from its or their operations which are neither included in or excluded from gross sales by the other provisions of this definition. There shall be deducted from the above sum in determining gross sales (a) the amount of cash or credit refunds made upon, but not in excess of, transactions previously included within gross sales for merchandise returned by the purchaser and accepted by Lessee, and (b) the amount of cash or credit discounts from Lessee's regular published prices for any food, beverage, or service sold to a customer which Lessee has allowed for the sole purpose of acquiring or maintaining goodwill for Lessee's business conducted on the Premises; and (c) the amount recorded by Lessee as sales for employee meals for which no consideration was received from the employees, but only to the extent such amount was previously 3 included within gross sales. "Gross sales" shall not include the exchange of merchandise between restaurants of Lessee where such exchanges are made solely for the convenient operation of Lessee's business; returns to shippers or manufacturers; sales of fixtures after use thereof; tips and other compensation paid directly by customers to employees of the restaurant business to be conducted on the Premises or designated for such employees on credit card charge slips; the amount of any fixed, but separately stated, service charge added by Lessee to the cost of food and beverages and collected by Lessee from its customers, but only to the extent that the funds collected from such charge (a) do not exceed fifteen percent (15%) of the cost of the food and beverages with respect to which such charge is attributable and (b) are segregated for, and actually paid to, employees providing the services to which the charges are attributable; the amount of any city, county, state or federal sales, luxury or excise tax which is added to the selling price or absorbed therein and also paid to the taxing authority by Lessee; or gaming revenues from slot machines, video poker games, or similar types of gaming devices. No franchise or capital stock tax and no income or similar tax based upon income, profits or gross sales as such shall be deducted from gross sales in any event whatsoever. Each charge or sale upon installment or credit shall be treated as a sale for the full price in the month during which such charge or sale shall be made, irrespective of the time when Lessee shall receive payment therefor. Anything in this definition to the contrary notwithstanding, Lessee may not permit any licensees, concessionaires, or subtenants to conduct any business in, on or about the Premises except with the written consent of Lessor pursuant to Article 12. 4.2.3 The term "restaurant business" as used in this Lease shall include the operation of a restaurant/nightclub as is currently operated by Lessee in its other locations under the trade name "Bobby McGee's" as well as a bar, take-out service, catering service and incidental activities on the Premises such as dancing, entertainment and games. 4.2.4 Lessee shall keep full, complete, and proper books, records, and accounts of its daily gross sales, both for cash and on credit, of each separate department, subtenant, and concessionaire operated at any time in the Premises. Lessor and its agents and employees shall have the right at any and all times, during the regular business hours, to examine and inspect all of the books and records of Lessee, including any sales tax reports pertaining to the business of Lessee conducted in, upon, or from the Premises, for the purpose of investigating and verifying the accuracy of any statement of gross sales. Lessor may once in any calendar year cause an audit of the business of Lessee to be made by an accountant of Lessor's selection and if the statement of gross sales previously made to Lessor shall be found to be inaccurate, then and in that event, there shall be an adjustment and one party shall pay to the other on demand such sums as may be necessary to settle in full the accurate amount of said percentage rent that should have been paid for the period or periods covered by such inaccurate statement or statements. Lessee shall keep all said records for a minimum of three (3) years. If said audit shall disclose an inaccuracy in favor of Lessee of greater than a three percent (3%) error with respect to the amount of gross sales reported by Lessee for the period of said report, then Lessee shall immediately pay to Lessor the cost of such audit; otherwise, the cost of such audit shall be paid by Lessor. If such audit shall disclose any willful or substantial inaccuracies Lessor may, in addition to any other remedies it may have for Lessee's breach of this Lease, terminate this Lease. 4.2.5 Notwithstanding the foregoing, any gross sales during the period prior to January 1, 1996 shall be added to gross sales for the six-month period ending June 30, 1996, for purposes of determining the percentage rent payable July 30, 1996. In addition, it shall be presumed that Lessee paid $14,000.00 per month Base Rent during such period for purposes of calculating the percentage rent payable July 30, 1996. 4.3 BASE RENT ADJUSTMENT. The Base Rent set forth in Section 1.1.7 shall be adjusted on the Rental Adjustment Dates. Adjustments, if any, shall be based only upon increases (if any) in the Index, as set forth in Section 1.1.9. The Index in publication three (3) months before the Lease Term Commencement Date shall be the "Base Index." The Index in publication three (3) months before each Rental Adjustment Date shall be the "Comparison Index." As of each Rental Adjustment Date, the Base Rent payable monthly shall be determined by increasing the Initial Base Rent by a percentage equal to the percentage increase, if any, in the applicable Comparison Index over the Base Index. If the Comparison Index for any Rental Adjustment Date is equal to or less than the Comparison Index for any preceding Rental Adjustment Date (or the Base Index, in the case of the First Adjustment Date), the Base Rent for the ensuing period shall remain the amount of Base Rent payable monthly during the preceding period. When the Base Rent payable as of each Rental Adjustment Date is determined, Lessor shall promptly give Lessee written notice of such adjusted Base Rent. The Base Rent as so adjusted from time to time shall be the "Minimum Rent" for all purposes under this Lease, if at any Rental Adjustment Date the Index no longer exists in the form described in this Lease, Lessor may substitute any substantially equivalent official Index published by the Bureau of Labor Statistics or 4 its successor. Lessor shall use any appropriate conversion factors to accomplish such substitution. The substitute Index shall then become the "Index" hereunder. 4.4 OPERATING EXPENSES. Lessee shall pay during the Term, in addition to the Base Rent and percentage rent, all expenses relating to the operation of the Premises, including but not limited to: a. all expenses incurred in the operation, maintenance, repair and replacement of the following: (i) parking areas; (ii) trash disposal services; (iii) landscaping; (iv) fire detection systems, including sprinkler system maintenance and repair; (v) security services; (vi) the heating, air conditioning, and fire protection systems and equipment including fire sprinklers, including the cost of a preventive maintenance contract which Lessor may procure, and (vii) any other service to be provided by Lessor that is elsewhere in this Lease stated to be an "Operating Expense"; b. the deductible portion of an insured loss concerning the Premises; c. the cost of the premiums for the liability and property insurance policies to be maintained by Lessor under Section 8 hereof; d. the amount of the real property tax paid by Lessor under Section 10 hereof; e. the cost of water, gas, electricity and any other utility servicing the Premises; f. any other cost and expense to Lessor which is fairly and equitably attributable to the Premises. 4.4.1 The inclusion of improvements, facilities and services set forth in Section 4.4.1.a as being within the definition of Operating Expenses shall not be deemed to impose an obligation upon Lessor to either provide said improvements or facilities or to provide those services unless the Lessor already provides the services or Lessor has agreed elsewhere in this Lease to provide the same or some of them. Lessor shall not be liable for damages or loss of any kind caused by accident, breakage, repairs, strikes, lockout or other labor disturbances or disputes of any character or by any other cause beyond the reasonable control of Lessor. 4.4.2 Lessee's Share of Operating Expenses shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expense is transmitted to Lessee by Lessor. At Lessor's option, however, Lessee's Share of annual Operating Expenses may be estimated by Lessor from time to time and the same shall be payable monthly on the same day as the Base Rent is due hereunder. If Lessee pays Lessor's estimate of Lessee's Share of Operating Expenses as aforesaid, Lessor shall transmit to Lessee within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Operating Expenses incurred during the preceding year. If Lessee's payments under this Section 4.4.2 for said preceding year exceed Lessee's Share as indicated on said statement, Lessee shall be entitled to credit the amount of such overpayment against Lessee's Share of Operating Expenses next falling due. If Lessee's payments under this paragraph during said preceding year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after transmittal by Lessor to Lessee of said statement. 4.5 TAX. Lessee shall be liable for any tax (now or hereafter imposed by any governmental entity) applicable to or measured by or on the rents or any other charges payable by Lessee under this Lease, including but not limited to any commercial rental tax, transaction privilege tax or excise tax with respect to the rent or other charges or the possession, leasing, operation, use or occupancy of the Premises, but not including any net income, franchise, capital stock, estate or inheritance taxes. Lessee shall pay to Lessor at the same time as Lessee pays its monthly installment of rent and at the same time as Lessee pays to Lessor any other sum of money hereunder upon which the aforementioned tax is imposed, an amount equal to such tax. Without limiting the foregoing, Lessee shall also be liable and responsible for payment of any taxes or license fees relating to gaming on the Premises. 5. SECURITY DEPOSIT. A $15,000.00 portion of the Security Deposit specified in Section 1.1.11 is being held by Paragon and shall be applied as set forth in Section 15. Lessee shall deposit with Lessor upon execution hereof 5 the remaining $14,000.00 portion of the Security Deposit specified in Section 1.1.11 as security for Lessee's faithful performance of Lessee's obligations hereunder. Lessor shall apply such $14,000.00 toward payment of Base Rent due and payable January 1, 1996 if Lessee is not then in default. If Lessee fails to pay rent or other charges due hereunder or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default or for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall, within ten (10) days after the date of written demand therefor, deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount then required of Lessee. If the Base Rent shall, from time to time, increase during the Term of this Lease, Lessee shall, at the time of such increase, deposit with Lessor additional money as a security deposit so that the total amount of the security deposit held by Lessor shall at all times bear the same proportion to the then current Base Rent as the initial security deposit bears to the initial Base Rent set forth In Section 4. Lessor shall not be required to keep said security deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit or so much thereof as has not theretofore been applied by Lessor shall be returned, without payment of interest or other Increment for its use to Lessee (or at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) at the expiration of the Term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said security deposit. 6. USE. 6.1 USE. The Premises shall be used and occupied only for the use specified in Section 1.1.12. 6.2 COMPLIANCE WITH LAW. Lessee shall, at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record and requirements of any fire insurance underwriters or rating bureaus now in effect or which may hereafter come into effect relating in any manner to the Premises and/or the occupation and use by Lessee of the Premises. Lessee shall not use or permit the use of the Premises in any manner that will tend to create waste or a nuisance. Lessee shall, at Lessee's expense, further comply with the 1964 Civil Rights Act and all amendments thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive Environmental Responsibility Compensation and Liability Act, and the Americans With Disabilities Act insofar as such Acts or any of them relate to Lessee's use and occupancy of the Premises. Lessee shall also, at Lessee's expense, promptly comply with all applicable statutes, rules, ordinances, regulations, orders, covenants, and restrictions of record concerning or relating to gaming activities on the Premises. 6.3 CONDITION OF PREMISES. 6.3.1 Lessor shall deliver the Premises to Lessee In "'As-Is" condition, without any representations or warranties. 6.3.2 Except as otherwise provided in this Lease, Lessee hereby accepts the Premises in their condition existing as of the Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed hereby and by any exhibits attached hereto. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the present or future suitability of the Premises for the conduct of Lessee's business. 7. MAINTENANCE. 7.1 LESSOR'S OBLIGATIONS. Except as otherwise set forth in this Lease, Lessor, at Lessor's expense, shall keep in good condition and repair the foundations, exterior walls and roof structure of the Premises. Lessor shall not, however, be obligated to paint the exterior or interior surface of exterior walls, nor shall Lessor be required to maintain, repair or replace windows, doors or plate glass of the Premises nor perform any other maintenance, repair and/or replacement not specifically the obligation of Lessor pursuant to this Lease. Lessor shall have no obligation to make repairs under this Section 7.1 until Lessor has received written notice from Lessee of the need for such repairs. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the 6 right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. With respect to damage caused by any negligent or intentional act or omission of Lessee, Lessee's employees, agents, independent contractors or invitees, Lessor shall have the right, but not the obligation, to make such repairs and/or replacements as may be necessary or required by reason of such damage and all such costs and expenses so incurred by Lessor in connection therewith, together with interest thereon at the rate of eighteen percent (18%) per annum, from the date of expenditure by Lessor until paid by Lessee, shall become due and payable as additional rent to Lessor, together with Lessee's next rental installment. Lessor may require as a condition to Lessor's obligation to commence repairs and/or replacements that Lessee deposit with Lessor within twenty (20) days after Lessor sends Lessee a statement therefor in an amount that Lessor estimates will be necessary to pay for such costs and expenses. If the amount deposited by Lessee is greater than the actual amount expended by Lessor, the difference thereof shall be credited by Lessor to Lessee against the next payment due Lessor from Lessee pursuant to this Lease. If the amount deposited by Lessee is less than the amount expended by Lessor, Lessee shall pay the deficiency to Lessor upon demand. If Lessee fails to pay any amount required pursuant to this paragraph, all of Lessor's cost and expenses in connection with such repairs and/or replacements or the amount of any deficiency shall bear interest at the rate of eighteen percent (18%) per annum from the date of expenditure by Lessor until repaid by Lessee. Lessor shall not be liable for and Lessee shall not be entitled to any abatement of rent with respect to any injury to or any interference with Lessee's business arising from any repair, maintenance, alteration or improvement in business arising from any repair, maintenance, alteration or improvement in or to any portion of the Premises. 7.2 LESSEE'S OBLIGATIONS. 7.2.1 Except for the items to be maintained by Lessor as set forth in Section 7.1, Lessee, at Lessee's expense, shall keep in good condition and repair the Premises and every part thereof including, without limiting the generality of the foregoing, all plumbing, electrical and lighting facilities and equipment, fixtures, interior walls and interior surfaces of exterior walls, ceilings, windows, doors, plate glass and skylights located within the Premises and shall perform any other maintenance, repair and/or replacement not specifically the obligation of Lessor pursuant to this Lease. 7.2.2 On the last day of the Term hereof or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, broom clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices. Lessee shall leave the space heaters, air conditioning, heating and plumbing servicing Utility Installations on the Premises in good operating condition. 7.3 TENANT IMPROVEMENTS. Lessee shall be responsible for all tenant improvements. Lessee shall submit to Lessor on or before September 10, 1995 three (3) sets of Lessee's proposed construction plans and specifications for all tenant improvements to be constructed in the Premises and within seven (7) working days after receipt of Lessee's plans and specifications Lessor shall either: (a) evidence Its approval by endorsement on one (1) set of said plans and specifications and return such signed or initialled set to Lessee (whereupon such approved preliminary plans and specifications shall then constitute the final plans and specifications for the tenant improvement work, although such plans may subsequently be amended by Lessee with Lessor's prior approval, which approval shall be given or refused within seven (7) working days after receipt of such amended plans and specifications); or (b) refuse such approval if Lessor shall determine that the same (i) do not conform to the standards of design, motif, and decor established or adopted by Lessor for the Premises; (ii) would subject Lessor or the Premises to any additional cost, expense, liability, violation, fine, penalty, or forfeiture; (iii) would adversely affect the reputation, character, or nature of the Premises; (iv) would provide for or require any installation of work which is or might be unlawful, create an unsound or dangerous condition, or adversely affect the structural soundness of the Premises or the building; or (v) interfere with or abridge the use and enjoyment of any adjoining or other properties. If Lessor refuses approval, Lessor shall advise Lessee within such seven (7) day working period of those revisions and corrections which Lessor requires and Lessee shall, within ten (10) days thereafter, submit three (3) sets of proposed plans and specifications, as so revised or corrected, to Lessor for its approval in accordance with this paragraph. All tenant improvements in the Premises ("Lessee's Work") shall be furnished and installed by Lessee's general contractor or other contractor employed by Lessee upon the following terms and conditions: 7.3.1 Lessee's contractor must be approved by Lessor, which approval will not be unreasonably 7 withheld; 7.3.2 Prior to commencement of Lessee's Work, Lessee's contractor shall deliver to Lessor a true, accurate, and complete list of all subcontractors, suppliers, and materialmen who will be utilized for Lessee's Work, which list will be certified by Lessee to be true, correct, and complete; 7.3.3 Lessee shall perform and complete Lessee's Work in accordance with the plans and specifications approved by Lessee and Lessor in accordance with this Section. Lessee's Work shall be performed and completed at Lessee's sole cost and expense by Lessee's contractor; 7.3.4 Lessor may require Lessee to provide a lien and completion bond for Lessee's Work and/or also to present lien waivers to Lessor for services or materials used in performing Lessee's Work. Upon approval of the plans and specifications for Lessee's Work in accordance with the provisions of this Section, Lessee shall thereafter, through its general contractor, commence and diligently pursue completion of Lessee's Work; 7.3.5 No improvements shall be installed by Lessee unless and until (i) Lessor has approved the plans and specifications therefor as provided in this Section, and (ii) Lessee has submitted to Lessor certificates of insurance evidencing that Lessee's general contractor has in full force and effect, with Lessor named as an additional insured, contractor's general and automobile liability insurance coverage and workmen's compensation insurance against liability arising from claims of workmen in amounts and with insurers with an A or better rating in the most recent Best's Insurance guide or approved by Lessor, which approval will not be unreasonably withheld. Lessee shall cause the insurance described in subparagraph (ii) to be maintained during the period any construction Is being performed on the Premises and such Insurance shall be In addition to that required by Section 8 below; 7.3.6 Lessor is hereby granted the right, but not the obligation, to inspect the Premises from time to time at reasonable times during construction of Lessee's Work, so long as such entry does not adversely interfere with the work of Lessee's contractor and subcontractors. Any inspection by Lessor shall not be a representation by Lessor that there has been or will be compliance with the plans and specifications for Lessee's Work or that the construction is free from defective materials or workmanship, nor shall any inspection by Lessor constitute approval of any certification given to Lessor. 7.4 ALTERATIONS AND ADDITIONS. 7.4.1 Except as set forth in Section 7.3, Lessee shall not, without Lessor's prior written consent, make any alterations, additions, or Utility Installations in, on or about the Premises except for nonstructural alterations to the Premises not exceeding Twenty Thousand Dollars ($20,000.00) in cumulative costs, during the Term of this Lease. In any event, whether or not in excess of Twenty Thousand Dollars ($20,000.00) in cumulative cost, Lessee shall make no change or alteration to the Premises without Lessor's prior written consent, which may be given or withheld at Lessor's sole and absolute discretion. As used in this Section 7.4, the term, "Utility Installation," shall mean air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, heating and plumbing. Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements to insure Lessor against any liability for mechanics' and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior written approval of Lessor, Lessor may, at any time during the Term of this Lease, require that Lessee remove any or all of the same and restore the Premises to the condition that existed immediately prior to the alteration, improvement, addition or Utility Installations. 7.4.2 Any alterations, additions or Utility Installations in or about the Premises that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form, with detailed plans therefor. If Lessor shall give its consent, the consent shall be deemed conditioned upon Lessee's acquiring a permit to do so from appropriate governmental agencies, the furnishing of a copy thereof to Lessor prior to the commencement of the work and the compliance by Lessee of all conditions of said permit in a prompt and expeditious manner. 7.4.3 Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee or for use in the Premises, which claims are or may be secured by any mechanics' or 8 materialmen's lien against the Premises or Lessee's interest therein. Lessee shall give Lessor not less than ten (10) days notice in writing prior to the commencement of any work in the Premises, and Lessor shall have the right to post notices of nonresponsibility in or on the Premises or 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 itself and Lessor 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. Lessor may, however, require Lessee to procure, at Lessee's cost, a surety bond complying with the provision of A.R.S. ss. 33-1004 so as to discharge the Premises from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest to do so. 7.4.4 Subject to Section 7.5, all alterations, additions and Utility Installations, and all equipment, machinery, and fixtures affixed to or installed in the premises, whether by Lessor or by Lessee, and whether at Lessor's expense or Lessee's expense, at Lessor's option, shall either (i) be the property of Lessor at the expiration or earlier termination of this Lease and shall not be removed at the expiration of the Term or earlier termination thereof or, (ii) be removed by Lessee at Lessee's sole cost and expense, and Lessee shall repair any damage occasioned to the Premises by reason of such removal. Any personal property of Lessee, including furnishings and trade fixtures installed by or at the expense of Lessee at the Premises (collectively, "Lessee's property") that are removable without damage to the Premises, shall be and remain Lessee's property and, at the expiration of the Term or earlier termination thereof, shall be removed by Lessee at Lessee's sole cost and expense. Lessee shall promptly repair any damage to the Premises resulting from such removal. Any of Lessee's property not removed from the Premises before the expiration of the Term or earlier termination thereof, at Lessor's option, shall either become the property of Lessor or may be removed by Lessor and Lessee shall pay to Lessor the cost of such removal and the cost to repair any damage occasioned to the Premises by reason of such removal within ten (10) days after delivery of a statement reflecting the costs of the removal and repair to Lessee. Any damage to the Premises or to the Premises resulting from Lessee's use of Lessee's property or of the alterations shall be repaired by Lessee at Lessee's expense or at Lessor's option by Lessor but at Lessee's expense. 7.5 FURNITURE, FIXTURES AND EQUIPMENT. All furniture, fixtures, and equipment situated on or in the Premises constitute property of Lessor and are described In the inventory attached hereto as Exhibit "B" ("the Existing FF&E'). Lessor shall remain the sole and exclusive owner of the Existing FF&E throughout the Term of this Lease and any option period and it is mutually agreed that Lessee neither has nor shall acquire any ownership or leasehold interest in the Existing FF&E by virtue of this Lease. The Existing FF&E shall remain in the Premises during the Term of this Lease and shall not be disinstalled or removed from the Premises without Lessor's prior written consent. 8. INSURANCE; INDEMNITY. 8.1 LIABILITY INSURANCE - LESSEE. Lessee shall, at Lessee's expense, obtain and keep in force during the Term of this Lease a policy of Combined Single Limit Bodily Injury and Property Damage Insurance insuring Lessee and Lessor against any liability arising out of the use, occupancy or maintenance of the Premises. Such insurance shall be in an amount of not less than One Million Dollars ($1,000,000.00). The limits of said insurance shall not, however, limit the liability of Lessee hereunder. 8.2 LIABILITY INSURANCE - LESSOR. Lessor shall obtain and keep in force during the Term of this Lease a policy of Combined Single Limit Bodily Injury and Property Damage Insurance, insuring Lessor against liability arising out of the ownership, use, occupancy or maintenance of the Premises in an amount not less than $1,000,000.00 per occurrence. 8.3 PROPERTY INSURANCE. Lessor shall obtain and keep in force during the Term of this Lease a policy or policies of all risk insurance covering loss or damage to the Premises (but not Lessee's property, fixtures, equipment or tenant improvements) in such amount as Lessor may elect, but not to exceed the full replacement value thereof, as the same may exist from time to time. Lessor shall obtain and keep in force during the Term of this Lease such other insurance as Lessor deems advisable. In addition, Lessor may obtain and keep in force, during the Term of this Lease, a policy of rental loss insurance covering a period of one year, with loss payable to Lessor, which insurance may also cover all Operating Expenses for said period. In the event that the Premises shall suffer an insured loss as defined In Section 10.1.7 hereof, the deductible amounts under the insurance policies relating to the Premises 9 shall be paid by Lessee. 8.4 PAYMENT OF PREMIUM INCREASE. Lessee shall pay the entirety of any increase in the property insurance premium for the Premises over what it was immediately prior to the Commencement Date if the Increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies holding a "General Policyholders Rating" of at least A, Class XII, 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 carried by Lessor. Lessee shall deliver to Lessor copies of liability insurance policies required under Section 9.1 or certificates evidencing the existence and amounts of such insurance within seven (7) days after the Commencement Date. No such policy shall be cancelable or subject to reduction of coverage or other 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 renewals or "binders" thereof. 8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and relieve the other and waive their entire right of recovery against the other for loss or damage arising out of or incident to the perils insured against, which perils occur in, on or about the Premises, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. Lessee and Lessor shall, upon obtaining the policies of insurance required, give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor from and against any and all claims arising from Lessee's use of the Premises or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises. Lessee shall further indemnify and hold harmless Lessor from and against any and all claims arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease or arising from any act or omission of Lessee or any of Lessee's agents, independent contractors, employees, and/or invitees and from and against all costs, attorneys' fees, expenses and liabilities in the defense of any such claim or any action or proceeding brought thereon. If any action or proceeding is brought against Lessor by reason of any such claim, 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. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons in, upon or about the Premises arising from any Cause and Lessee hereby waives all claims in respect thereto against Lessor. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, agents, independent contractors and/or invitees or any other person in or about the Premises, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from fire, steam, electrical gas, water or rain or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures or from any other cause, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Lessee. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. 9.1.1 "Premises Partial Damage" shall mean, if the Premises are damaged or destroyed to the extent that the cost of repair is less than fifty percent (50%) of the then replacement cost of the Premises. 9.1.2 "Premises Total Destruction" shall mean if the Premises are damaged or destroyed to the extent that the cost of repair Is fifty percent (50%) or more of the then replacement cost of the Premises. 9.1.3 "Premises Building Partial Damage" shall mean if the building of which the Premises are a 10 part is damaged or destroyed to the extent that the cost to repair is less than fifty percent (50%) of the then replacement cost of the building. 9.1.4 "Premises Building Total Destruction" shall mean if the building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent (50%) or more of the then replacement cost of the building. 9.1.5 "Insured Loss" shall mean damage or destruction which was covered by an event required to be covered by the insurance described in Section 9. The fact that an Insured Loss has a deductible amount shall not make the loss an Uninsured Loss. 9.1.6 "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring, excluding all improvements made by lessees. 9.2 PREMISES PARTIAL DAMAGE; PREMISES BUILDING PARTIAL DAMAGE. 9.2.1 Insured Loss. Subject to the provisions of Sections 9,4 and 9.5, if at any time during the Term of this Lease there is damage which is an Insured Loss and which falls into the classification of either Premises Partial Damage or Premises Building Partial Damage, then Lessor shall proceed diligently to cause a repair of such damage to the Premises (but not Lessee's fixtures, equipment, property or tenant Improvements) as soon as reasonably possible after Lessor has received the insurance proceeds, and this Lease shall continue in full force and effect. 9.2.2 Uninsured Loss. Subject to the provisions of Sections 9.4 and 9.5, if at any time during the Term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Partial Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from using the Premises, 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 sixty (60) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage. In the event Lessor elects to give such notice of Lessor's intention to cancel and 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 intention to repair such damage at Lessee's expense, without reimbursement from Lessor, in which event this Lease shall continue in full force and effect, and Lessee shall proceed to make such repairs as soon as reasonably possible. If Lessee does not give such notice within such 10 day period, this Lease shall be canceled and terminated as of the date of the occurrence of such damage. 9.3 PREMISES TOTAL DESTRUCTION; PREMISES BUILDING TOTAL DESTRUCTION. Subject to the provisions of Sections 9.4 and 9.5, if at any time during the Term of this Lease there is damage, whether or not it is an Insured Loss, and which falls into the classifications of either (i) Premises Total Destruction, or (ii) Premises Building Total Destruction, then Lessor may at Lessor's option either (i) repair such damage or destruction (but not Lessee's fixtures, equipment, property or tenant improvements) as soon as reasonably possible after Lessor has received the insurance proceeds at Lessor's expense, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within sixty (60) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case, this Lease shall be canceled and terminated as of the date of the occurrence of such damage. 9.4 DAMAGE NEAR END OF TERM. 9.4.1 Subject to Section 9.4.2, if at any time during the last six (6) months of the Term of this Lease there is damage, whether or not an Insured Loss, which falls within the classification of Premises Partial Damage or Premises Building Partial Damage, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within sixty (60) days after the date of occurrence of such damage. 9.4.2 Notwithstanding Section 9.4.1, if Lessee has an option to extend or renew this Lease, and 11 the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than thirty (30) days after the occurrence of an Insured Loss falling within the classification of Premises Partial Damage or Premises Building Partial Damage during the last six (6) months of the Term of this Lease. If Lessee duly exercises such option during said thirty (30) day period, Lessor shall, at Lessor's expense, repair such damage (but not Lessee's fixtures, equipment, property or tenant improvements) as soon as reasonably possible after receipt of the insurance proceeds, and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said thirty (30) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said thirty (30) day period by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the expiration of said thirty (30) day period, notwithstanding any term or provision in the grant of option to the contrary. 9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES. 9.5.1 In the event Lessor repairs or restores the Premises pursuant to the provisions of this Section 9, the rent payable hereunder for the period during which such damage, repair or restoration continues shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair of restoration. 9.5.2 If Lessor shall be obligated to repair or restore the Premises under the provisions of this Section 9 and shall not commence such repair or restoration within one hundred eighty (180) days after such obligation shall accrue, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do at any time prior to the commencement of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. 9.6 TERMINATION ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Section 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor, Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.7 WAIVER. Lessor and Lessee waive the provisions of any statute which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as defined in Section 10.2, applicable to the Premises subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of Section 4.4, except as otherwise provided in Section 10.2. 10.2 DEFINITION OF "REAL PROPERTY TAX." As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Premises or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Premises or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Premises. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax," (ii) the nature of which was hereinbefore included within the definition of "real property tax," or (iii) which is imposed by reason of this transaction, any modifications or changes hereto or any transfers hereof. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's Share of the real property tax liability shall be an equitable proportion of the real property taxes for all of the land and buildings included within the tax parcel assessed, such portion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 12 10.4 PERSONAL PROPERTY TAXES. 10.4.1 Lessee shall pay at least thirty (30) days prior to delinquency all taxes, license fees, charges and assessments assessed against and levied upon fixtures, equipment, leasehold improvements and all other personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause said fixtures, equipment, leasehold improvements and all other personal property of Lessee to be assessed and billed separately from the real property of Lessor. 10.4.2 If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises without Lessor's prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void and shall constitute a breach of this Lease without the need for notice to Lessee under Section 12.6.1. Any sale or other transfer, including transfer by consolidation, merger or reorganization, of twenty-five percent (25%) or more of the voting stock of Lessee if Lessee is a corporation or any sale or other transfer of twenty-five percent (25%) or more of the partnership interest in Lessee if Lessee is a partnership or twenty-five percent (25%) or more of the member interests of Lessee is a limited liability company shall be an assignment for the purpose of this Section 12. 12.2 LESSEE AFFILIATE. Notwithstanding the provisions of Section 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, 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, all of which are referred to as "Lessee Affiliate," provided that before such assignment shall be effective said assignee shall assume, in full, the obligations of Lessee under this Lease. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, which consent shall not be necessary. 12.3 TERMS AND CONDITIONS OF ASSIGNMENT. Regardless of Lessor's consent, no assignment shall release Lessee of Lessee's obligations hereunder or alter the primary liability of Lessee to pay the Base Rent, Operating Expenses and any other monetary sums payable by Lessee hereunder and to perform all other obligations to be performed by Lessee hereunder. Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of rent shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this Section 12 or this Lease. Consent to one assignment shall not be deemed consent to any subsequent assignment. In the event of a default by any assignee of Lessee or any successor of Lessee, in the performance of any of the terms hereof, Lessor may proceed directly against Lessee without the necessity of exhausting remedies against said assignee. Lessor may consent to subsequent assignments of this Lease or amendments or modifications to this Lease with assignees of Lessee, without notifying Lessee or any successor of Lessee, and without obtaining its or their consent thereto and such action shall not relieve Lessee of liability under this Lease. 12.4 TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be included in subleases: Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income 13 arising from any sublease 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 default shall occur in the performance of Lessee's obligations under this Lease, Lessee may 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 default exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents due and to become due under the sublease, Lessee agrees that such sublessee shall have the right to rely upon any such statement and request from Lessor, and that such sublessee shall pay such rents to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right to claim against such sublessee or Lessor for any rents so paid by said sublessee to Lessor. 12.5 ATTORNEYS' FEES. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do, then Lessee shall pay Lessor's reasonable attorneys' fees incurred in connection therewith. 12.6 PROCEDURE. 12.6.1 If Lessee desires to enter into an assignment or a sublease, Lessee shall request in writing ('the notice'), at least sixty (60) days before the effective date of the assignment or sublease, Lessor's consent to the assignment or sublease and provide the following: (i) the name of the proposed assignee, sublessee or occupant; (ii) the nature of the proposed assignee's, sublessee's or occupant's business to be carried an in the Premises; (iii) the terms and provisions of the proposed assignment or sublease and (iv) such financial information concerning the proposed assignee, sublessee or occupant which Lessor shall have requested following its receipt of Lessee's request for consent. 12.6.2 At any time within forty-five (45) days after Lessor's receipt of the notice, Lessor may by written notice to Lessee elect either to (i) consent to the proposed assignment or sublease, or (ii) refuse to consent to the proposed assignment or sublease. Lessor and Lessee agree (by way of example and not limitation) that it shall be reasonable for Lessor to withhold its consent if any of the following situations may exist: (i) the proposed transferee's use of the Premises conflicts with the permitted use under this Lease, (ii) in Lessor's reasonable business judgment, the proposed transferee lacks sufficient business reputation or experience to operate a successful business of the type and quality permitted under this Lease, (iii) Lessee is in default pursuant to this Lease, or (iv) the proposed transferee's financial condition at such time is less favorable than Lessee's financial condition as of the date of this Lease, or (v) the percentage rent that would be reasonably anticipated from the sales by the contemplated transferee would reasonably be expected to be less than that of Lessee hereunder. 12.6.3 Each assignee or other transferee shall assume all obligations of Lessee under this Lease and shall be and remain liable jointly and severally with Lessee for the payment of rent and all other monetary obligations hereunder and for the performance of all the terms, covenants, conditions and agreements herein contained on Lessee's part to be performed for the Term. 13. DEFAULT; REMEDIES. 13.1 DEFAULT. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: 13.1.1 The vacating or abandonment of the Premises by Lessee. 13.1.2 The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of five (5) days after the date of written notice thereof from Lessor to Lessee. 13.1.3 The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee, other than described In Section 13.1.2 above, where such failure 14 shall continue for a period of thirty (30) days after the date of written notice thereof from Lessor to Lessee; provided, however that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. 13.1.4 (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors; (ii) Lessee becomes a "Debtor" as defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. If any provision of this Section 13.1.4 is contrary to any applicable law, such provision shall be of no force or effect. 13.1.5 The discovery by Lessor that any financial statement given to Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any successor in interest of Lessee or any guarantor of Lessee's obligation hereunder was materially false. 13.2 REMEDIES. In the event of any such material default by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default: 13.2.1 Terminate this Lease, which said termination shall be evidenced, if at all, only by written notice to Lessee of termination. 13.2.2 Immediately lock out and/or reenter and resume possession of the Premises or any part thereof (which said lock out and/or reentry and resumption shall not operate to terminate this Lease), without compensation to Lessee for any improvements placed upon the Premises, and at Lessor's option to seize all personal property, furnishings, inventory, equipment and any other property of Lessee upon the Premises (the "Lessee's Personal Property") and cause the Lessee's Personal Property to be removed and stored in a public or private warehouse or elsewhere at Lessor's sole and absolute discretion at the cost of and for the account of Lessee, all without service of notice of resort to legal process and without being deemed guilty of wrongful eviction, forcible entry, trespass or conversion, or becoming liable for any loss or damage that may be occasioned thereby. In the event of any default by Lessee under this Lease, Lessee hereby appoints Lessor as its attorney-in-fact to lock out and/or reenter and resume possession of the Premises and seize and take possession of the Lessee's Personal Property and cause the Lessee's Personal Property to be removed and stored in a public or private warehouse or elsewhere at Lessor's sole and absolute discretion at the cost of Lessee. 13.2.3 Lessor may, in its own name but acting as agent for Lessee, relet the Premises or any part thereof for such term or terms (which may be greater or less than the period that would otherwise have constituted the balance of the Term of this Lease) and on such conditions (which may include concessions, such as by way of illustration, but not of limitation, free rent and alteration of Premises) as Lessor may, in its sole and absolute discretion, deem appropriate and may collect and receive the rents therefor. Lessor shall in no way be responsible or liable for any failure to relet the Premises or any part thereof or any failure to collect any rent due under such reletting. Should Lessor have re-entered and resumed possession of the Premises or any part thereof without terminating this Lease, the rentals received by Lessor from such reletting shall be applied to the following in such order and in such amounts as Lessor may, in its sole and absolute discretion, deem appropriate: (i) to the payment of any indebtedness, other than rent, due hereunder from Lessee to Lessor; (ii) to the payment of rent due and unpaid hereunder; (iii) to the payment of any costs of such reletting, including but not limited to, broker's commissions, attorneys' fees and other expenses incurred by Lessor in reentering and reletting the Premises; (iv) to the payment of the cost of any alterations and repairs to the Premises; and the residue, if any, shall be held by Lessor and applied in payment of the above. Should any rental received from such reletting during any month be less than that required to satisfy items (i) through (iv), inclusive, then Lessee agrees to pay such deficiency to Lessor upon demand. If no rental is received during any month, Lessee agrees to pay such sums of money as is necessary to satisfy items (i) through (iv), inclusive. Such sums shall be calculated and paid monthly on the date on which the rent under this Lease became due and payable. Lessor may elect to bring an action to recover from Lessee for damages caused by Lessee's breach of the Lease. The filing or 15 prosecution of any such action shall not be construed as a termination of this Lease. 13.2.4 If this Lease is terminated, Lessor at any time thereafter may bring an action to recover from Lessee damages caused by Lessee's breach of this Lease. Lessee agrees that such damage will include, but not be limited to, all unpaid rent and other charges required or which would be required to be paid by Lessee had this Lease not be terminated. If the Premises are relet by Lessor for and on behalf of the Lessee, the net proceeds of such reletting after deducting any and all expenses incurred will be credited against amounts owed by Lessee to Lessor under this Lease if judgment had not been entered or will be considered a partial satisfaction of judgment if judgment has been recovered against Lessee. Expenses incurred to relet the Premises include, but are not limited to, all repossession costs, brokerage and management commissions, attorneys' fees, alteration costs, free rent and expenses associated with preparation for such reletting. 13.2.5 To recover from Lessee all expenses including attorneys' fees as may be determined by the court without a jury, incurred by Lessor in recovering possession of the Premises and caring for the Premises and any part thereof while vacant. In the event Lessor employs the services of an attorney by reason of Lessee's breach, then any such breach shall, notwithstanding any action taken by Lessee, not be deemed fully cured until such time as Lessee has also paid to Lessor an amount equal to the attorneys' fees incurred by Lessor by reason of Lessee's default. 13.2.6 The term "rent" as used herein shall be deemed to be and to mean the Base Rent, percentage rent, if applicable, and in such connection the amount of percentage rent shall be the highest amount paid by Lessee for any six-month period during the Lease term, Lessee's share of Operating Expenses, real property taxes, and all other sums required to be paid by Lessee pursuant to the terms of this Lease. 13.2.7 Lessor shall have the right, but not the obligation, immediately or at any time after the event of any act of default hereunder by Lessee without notice, written or otherwise, to cure such default for the account and at the expense of Lessee. If Lessor at any time by reason of any such default, is compelled to pay, or elects to pay, any sum of money or to do any act that will require the payment of any sum of money, or is compelled or elects to incur any expense, including attorneys' fees, in instituting or prosecuting or defending any action or proceeding to enforce any of Lessor's rights hereunder or otherwise, Lessor may recover the sum or sums so paid by Lessor together with interest at the rate of eighteen percent (18%) per annum from the date of expenditure by Lessor until repaid by Lessee. 13.2.8 No termination of this Lease by forfeiture or otherwise nor taking or recovering possession of the Premises, shall deprive Lessor of any other action, right or remedy against Lessee. 13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, and in no event earlier than thirty (30) days after receipt by Lessor of written notice from Lessee, specifying wherein Lessor has failed to perform such obligations; provided, however, that if the nature of Lessor's obligations is such that more than thirty (30) days are required for performance, then Lessor shall not be in default if Lessor commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. Lessee agrees to give any mortgagee and/or deed of trust holder by certified mail a copy of any notice of default given by Lessee to Lessor, provided that before such notice Lessee has been notified in writing (by way of notice of assignment of rents and leases or otherwise) of the address of such mortgagee and/or deed of trust holder, Lessee further agrees that if Lessor has failed to cure such default within the time period provided in this Lease, that the mortgagees and/or deed of trust holders shall have an additional thirty (30) days within which to cure such default; or if such default cannot be cured within that time, then such additional time as may be necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary to effect such cure) in which event this Lease shall not be terminated while such remedies are being diligently pursued. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Share of Operating Expenses or 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 on Lessor by the terms of any mortgage or trust deed covering the Property. Accordingly, if any installment of Base Rent, Operating Expenses or any other sum due from Lessee shall not be received by Lessor or Lessor's designee on the due date, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to five percent (5%) of such 16 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 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 any of the aforesaid monetary obligations of Lessee, then Base Rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding Section 4.1 of any other provision of this Lease to the contrary. 13.5 LESSEE'S BANKRUPTCY OR INSOLVENCY. If the Lessor is not permitted to terminate this Lease as hereinabove provided because of the provisions of the United States Code relating to bankruptcy, as amended ("Bankruptcy Code"), then Lessee as a Debtor-in-possession, or any trustee for Lessee, agrees promptly, within no more than fifteen (15) days after request by Lessor to the Bankruptcy Court or to any court of competent jurisdiction, to assume or reject this Lease and Lessee on behalf of itself, and any trustee, agrees not to seek or request an extension or adjournment of any application to assume or reject this Lease by Lessor with such court. In such event, Lessee or any trustee for Lessee may only assume this Lease if it (a) cures or provides adequate assurance that all defaults thereunder will be cured promptly, and, with respect to any monetary defaults, cures by making a lump sum payment in cash or cash equivalent, (b) compensates or provides adequate assurance that Lessee or any trustee for Lessee will promptly compensate Lessor for any actual pecuniary loss to Lessor resulting from Lessee's defaults, and (c) provides adequate assurance of performance during the fully stated Term hereof of all of the terms, covenants and provisions of this Lease to be performed by Lessee. In no event after the assumption of this Lease shall any then existing default remain uncured for a period in excess of the earlier of ten (10) days or the time period set forth for cure herein. Lessor's right to be compensated for damages shall survive any rejection, assumption or assignment of this Lease. Adequate assurance of performance of this Lease shall include, without limitation, adequate assurance (i) of the source of rent reserved hereunder, (ii) that any percentage rents, if applicable, or additional rent, if applicable, due hereunder will not decline from the levels anticipated, and (iii) the assumption of any permitted assignment of this Lease will not breach any provision hereunder. In the event of the filing of a petition under the Bankruptcy Code, Lessor shall have no obligation to provide Lessee with any services or utilities as herein required, unless Lessee shall have paid and be current in all payments of operating costs, utilities or other charges therefor. 14. CONDEMNATION. If the Premises or any portion thereof is taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are hereunder 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 is taken by condemnation, Lessee may, at Lessee's option, 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), or Lessor may at Lessor's option exercised by written notice to Lessee, terminate this Lease as of the date the condemning authority takes possession or title whichever first occurs. If Lessee or Lessor do not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the promises remaining, except that the rent shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. No reduction of rent shall occur if the only area taken is that which does not have the Premises located thereon. 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 award for loss of or damage to Lessee's trade fixtures and removable personal property. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, which are attributable to the improvements only, 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 pay any amount in excess of such severance damages required to complete such repair. 15. BROKER'S FEE. Paragon holds $15,000,00 received from Lessee. Upon Lessee's execution of this Lease, Paragon shall receive ownership, possession, and control of such $15,000.00 as and for its broker's fee. In addition, the following commissions are to be paid monthly by Lessee to the respective broker ('the Monthly Commission Payments'): 17 To Paragon To Arbitare Commencing February 1, 1996 through June 30, 1997 (17 mos,) $ 2,500 $ 490 Commencing July 1, 1997 through -0- $ 490 September 30, 1999 Commencing October 1, 1999 -0- $ 525 through the remaining term of the Lease The Monthly Commission Payments shall be paid directly by Lessee to the respective broker. The Monthly Commission Payments may be deducted from Lessee's monthly Base Rent payment only if paid concurrently with Lessee's monthly Base Rent payment. Lessor shall have no liability for brokers' fees or commissions due and payable pursuant to this paragraph. 15.1 Lessor and Lessee agree that no further fee or commissions are owed or payable with respect to this Lease unless expressly set forth in a separate agreement executed between Lessor and the broker(s) named in Section 1.1.4 above, which fee or commission shall be paid in accordance with the terms of such agreement. 15.2 Lessee represents to Lessor that no broker or sales agent other than the broker named in Section 1.1.4 above is entitled to any commission or fee payable in connection with this Lease. Lessee agrees to indemnify and hold Lessor harmless from claims for fees or commissions which may become payable and which are claimed to have been incurred by reason of the act or omission of Lessee. 16. ESTOPPEL CERTIFICATE. 16.1 Each party (as "responding party") shall at any time upon not less than twenty (20) days prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing, which shall include such information as Lessor or any prospective purchaser or encumbrancer may reasonably require, including by way of illustration but not of limitation, (i) certification that this Lease is unmodified and in full force and effect (or, if modified, states the nature of such modification and certification that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledgment that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises or of the business of the requesting party. 16.2 At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. 16.3 If Lessor desires to finance, refinance or sell the Premises, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence. 17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean The Flamingo Garcia's Joint Venture. In the event of any transfer of fee title to the Premises or any interest therein, Lessor and its joint venture partners (and in case of any subsequent transfers, then the grantor) shall be relieved from and after the date of such transfer of all liability with respect to Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding upon Lessor's 18 successors and assigns, only during their respective periods of ownership. Lessee agrees that: (a) the obligations of Lessor, if any, under or with respect to this Lease do not constitute personal obligations of Lessor or of any of the directors, officers, partners or shareholders of Lessor; (b) Lessee and all persons and other entities claiming by, through or under Lessee shall look solely to Lessor's interests in the Premises, including any proceeds arising therefrom, and not to any other assets of Lessor or any of its officers, directors, partners or shareholders for satisfaction of any liability of Lessor in respect of this Lease; and (c) Lessee shall not seek recourse against any of such directors, officers, partners or shareholders or against any of their personal assets or any of Lessor's other assets for such satisfaction. The foregoing provisions do not expand or create new obligations of Lessee under this Lease. Lessor agrees that the obligations of Lessee do not constitute personal obligations of the Lessee's directors, officers, partners or shareholders, but they are the personal (corporate) obligations of Lessee and Lessee's guarantor. 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. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the rate of eighteen percent (18%) per annum from the date due until paid. 20. TIME OF ESSENCE. Time is of the essence with respect to the obligations to be performed under this Lease. 21. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned hereon. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither real estate broker listed in Section 1.1.4 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the Term of this Lease except as otherwise specifically stated in this Lease. 22. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified mail, and if given personally or by mail, shall be deemed sufficiently given if addressed to Lessee or to Lessor at the address noted in Section 1.1.1 and 1.1.2 for the respective parties. Either party may by 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 notice purposes. 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 addressed as Lessor may from time to time hereafter designate by notice to Lessee. Notices given as required shall be deemed received within 72 hours after the same deposited in the U.S. mail. 23. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. 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 act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 24. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the Term hereof, such occupancy shall be a tenancy from month to month at double the last month's rental, upon all the provisions of this Lease pertaining to the obligations of Lessee, but all Options, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. 25. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, whenever possible, be cumulative with all other remedies at law or in equity. 19 26. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 27. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting assignment or subletting by Lessee, this Lease shall bind the parties, their personal representatives, successors and assigns. To the extent practicable, this Lease shall be governed by the laws of the State of Arizona and any litigation concerning this Lease between the parties hereto shall be initiated in Maricopa County, Arizona. 28. SUBORDINATION. 28.1 This Lease, at Lessor's option, shall be subordinate to any mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Premises and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease Is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease and any options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease and such options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. 28.2 Lessee agrees to execute any documents required to effectuate an attornment, a subordination or to make this Lease prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within ten (10) days after the date of written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this Section 28.2. 28.3 In the event any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage or deed of trust made by the Lessor covering the Premises, the Lessee shall attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Lessor under this Lease. 29. RIGHT OF FIRST OFFER. During the term of this Lease and any extension or renewal thereof, provided that Lessee is not then in default hereunder, and as a condition precedent to any good faith sale or proposed sale by Lessor of any portion of the Premises ("the Affected Property"), Lessor shall give Lessee written notice of Lessor's intent to sell the Affected Property and the purchase price and all material terms of any listing of the Affected Property or any offer Landlord may have received to purchase the Affected Property, and Lessee shall thereafter have the right to purchase the Affected Property for the same purchase price and upon the same material terms as set forth in such written notice from Lessor to Lessee. Lessee may then exercise its right of purchase by giving Lessor written notice thereof received by Lessor within fourteen (14) days after the date Lessee receives the aforementioned written notice from Lessor together with a refundable earnest money deposit in the amount of Fifty Thousand Dollars ($50,000.00) in cash or certified funds. If Lessee timely exercises its right of purchase as provided herein, the parties shall forthwith and in good faith set up an escrow account and execute all documents necessary to complete a sale of the Affected Property to Lessee upon the accepted terms. If Lessee chooses not to exercise its right of purchase as provided herein, Lessor may thereafter sell the Affected Property upon the terms offered to Lessee or on terms more favorable to Lessor than those offered to Lessee or for a purchase price which is not less than ninety-seven and one-half percent (97.5%) or more than the price offered to Lessee without any further obligation to Lessee pursuant to this paragraph; provided, however, that Lessor may not thereafter sell the Affected Property for less than ninety-seven and one-half percent (97.5%) of the purchase price offered to Lessee or upon material terms, which are materially less favorable to Lessor than were offered to Lessee unless and until Lessor again complies with the provisions of this paragraph by written notice to Lessee that Lessee may have the opportunity to purchase the Affected Property upon the same terms. If the Affected Property has not been placed in escrow within twelve (12) months from the date of the expiration of the aforesaid fourteen (14) day period, the Affected Property must be offered to Lessee again. For purposes of this Article, a "sale" or "purchase" of the property shall mean the transfer or conveyance, or a contract or option for the transfer or 20 conveyance, of title to the Affected Property. Neither party shall record this Lease or a memorandum thereof reflecting the rights granted herein. Should Lessee not exercise its right as hereinbefore set forth, Lessee agrees to execute such documents, instruments, or writings as Lessor may reasonably require in order to confirm Lessee's election not to exercise its right of first refusal. Lessee agrees to execute such document, instrument or writing within seven (7) days after the date of Lessee's receipt of such document, instrument or writing. Should Lessor not have received such document, instrument or writing within said seven (7) day period, then Lessor may send a second notice requiring Lessee to execute such document, instrument or writing. Should Lessor not have received such document, instrument or writing duly executed by Lessee within five (5) days from Lessee's receipt thereof, then and in such event, Lessee agrees to indemnity and hold Lessor free and harmless from any loss, liability, cost, or expense, including reasonable attorneys' fees, should Lessee fail or refuse so to do. 30. ATTORNEYS FEES. If either party brings an action to enforce the terms hereof or declares rights hereunder, the prevailing party in any such action, on trial or appeal, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the court. 31. LESSOR'S ACCESS. Lessor or Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, 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 part as Lessor may deem necessary or desirable. To the extent Lessor commences alteration or repair work, Lessor shall make reasonable efforts to avoid disruption of Lessee's restaurant business. Lessor may, at any time, place on or about the Premises or the Building any ordinary "For Sale" signs, and Lessor may at any time during the last 120 days of the Term place on or about the Premises any ordinary "For Lease" signs. All activities of Lessor pursuant to this Section shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. 32. 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 of this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 33. SIGNS. Lessee shall not place any sign upon the Premises without Lessor's prior written consent which may be given or withheld in Lessor's reasonable discretion. Under no circumstances shall Lessee place a sign on any roof of the Premises. Subject to the foregoing, Lessor shall support Lessee's application for signs to the appropriate county authorities, as well as Lessee's application to Nevada Power to place signage in the Nevada Power easement. All expenses concerning such applications shall be borne exclusively by Lessee. 34. MERGER. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 35. CONSENTS. Except as otherwise specified in this Lease, wherever in this Lease the consent of one party is required to an act of the other party, such consent shall not be unreasonably withheld or delayed. 36. GUARANTOR. In the event there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 37. QUIET POSSESSION. Upon Lessee's paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire Term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution Is binding upon all parties holding an ownership interest in the Premises. 38. SECURITY MEASURES. Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises. Lessee assumes all responsibility for the protection of Lessee, its agents and invitees and the property of Lessee and of Lessee's agents and invitees 21 from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing security protection for the Premises or any portion thereof, in which event the cost thereof shall be included within the definition of Operating Expenses, as set forth In Section 4.4 above. 39. EASEMENTS. Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, 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 shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 40. 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. 41. AUTHORITY. If Lessee 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 behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 42. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 43. 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. This Lease shall become binding upon Lessor and Lessee only when fully executed by Lessor and Lessee. 44. INABILITY TO PERFORM. This lease and the obligations of Lessee hereunder shall not be affected or impaired because the Lessor is unable to fulfill any of its obligations hereunder or is delayed in doing so if such inability or delay is caused by reason of strike, labor troubles, acts of God or any other cause beyond the reasonable control of Lessor. 45. LESSOR'S RESERVED RIGHTS. All exterior walls and windows bounding the Premises, and all space located within the Premises for public building stairs, elevator shafts, fire towers, flues, vents, stacks, pipe shafts, vertical ducts, conduits, electric and all other utilities, air conditioning, sinks or other building facilities, the use thereof and all access thereto through the Premises for operation, maintenance, repair or replacement thereof, and all other appurtenant rights, are reserved to Lessor. Lessor further reserves the right from time to time, without unreasonable interference with Lessee's use, to install, remove or relocate any of the foregoing to locations which will not materially interfere with Lessee's use of the Premises; to relocate any pipes, ducts, conduits, wires and appurtenant meters and equipment included in the Premises; to make alterations or additions to the Premises. 46. RENTABLE SQUARE FEET. The rentable square feet of the Premises is computed by measuring the exterior finish of permanent outer walls of the building to the centerline of the hallway or public corridors and to the centerline of partitions or other party walls which separate the Premises from adjoining rentable areas, with no deduction for columns and projections necessary to the building structure, 47. WINDOW COVERING. Lessee may install, at Lessee's expense, ordinary window coverings in the Premises such as blinds, drapes, etc. However, Lessee may not install window film or similar tinting material without Lessor's written consent. 48. HAZARDOUS MATERIALS. 48.1 DEFINED TERMS. "Environmental Laws" means any one of the following: Comprehensive 22 Environmental Response, Compensation and Liability Act; Resource Conservation and Recovery Act; Solid Waste Disposal Act; National Environmental Policy Act; Endangered Species Act; Toxic Substances Control Act; Safe Drinking Water Act; Clean Water Act; Nevada Hazardous Waste Management Act; Nevada Environmental Quality Act: Superfund Amendments and Reauthorization Act; regulations promulgated under each such Act; and any other laws or regulations now in effect or hereinafter enacted including any applicable state or local environmental legislation such as, but not limited to, any so called "Superfund" or "Superlien" laws, or any applicable regulations regulating, relating to, or imposing liability or standards of conduct concerning any hazardous, toxic, or dangerous waste, substance or material, including asbestos or any substance or compound containing asbestos, and any other hazardous, toxic or dangerous substance or material specifically defined in such regulations. "Hazardous Material" means and includes, but is not limited to, any hazardous substance, pollutant, contaminant, or regulated substance defined in the Environmental Laws. 48.2 COMPLIANCE WITH ENVIRONMENTAL LAWS. Lessee shall, at Lessee's own expense, comply with all present and hereinafter enacted Environmental Laws, and any amendments thereof, affecting Lessee's operation on the Premises. 48.3 NOTIFICATION. Lessee shall immediately notify Lessor of any of the following: (i) any correspondence or communication from any governmental entity regarding the application of Environmental Laws to the Premises or Lessee's operation on the Premises; (ii) any change in Lessee's operation on the Premises that will change or has the potential to change Lessee's or Lessor's obligation or liabilities under the Environmental Laws. 48.4 INDEMNITY. Lessee shall not cause or permit any Hazardous Material to be brought upon, kept or used in or about the Premises by Lessee, its agents, employees, contractors, or invitees, without the prior written consent of Lessor (which Lessor shall not unreasonably withhold as long as Lessee demonstrates to Lessor's reasonable satisfaction that such Hazardous Material is necessary or useful to Lessee's business and will be used, kept and stored in a manner that complies with all laws regulating any such Hazardous Materials so brought upon or used or kept in or about the Premises). If Lessee breaches the obligations stated in the preceding sentence, or if the presence of Hazardous Material on the Premises caused or permitted by Lessee results in contamination of the Premises, or if contamination of the Premises by Hazardous Material otherwise occurs for which Lessee is legally liable to Lessor for damage resulting therefrom, the Lessee shall indemnify, defend and hold Lessor harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including, without limitation, diminution in value of the Premises, damages for the loss or restriction of use of rentable or usable space or of any amenity of the Premises, damages arising from any adverse impact on marketing of space in the Project, and sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees) which arise during or after the Term as a result of such contamination. This indemnification of Lessor by Lessee includes, without limitation, costs incurred in connection with any investigation of site conditions or any clean-up, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of Hazardous Material present in the soil or groundwater on or under the Premises. Without limiting the foregoing, if the presence of any Hazardous Material on the Premises caused or permitted by Lessee results in any contamination of the Premises, Lessee shall promptly take all actions at its sole expense as are necessary to return the Premises to the condition existing prior to the introduction of any such Hazardous Material to the Premises; provided that Lessor's written approval of such actions shall first be obtained, which approval shall not be unreasonably withheld so long as such actions would not potentially have any material adverse long-term or short-term effect on the Premises. Lessee's failure to comply with the terms of this paragraph shall be restrainable by injunction. 23 49. EXHIBITS. All exhibits which are attached hereto are incorporated herein by reference. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY 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. LESSOR FLAMINGO RESTAURANT JOINT VENTURE, an Arizona joint venture BY /s/ Sam Nocifera, President --------------------------- Sam Nocifera, its authorized agent LESSEE: PERFORMANCE RESTAURANTS OF NEVADA, INC., a Nevada corporation By /s/ James W. Brown ------------------- Its Secretary 24 STATE OF ARIZONA ) ) ss. County of Maricopa ) The foregoing instrument was acknowledged before me, the undersigned Notary Public, on this lst day of September, 1995, by Sam Nocifera, the authorized agent of FLAMINGO RESTAURANT JOINT VENTURE, an Arizona joint venture. /s/ Barbara H. Holt ---------------------------------------- Notary Public My Commission Expires: 1/16/96 - -------------------- STATE OF ARIZONA ) ) ss. County of Maricopa ) The foregoing instrument was acknowledged before me, the undersigned Notary Public, on this 1st day of September, 1995, by James W. Brown, the secretary of PERFORMANCE RESTAURANTS OF NEVADA, INC., a Nevada corporation, for and on behalf of the corporation. /s/ Barbara H. Holt ---------------------------------------- Notary Public My Commission Expires: 1/16/96 - -------------------- 25 EXHIBIT "A" That portion of the Southeast Quarter (SE 1/4) of the Southeast Quarter (SE 1/4) of Section 15, Township 21 South, Range 61 East, M.D.M., more particularly described as follows: Lot Two (2) as shown by map thereof on file in File 31 of Parcel Maps, page 46, record June 3, 1980 as Document No. 1194617, Official Records. TOGETHER WITH AND RESERVING THEREFROM the east 15 feet of the South 50 feet of Lot One (1) of Parcel Map in File 31 of plats, page 46; the East 15 feet of Lot Two (2) of Parcel Map in File 31 of plats, page 46; and the West 15 feet of the South 1560.02 feet of Lot three (3) of Parcel Map in File 31 of plats, page 46, with right of ingress and egress for roads, pubic utilities and purposes incidental thereto as disclosed by Instrument No. 1486092. Memo: Property Address: 1030 E. Flamingo Rd., Las Vegas, NV 26 All personal property, furniture, fixtures, and equipment situated on or In the Premises on the Commencement Date Exhibit "B" 27 EX-10.59 4 SECOND AMENDMENT TO RETAIL PHASE LOAN WHEN RECORDED, RETURN TO: - ------------------------- Jay S. Kramer Fennemore Craig Two North Central Avenue Suite 2200 Phoenix, AZ 85004 SECOND AMENDMENT TO RETAIL PHASE CONSTRUCTION LOAN AGREEMENT, RETAIL PHASE PROMISSORY NOTE AND RETAIL PHASE LEASEHOLD DEED OF TRUST AND SECURITY AGREEMENT WITH ASSIGNMENT OF RENTS AND FIXTURE FILING THIS SECOND AMENDMENT TO RETAIL PHASE CONSTRUCTION LOAN AGREEMENT, RETAIL PHASE PROMISSORY NOTE AND RETAIL PHASE LEASEHOLD DEED OF TRUST AND SECURITY AGREEMENT WITH ASSIGNMENT OF RENTS AND FIXTURE FILING (the "Amendment") is made as of this 31st day of October, 1995 by and among CAMELBACK PLAZA DEVELOPMENT L.C., an Arizona limited liability company ("Borrower"), NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association ("Lender"), the successor-by-merger to Caliber Bank, an Arizona banking corporation ("Caliber"), and PERFORMANCE INDUSTRIES, INC., an Ohio corporation ("Guarantor"). WHEREAS, Borrower and Caliber entered into that certain Retail Phase Construction Loan Agreement dated as of June 24, 1994 (the "Loan Agreement"), pursuant to which Lender agreed to advance up to $3,000,000 to Borrower (the "Construction Loan") for the construction and equipping of the Improvements; WHEREAS, the Construction Loan is evidenced or secured by, among others, the Loan Agreement, that certain Retail Phase Promissory Note dated June 24, 1994 from Borrower in favor of Caliber in the original amount of $3,000,000 (the "Note"), that certain Retail Phase Leasehold Construction Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing dated June 24, 1994 from Borrower in favor of Caliber, recorded on September 26, 1994 as Instrument No. 94-0702374, Records of Maricopa County, Arizona (the "Deed of Trust"), as amended by Amendment to Retail Phase Construction Loan Agreement, Retail Phase Promissory Note, and Retail Phase Deed of Trust dated September 21, 1994, recorded on September 26, 1994 as Instrument No. 94-0702377, Records of Maricopa County, Arizona, which encumbers the Mortgaged Property as described therein, that certain Assignment of Retail Leases dated June 24, 1994 from Borrower in favor of Caliber, recorded on September 26, 1994 as Instrument No. 94-0702375, Records of Maricopa County, Arizona (the "Assignment of Leases"), that certain Subordination Agreement (Retail Phase) dated June 24, 1994 from Guarantor in favor of Caliber, recorded on September 26, 1994 as Instrument No. 94-0702373, Records of Maricopa County, Arizona (the "Subordination Agreement"), and that certain Unconditional Guarantee of Payment dated June 24, 1994 from Guarantor in favor of Caliber (the "Guaranty") (the Loan Agreement, the Note, the Deed of Trust, the Assignment of Leases, the Subordination Agreement and the Guaranty and any other agreement now or hereafter given by Borrower or Guarantor evidencing, securing or relating to the Loan are sometimes hereinafter referred to collectively as the "Loan Documents"); WHEREAS, the Loan Agreement provided for a mini-permanent loan upon the expiration of the Initial Maturity Date of the Note, provided that Borrower satisfied certain conditions precedent thereto, which conditions precedent were not satisfied; WHEREAS, the Construction Loan has been fully advanced and Borrower has not fulfilled all of the conditions precedent for the final advance under the Construction Loan; WHEREAS, Borrower has requested, and Lender has agreed, to extend the Initial Maturity Date upon the terms and conditions contained herein; NOW, THEREFORE, in consideration of the premises set forth above and the covenants and agreements contained herein, and other consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender, intending to be legally bound, agree as follows: 1. Interpretation. Except as otherwise defined herein, all capitalized terms used herein shall have the meanings ascribed thereto in the Loan Documents. In the event of any conflicts between the terms and provisions of this Amendment and the terms and provisions of the Loan Documents, the terms and provisions of this Amendment shall govern and prevail. 2. Conditions Precedent. The effectiveness of this Amendment is subject to the condition precedent that Lender shall have received on or before the date hereof the following, in form and substance satisfactory to Lender: (a) This Amendment, duly executed and delivered by Borrower and Guarantor. (b) Certified copies of the resolutions of the boards of directors of Performance Camelback Development Corp. and Guarantor authorizing the execution, delivery and performance of this Amendment and any other documents, agreements or certificates required by Lender or any other Person in connection with the transactions contemplated by this Amendment. (c) An incumbency certificate from the Secretary or an Assistant Secretary of Performance Camelback Development Corp. and Guarantor, certifying the names and true signatures of the officers of Performance Camelback Development Corp. and Guarantor authorized to sign this Amendment and the other documents to be delivered by them hereunder. (d) Current certificates of good standing for Borrower and Guarantor issued by the applicable governmental agency of their state of formation. -2- (e) An Amendment to the Restaurant Phase Construction Loan Agreement, Retail Phase Promissory Note and Retail Phase Leasehold Construction Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing from Borrower and Guarantor in favor of Lender, and satisfaction of all conditions to the effectiveness thereof. (f) An opinion of Borrower's and Guarantor's counsel from legal counsel and in form and substance satisfactory to Lender. (g) A final as-built survey of the Retail Phase of the Project. (h) A Certificate of the Architect that the Improvements have been completed in accordance with the Plans and Specifications. (i) Evidence of, and a certificate of insurance naming Lender as mortgagee satisfactory to Lender with respect to, the fire and extended coverage insurance policy and rental interruption insurance for the Retail Phase as required pursuant to Section 4.3.2 of the Loan Agreement, and evidence of compliance with all other insurance requirements under the Loan Documents and all insurance requirements under the Ground Lease. (j) Full and final lien waivers from the Contractor and all subcontractors and materialmen for the Retail Phase. (k) Such endorsements to Lender's existing title policy as may be requested by Lender insuring the continued priority of Lender's lien, in the same priority as stated in the original title policy, subject only to the exceptions shown in the title policy and current taxes and assessments. (l) A Ground Lessor Estoppel Certificate and Agreement in form and substance satisfactory to Lender. (m) Evidence satisfactory to Lender that the legal action instituted by Just For Feet, Inc. against Borrower has been dismissed with prejudice and/or settled on terms acceptable to Lender, that the space lease between Borrower and Just For Feet, Inc. has been amended such that the deadline for occupancy and opening for business of the Hard Rock Cafe has been extended to no earlier than December 31, 1995, and that $100,000 was paid in cash by Borrower to Just for Feet, Inc. for reimbursement of tenant improvement expenses incurred by Just for Feet, Inc. (n) A Subordination, Non-Disturbance and Attornment Agreement and an Estoppel Certificate from Just For Feet, Inc., both satisfactory to Lender. (o) Final certificates of occupancy for all shell buildings and tenant improvements for the Mortgaged Property. -3- (p) The balance sheets, statements of income and changes in financial position of Borrower for the fiscal year ending December 31, 1994 and the year-to-date ending September 30, 1995, accompanied by a statement from the President or chief financial officer of the managing member of Borrower that the same have been prepared in accordance with GAAP. (q) The balance sheets, statements of income and changes in financial position of Guarantor for the fiscal year ending December 31, 1994 and the fiscal quarter ending September 30, 1995, accompanied by a statement from the President or chief financial officer of Guarantor that the same have been prepared in accordance with GAAP and, with respect to the fiscal year-end information, certified with an unqualified opinion from independent public accountants acceptable to the Lender. (r) Copies of Guarantor's quarterly report on Form 10-Q for the fiscal quarter ending September 30, 1995 and annual report on Form 10-K for the fiscal year ending December 31, 1994, together with all exhibits and schedules thereto, and copies of any reports of Guarantor on Form 8-K, and all exhibits and schedules thereto, not previously provided to Lender. (s) All costs and expenses incurred by Lender in connection with the negotiation, due diligence and documentation of this Amendment and any other agreements relating to the Mortgaged Property. (t) Such other documents, instruments, approvals (and, if requested by the Lender, certified duplicates of executed copies thereof) or opinions as the Lender may request. 3. Representations and Warranties. Borrower and Guarantor, jointly and severally, represent and warrant as follows: (a) Borrower is a limited liability company duly formed and validly existing under the laws of the State of Arizona. (b) Guarantor is a corporation duly formed and validly existing under the laws of the State of Ohio and Guarantor is duly qualified to transact business as a foreign corporation in the State of Arizona. (c) The execution, delivery and performance by Borrower and Guarantor of this Amendment and any other documents, agreements or certificates required by Lender in connection with the transactions contemplated by this Amendment are within their company or corporate powers, have been duly authorized by all necessary action, do not contravene (i) their organizational documents or (ii) any law or contractual restriction binding on or affecting Borrower or Guarantor, and do not result in or require the creation of any lien, security interest or other charge or encumbrance (other than pursuant to this Agreement and the other documents executed in connection herewith) upon or with respect to any of their properties. -4- (d) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by Borrower or Guarantor of this Amendment and any other documents, agreements or certificates required by Lender in connection with the transactions contemplated by this Amendment. (e) This Amendment and any other documents, agreements or certificates required by Lender in connection with the transactions contemplated by this Amendment are the legal, valid and binding obligations of Borrower and Guarantor enforceable against them in accordance with their respective terms (except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors' rights generally or subject to general principles of equity). (f) There is no pending or, to the best of Borrower's or Guarantor's knowledge, threatened action, investigation or proceeding before any court, governmental agency or arbitrator against or affecting Borrower, Guarantor or any of their affiliates which, if adversely determined, would materially adversely affect the financial condition or operations of Borrower or Guarantor or their affiliates. (g) The balance sheet of Borrower and the related statements of income and of changes in financial position of Borrower and for its fiscal year most recently ended, copies of which have been furnished to Lender, present fairly the financial condition of Borrower as of such date and the results of the operations of Borrower for the period ended on such date, all in accordance with GAAP consistently applied; and since the date of such statement, there has been no material adverse change in Borrower's financial condition or operations. The balance sheet of Guarantor, and the related statements of income and changes in financial position of Guarantor, for its fiscal year most recently ended, fairly present the financial condition of Guarantor at such date and the results of operations for the period then ended, all in accordance with GAAP consistently applied; and since such date there has been no material adverse change in Guarantor's financial condition or operations. 4. Amendments to Loan Agreement. (a) Section 1.16 of the Loan Agreement is hereby deleted in its entirety and the following inserted therefor: 1.16 "Lender": Norwest Bank Arizona, National Association, a national banking association, whose address, for the purpose of this Agreement, and particularly provisions hereof relating to notice is: Norwest Bank Arizona, 3300 North Central Avenue, M.S. 9008, Phoenix, AZ 85012-2501, Attn: Ms. Vicki Slade, Vice President. -5- (b) Section 6.4 of the Loan Agreement is hereby deleted in its entirety and the following inserted therefor: 6.4 Records. Borrower shall maintain, and shall cause Guarantor to maintain, proper books of record and account, in which full and correct entries shall be made in accordance with generally accepted accounting principles, of all its business and affairs. Borrower shall furnish to Lender, or cause Guarantor to furnish to Lender: 6.4.1 As soon as available and in any event within forty-five (45) days after the end of each of the first three quarters of each fiscal year of Borrower and as soon as available and in any event within one-hundred twenty (120) days after the end of each fiscal year of Borrower, balance sheets, statements of income and changes in financial position of Borrower for the period commencing at the end of the previous fiscal year and ending with the end of such quarter or fiscal year, as applicable, accompanied by a compliance certificate in the form attached hereto as Exhibit "D" and incorporated herein by this reference (the "Borrower Compliance Certificate"). 6.4.2 As soon as available and in any event within forty-five (45) days after the end of each of the first three quarters of each fiscal year of Guarantor and as soon as available and in any event within one-hundred twenty (120) days after the end of each fiscal year of Guarantor, balance sheets, statements of income and changes in financial position of Guarantor for the period commencing at the end of the previous fiscal year and ending with the end of such quarter or fiscal year, as applicable, accompanied by a statement from the President or chief financial officer of Guarantor that the same have been prepared in accordance with GAAP and, with respect to the fiscal year-end information, certified with an unqualified opinion from independent public accountants acceptable to the Lender, together with a compliance certificate in the form attached hereto as Exhibit "E" and incorporated herein by this reference (the "Guarantor Compliance Certificate"). 6.4.3 On or before fifteen (15) days after delivery to the Securities Exchange Commission, copies of Guarantor's quarterly report on Form 10-Q and annual report on Form 10-K reports, together with all exhibits and schedules thereto. On or before five (5) days after delivery to the Securities Exchange Commission, copies of Guarantor's reports on Form 8-K, and all exhibits and schedules thereto. -6- (c) Section 6 of the Loan Agreement is hereby amended to add the following: 6.14 Negative Covenants. So long as any indebtedness of Borrower or Guarantor to Lender remains unpaid, without the prior written consent of the Lender, Borrower will not do, or permit to be done, the following: (a) Make any loan to an affiliate. (b) Incur any guarantee of any indebtedness of an affiliate. (c) Borrow money from, or otherwise create indebtedness to, any affiliate unless such borrowing or the creation of such indebtedness is specifically subordinated in writing to the indebtedness of Borrower and Guarantor to Lender and the terms and conditions of all such subordinated borrowings and indebtedness shall be subject to prior written approval of Lender. (d) Permit any further encumbrance on the Mortgaged Property. (d) Section 7 of the Loan Agreement is hereby amended to add the following: 7.11 Restaurant Phase Construction Loan Agreement. An event of default shall occur and be continuing under that certain Restaurant Phase Construction Loan Agreement dated as of June 24, 1994 between Borrower and Caliber Bank and any documents or instruments now or hereafter evidencing, securing or otherwise relating to the $1,900,000 loan (the "Restaurant Phase Loan") advanced or to be advances thereunder (together with any amendments, modifications or supplements thereto, or restatements thereof, the "Restaurant Phase Loan Documents"). and (e) Section 10 of the Loan Agreement is hereby deleted in its entirety and the following inserted therefor: 10. MINI-PERMANENT LOAN. -------------------- Provided that no Event of Default under the Loan Documents or "event of default" under the Restaurant Phase Loan Documents has occurred and is continuing on December 31, 1995, and provided further that Borrower has complied by such date with the conditions precedent enumerated in the Mini-Perm Loan Documents (as defined below), the maturity date of the Construction Loan and the Restaurant Phase Loan shall be -7- extended for a period of forty (40) months from December 31, 1995 (the "Mini-Perm Loan"). Borrower and Lender shall execute and deliver loan documents in the form attached to the Restaurant Phase Construction Loan Agreement and incorporated herein by this reference (the "Mini-Perm Loan Documents"). 5. Amendments to Note. (a) Section 2 of the Note is hereby deleted in its entirety and the following inserted therefor: 2. Initial Term. Commencing on October 31, 1995, and on the last day of each calendar month thereafter, continuing to and including December 31, 1995 (the "Initial Maturity Date"), Maker shall pay installments of interest only on the balance outstanding hereunder, but with a final payment of all unpaid principal and interest due and payable on the Initial Maturity Date. (b) Section 3 of the Note is hereby deleted in its entirety and the following inserted therefor: 3. INTENTIONALLY DELETED. and (c) Exhibits "A" and "B" to the Note are hereby deleted in their entirety. 6. Amendments to Deed of Trust. (a) Paragraphs "TWO" and "THREE" on page 4 of the Deed of Trust are hereby deleted in their entirety and the following inserted therefor: TWO: Payment and performance of each and every obligation and liability of Trustor and/or Performance Industries, Inc. ("Guarantor") under that certain Restaurant Phase Construction Loan Agreement dated as of June 24, 1994 between Borrower and Caliber Bank and any documents or instruments now or hereafter evidencing or securing the $1,900,000 loan (the "Restaurant Phase Loan") advanced or to be advances thereunder (together with any amendments, modifications or supplements thereto, or restatements thereof, the "Restaurant Phase Loan Documents"). THREE: Payment of all other monies herein or in the Loan Documents (as defined below) agreed or provided to be paid by Trustor or Guarantor. (b) The first paragraph on page 5 of the Deed of Trust is hereby deleted in its entirety and the following inserted therefor: This Deed of Trust, the Note, the Guarantee and any other agreement now or hereafter given by Trustor or Guarantor evidencing, securing or otherwise relating to the obligations under -8- the Note are sometimes hereinafter referred to collectively as the "Loan Documents". (c) Section 1.2 of the Deed of Trust is hereby amended to add the following: Trustor shall not, without the prior written approval of Beneficiary, create or suffer to exist any mortgage, lien, charge, encumbrance, easement, or license of any kind on, or pledge of, the Mortgaged Property. (d) Section 1.6.4 of the Deed of Trust is hereby deleted in its entirety and the following inserted therefor: 1.6.4 The architect for the Improvements shall be required to provide architect's professional liability insurance with a limit of liability of not less than $1,000,000.00. This policy shall permit claims to be filed thereunder for a period of not less than three (3) years following the completion of the Improvements. (e) The first paragraph of Section 1.10.1 of the Deed of Trust is hereby deleted in its entirety and the following inserted therefor: 1.10.1 Trustor will submit to Beneficiary for approval each lease for leasing any portion of the Property and each amendment, modification, supplement or restatement of any lease of any portion of the Property, which approval shall not be unreasonably withheld by Beneficiary. Beneficiary shall not withhold its approval of any amendment, modification, supplement or restatement of any existing lease which does not release tenant or any other person or entity liable for the obligations of the tenant under such lease, reduce the rent or additional rent payments of the tenant or otherwise change the payment terms under such lease, shorten the lease term, reduce the size of the leased premises, increase the obligations or liabilities of the Trustor under such lease or otherwise change any other material provision of such lease. (f) The second paragraph of Section 1.12 of the Deed of Trust is hereby deleted in its entirety and the following inserted therefor: Trustor shall furnish Beneficiary and shall cause Guarantor to furnish to Beneficiary: (a) As soon as available, but in no event later than 45 days after each fiscal quarter (including Borrower's and Guarantor's fiscal year-end quarter), an unaudited balance sheet as of the end of the relevant fiscal quarter and an unaudited statement -9- of income for the same period, setting forth in each case in comparative form the figures for the corresponding periods of the preceding year, all in reasonable detail, prepared in accordance with generally accepted accounting principles consistently applied and certified as complete and correct, subject to changes resulting from year end adjustments, by a principal financial officer of Trustor or Guarantor, as the case may be, together with the Borrower Compliance Certificate or Guarantor Compliance Certificate, as applicable, as required pursuant to the Loan Agreement; and (b) Within 120 days after the end of each fiscal year, an unaudited balance sheet of Trustor and an audited balance sheet of Guarantor, as at the end of such year, setting forth in comparative form the figures for the previous calendar year, all in reasonable detail and, with respect to Guarantor, accompanied by an opinion thereon of independent certified public accounts, who shall have been approved by Beneficiary, which opinion shall state that such financial statements fairly present the financial condition of Guarantor (subject to such reasonable qualifications as may be necessary, so long as the substance of the qualification does not involve a scope limitation imposed by Guarantor on such accountants, their audit, or audit procedures), that such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied (except for changes in application in which such accountants concur), that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and accordingly, included such tests of the accounting records and such other auditing procedures as were considered necessary under the circumstances, and, in the course of such examination such accountants did not become aware of any Event of Default, or act, omission or event that with the giving of notice and/or passage of time would constitute an Event of Default, under the Loan Documents. Trustor will furnish Beneficiary and cause Guarantor to furnish Beneficiary with such other financial information, reports, and statements, pro forma or otherwise, as Beneficiary may from time to time reasonably request concerning the financial affairs and business operations of Trustor or Guarantor. (c) On January 1 and July 1 of each year, current rent rolls and financial and accounting data relative to the Improvements and operation of the business conducted therein, in form and substance satisfactory to Beneficiary. -10- (d) On or before fifteen (15) days after delivery to the Securities Exchange Commission, copies of Guarantor's quarterly report on Form 10-Q and annual report on Form 10-K reports, together with all exhibits and schedules thereto. On or before five (5) days after delivery to the Securities Exchange Commission, copies of Guarantor's reports on Form 8-K, and all exhibits and schedules thereto. (g) Section 2.1.1 of the Deed of Trust is hereby deleted in its entirety and the following inserted therefor: 2.1.1 Breach or default in payment of any principal, interest or other indebtedness evidenced by the Note and/or any other indebtedness or payments of money secured hereby, including, without limitation, the Restaurant Phase Loan Documents, which is not cured within ten (10) days after the occurrence of such breach or default; or (h) all notices to Beneficiary under Section 3.6.1 of the Deed of Trust shall be addressed as follows: To Beneficiary: Norwest Bank Arizona 3300 North Central Avenue M.S. 9008 Phoenix, AZ 85012-2501 Attn: Ms. Vicki Slade, Vice President With a copy to: Jay S. Kramer Fennemore Craig Two North Central Avenue Suite 2200 Phoenix, AZ 85004-2390 (i) Section 3.14 of the Deed of Trust is hereby deleted in its entirety and the following inserted therefor: 3.14 Conveyance of Property; Change of Ownership. In order to protect Beneficiary under this Deed of Trust and the other Loan Documents, Trustor agrees that if either (i) Trustor sells, conveys, transfers, disposes of, or leases (except as provided in Section 1.10.1 of the Deed of Trust) the Property or any portion thereof, either voluntarily, involuntarily, or otherwise, or enters into an agreement so to do, or (ii) if there is any change in the general partners, shareholders, or members of Trustor without the prior written consent of Beneficiary (other than transfers as a result of death or transfers by a natural person to a member or members of his or her immediate family or transfers by any natural persons -11- in connection with bona fide estate planning), Trustor shall, not less than thirty (30) days prior to any such event, notify Beneficiary in writing of the occurrence of any such event, and Beneficiary, whether or not it received such notice, upon the occurrence of any one or more of any such events, shall have the right to declare the obligations under that certain Restaurant Phase Construction Loan Agreement dated as of June 24, 1994 between Borrower and Caliber Bank and any documents or instruments now or hereafter evidencing, securing or otherwise relating to the $1,900,000 loan (the "Restaurant Phase Loan") advanced or to be advances thereunder (together with any amendments, modifications or supplements thereto, or restatements thereof, the "Restaurant Phase Loan Documents") and the Loan Documents immediately due and payable, together with all accrued and unpaid interest and other amounts due hereunder and under the other Loan Documents and under the Restaurant Phase Loan Documents, which sum shall be applied, after being applied to payment of all other sums secured hereby then due and payable in such order as Beneficiary may determine, to the reduction of the unpaid principal balance of the Note and the Restaurant Phase Note. Trustor agrees to submit or cause to be submitted to Beneficiary within thirty (30) days after December 31 of each calendar year after the date hereof, without further request from Beneficiary, and within ten (10) days after any written request by Beneficiary for the same, a sworn, notarized certificate signed by Trustor or the general partners or officer of Trustor stating whether (i) the property encumbered by this Deed of Trust or any part thereof has been conveyed, transferred, assigned, sold or leased, and (ii) there has been any change in the general partners, shareholders, or members of Trustor. and (j) Article III of the Deed of Trust is hereby amended to add the following: 3.18 General Indemnification. Trustor agrees to indemnify and hold Beneficiary harmless from and against any claim, liability, expense, or cause of action arising out of Trustor's ownership of the Mortgaged Property (including environmental liabilities and claims related to any Hazardous Substance or otherwise), Trustor's construction, use, and occupancy of the Improvements and the mortgaging of the Mortgaged Property to Beneficiary. 7. Lien Priority. Borrower and Lender acknowledge and agree that the lien of the Deed of Trust and any other document evidencing, securing or guaranteeing the Note and all advances made thereunder are, and shall remain, prior in lien and in payment to the lien and payment of that certain Restaurant Phase Leasehold Construction Deed of Trust and Security -12- Agreement with Assignment of Rents and Fixture Filing dated June 24, 1994 from Trustor in favor of Beneficiary, recorded on July 8, 1994 as Instrument No. 94-0528680, Records of Maricopa County, Arizona, as amended by Amendment to Restaurant Phase Construction Loan Agreement, Restaurant Phase Promissory Note, and Restaurant Phase Deed of Trust dated September 21, 1994, recorded on September 26, 1994 as Instrument No. 94-0702378, Records of Maricopa County, Arizona, and Tenth Amendment to Restaurant Phase Construction Loan Agreement, Restaurant Phase Promissory Note, and Restaurant Phase Deed of Trust dated October 31, 1995 between Trustor and Beneficiary, and recorded concurrently herewith, and the promissory note secured thereby and all advances made thereunder. 8. Release Of Lender and Caliber. ----------------------------- (a) As additional consideration for the agreements by Lender as set forth in this Amendment, Borrower and Guarantor hereby release and forever discharge Lender and Caliber, and their agents, servants, employees, directors, officers, attorneys, branches, affiliates, subsidiaries, successors and assigns and all persons, firms, corporations, and organizations in their behalf, of and from all damage, loss, claims, demands, liabilities, obligations, actions and causes of action whatsoever which Borrower or Guarantor may now have or claim to have against Lender or Caliber, whether presently known or unknown, and of every nature and extent whatsoever on account of or in any way touching, concerning, arising out of or founded upon the Note, the Loan Documents or upon this Amendment, including, without limitation, all such loss or damage of any kind heretofore sustained, or that may arise as a consequence of the dealings between the parties prior to the date hereof. The release set forth above shall not extend to any claim arising after the date hereof to the extent based on acts or omissions of Lender or Caliber occurring after such date, except that such release is specifically intended by the parties to include the transactions leading up to the execution of this Amendment. This Amendment and the covenants contained in this Section 8 are contractual, and not a mere recital, and the parties hereto acknowledge and agree that no liability whatsoever is admitted on the part of any party, except as provided for by the Loan Documents and this Amendment. (b) Borrower and Guarantor acknowledge and agree that Lender is not, and shall not be, obligated in any way to continue or undertake any loan, financing or other credit arrangement with Borrower, including, without limitation, any renewal of the indebtedness evidenced by the Note, beyond the maturity date thereof as set forth therein. 9. Miscellaneous Provisions. ------------------------ (a) Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Arizona. (b) Counterparts. This Amendment may be executed in one or more counterparts, each of which shall constitute an original and all of which combined shall constitute one and the same instrument. (c) Headings. Paragraph or other headings contained in this Amendment are for reference purposes only and are not intended to affect in any way the meaning or interpretation of this Amendment. -13- (d) Binding Effect. All of the provisions of this Amendment shall be binding upon and inure to the benefit of Borrower and Lender and their permitted successors and assigns, including without limitation any successor trustor or beneficiary under the Deed of Trust. 10. Amendment. The Note and all other Loan Documents, including without limitation the Guaranty and Subordination Agreement, shall remain in full force and effect, except as modified by this Amendment, and the liability thereunder, the liens and security interests granted therein and the priority thereof, and the continued enforceability thereof, is hereby acknowledged, confirmed and ratified by Borrower and Guarantor. By execution of this Amendment, Guarantor acknowledges and agrees that it remains jointly and severally liable for all of the debts and obligations of Borrower and all debts of Borrower to Guarantor shall remain subordinate and inferior in all respects to the indebtedness evidenced by the Note. 11. ARBITRATION. EXCEPT FOR "CORE PROCEEDINGS" UNDER THE UNITED STATES BANKRUPTCY CODE, THE PARTIES AGREE TO SUBMIT TO BINDING ARBITRATION ALL CLAIMS, DISPUTES AND CONTROVERSIES BETWEEN OR AMONG THEM, WHETHER IN TORT, CONTRACT OR OTHERWISE (AND THEIR RESPECTIVE EMPLOYEES, OFFICERS, DIRECTORS, ATTORNEYS, AND OTHER AGENTS) ARISING OUT OF OR RELATING TO IN ANY WAY THIS AMENDMENT OR THE LOAN DOCUMENTS. ANY ARBITRATION PROCEEDING WILL (A) PROCEED IN PHOENIX, ARIZONA; (B) BE GOVERNED BY THE FEDERAL ARBITRATION ACT (TITLE 9 OF THE UNITED STATES CODE); AND (C) BE CONDUCTED IN ACCORDANCE WITH THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA"). THIS ARBITRATION REQUIREMENT DOES NOT LIMIT THE RIGHT OF ANY PARTY TO (I) FORECLOSE AGAINST REAL OR PERSONAL PROPERTY COLLATERAL; (II) EXERCISE SELF-HELP REMEDIES RELATING TO COLLATERAL OR PROCEEDS OF COLLATERAL SUCH AS SETOFF OR REPOSSESSION; OR (III) OBTAIN PROVISIONAL ANCILLARY REMEDIES SUCH AS REPLEVIN, INJUNCTIVE RELIEF, ATTACHMENT OR THE APPOINTMENT OF A RECEIVER, BEFORE, DURING OR AFTER THE PENDENCY OR ANY ARBITRATION PROCEEDING. THIS EXCLUSION DOES NOT CONSTITUTE A WAIVER OF THE RIGHT OR OBLIGATION OF ANY PARTY TO SUBMIT ANY DISPUTE TO ARBITRATION, INCLUDING THOSE ARISING FROM THE EXERCISE OF THE ACTIONS DETAILED IN CLAUSES (I), (II) AND (III) ABOVE. ANY ARBITRATION PROCEEDING WILL BE BEFORE A SINGLE ARBITRATOR SELECTED ACCORDING TO THE COMMERCIAL ARBITRATION RULES OF THE AAA. THE ARBITRATOR WILL BE A NEUTRAL ATTORNEY WHO HAS PRACTICED IN THE AREA OF COMMERCIAL LAW FOR A MINIMUM OF TEN YEARS. THE ARBITRATOR WILL DETERMINE WHETHER OR NOT AN ISSUE IS ARBITRABLE AND WILL GIVE EFFECT TO THE STATUTES OF LIMITATION IN DETERMINING ANY CLAIM. JUDGMENT UPON THE AWARD RENDERED BY THE ARBITRATOR MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. IN ANY ARBITRATION PROCEEDING, THE ARBITRATOR WILL DECIDE (BY DOCUMENTS ONLY OR WITH A HEARING AT THE ARBITRATOR'S DISCRETION) ANY PRE-HEARING MOTIONS WHICH ARE SIMILAR TO MOTIONS TO DISMISS FOR FAILURE TO STATE A CLAIM OR -14- MOTIONS FOR SUMMARY ADJUDICATION. IN ANY ARBITRATION PROCEEDING DISCOVERY WILL BE PERMITTED AND WILL BE GOVERNED BY THE ARIZONA RULES OF CIVIL PROCEDURE. ALL DISCOVERY MUST BE COMPLETED NO LATER THAN 20 DAYS BEFORE THE HEARING DATE AND WITHIN 180 DAYS OF THE COMMENCEMENT OF ARBITRATION PROCEEDINGS. ANY REQUESTS FOR AN EXTENSION OF THE DISCOVERY PERIODS, OR ANY DISCOVERY DISPUTES, WILL BE SUBJECT TO FINAL DETERMINATION BY THE ARBITRATOR UPON A SHOWING THAT THE REQUEST FOR DISCOVERY IS ESSENTIAL FOR THE PARTY'S PRESENTATION AND THAT NO ALTERNATIVE MEANS FOR OBTAINING INFORMATION IS AVAILABLE. THE ARBITRATOR SHALL AWARD COSTS AND EXPENSES OF THE ARBITRATION PROCEEDING IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT. EXCEPT AS OTHERWISE PROVIDED HEREIN, THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ARIZONA, WITHOUT REGARD TO ITS CONFLICT OF LAWS RULES. ------- ------- ------- INITIAL INITIAL INITIAL [THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK] -15- IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. BORROWER: CAMELBACK PLAZA DEVELOPMENT L.C., an Arizona limited liability company By: Performance Camelback Development Corp., an Arizona corporation Managing Member By: /s/ James W. Brown ----------------------- Name: James W. Brown ----------------------- Title: Secretary ----------------------- GUARANTOR: PERFORMANCE INDUSTRIES, INC., an Ohio corporation By: /s/ James W. Brown ----------------------- Name: James W. Brown ----------------------- Title: Treasurer ----------------------- LENDER: NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association By: /s/ Timothy J. Stouffer ---------------------------- Name: Timothy J. Stouffer ---------------------------- Title: Vice President ---------------------------- -16- STATE OF ARIZONA ) ) ss. County of Maricopa ) On this 14th day of March, 1996, before me, the undersigned notary public, in and for said state, personally appeared James W. Brown, the Secretary of Performance Camelback Development Corp., an Arizona corporation, the managing member of CAMELBACK PLAZA DEVELOPMENT L.C., an Arizona limited liability company, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. /s/ Terri L. Smith ------------------ Notary Public My Commission Expires: August 18, 1999 - --------------- STATE OF ARIZONA ) ) ss. County of Maricopa ) On this 14th day of March, 1996, before me, the undersigned notary public, in and for said state, personally appeared James W. Brown, the Treasurer of PERFORMANCE INDUSTRIES, INC., an Ohio corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. /s/ Terri L. Smith ------------------ Notary Public My Commission Expires: August 18, 1999 - --------------- -17- STATE OF ARIZONA ) ) ss. County of Maricopa ) On this 14th day of March, 1996, before me, the undersigned notary public, in and for said state, personally appeared Timothy J. Stouffer, the Vice President of NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. /s/ Terri L. Smith ------------------ Notary Public My Commission Expires: August 18, 1999 - --------------- -18- EXHIBIT "D" BORROWER COMPLIANCE CERTIFICATE The undersigned, the [President/Chief Financial Officer] of Performance Camelback Development Corp., the managing member of Camelback Plaza Development L.C., an Arizona limited liability company (the "Company"), hereby certifies as follows: 1. I am familiar with the agreements and instruments evidencing, securing or otherwise relating to the Retail Phase Construction Loan Agreement dated as of June 24, 1994 between the Company and Caliber Bank ("Caliber"), as amended, including, without limitation, the Retail Phase Promissory Note dated June 24, 1994 from the Company in favor of Caliber in the original amount of $3,000,000, as amended (the "Note"), and the Retail Phase Leasehold Construction Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing dated June 24, 1994 from the Company in favor of Caliber, recorded on September 26, 1994 as Instrument No. 94-0702374, Records of Maricopa County, Arizona, as amended (collectively, the "Loan Documents"). 2. I am familiar with the Ground Lease dated December 15, 1976 between Bill J. Davis and Betty Davis, Ida E. Davis, William S. Davis and Robert J. Davis (collectively, "Ground Lessor"), as Lessor, and Douglas P. Simpson and Janice C. Simpson, d/b/a Bayshore Development Company ("Ground Lessee"), as Lessee, as amended (the "Ground Lease"). 3. In connection with this Certificate, I have reviewed the books and records of the Company and I am familiar with the affairs of the Company. 4. The financial statements provided together with this Certificate present fairly, in all material respects, the financial position of the Company as of [insert appropriate date] and the results of its operations and cash flows for the period then ended in conformity with generally accepted accounting principles. 5. To the undersigned knowledge, after diligent investigation, except as indicated below, the Company is not in default of any of its representations, warranties, covenants or agreements under the Loan Documents or the Ground Lease [if any Event of Default, or act, omission or event that with the passage of time and/or giving of notice would constitute an Event of Default, has occurred and is continuing, set forth details of such Event of Default or incipient Event of Default below and the action which the Company proposes to take with respect thereto]: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DATE: , 199 . ----------------------------------- ---- ------------------------------- [Name], [title] -19- EXHIBIT "E" GUARANTOR COMPLIANCE CERTIFICATE The undersigned, the [President/Chief Financial Officer] of Performance Industries, Inc., an Ohio corporation (the "Company"), hereby certifies as follows: 1. I am familiar with the agreements and instruments evidencing, securing or otherwise relating to the Retail Phase Construction Loan Agreement dated as of June 24, 1994 between the Company and Caliber Bank ("Caliber"), as amended, including, without limitation, the Retail Phase Promissory Note dated June 24, 1994 from the Company in favor of Caliber in the original amount of $3,000,000, as amended (the "Note"), and the Retail Phase Leasehold Construction Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing dated June 24, 1994 from the Company in favor of Caliber, recorded on September 26, 1994 as Instrument No. 94-0702374, Records of Maricopa County, Arizona, as amended, and the Unconditional Guarantee of Payment dated June 24, 1994 from the Company in favor of Caliber (collectively, the "Loan Documents"). 2. In connection with this Certificate, I have reviewed the books and records of the Company and I am familiar with the affairs of the Company. 3. The financial statements provided together with this Certificate present fairly, in all material respects, the financial position of the Company as of [insert appropriate date] and the results of its operations and cash flows for the period then ended in conformity with generally accepted accounting principles. 4. To the undersigned knowledge, after diligent investigation, except as indicated below, the Company is not in default of any of its representations, warranties, covenants or agreements under the Loan Documents [if any Event of Default, or act, omission or event that with the passage of time and/or giving of notice would constitute an Event of Default, has occurred and is continuing, set forth details of such Event of Default or incipient Event of Default below and the action which the Company proposes to take with respect thereto]: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DATE: , 199 . ------------------------------------ ---- ------------------------------- [Name], [title] -20- EX-10.60 5 TENTH AMENDMENT TO RESTAURANT LOAN WHEN RECORDED, RETURN TO: Jay S. Kramer Fennemore Craig Two North Central Avenue Suite 2200 Phoenix, AZ 85004 TENTH AMENDMENT TO RESTAURANT PHASE CONSTRUCTION LOAN AGREEMENT, RESTAURANT PHASE PROMISSORY NOTE AND RESTAURANT PHASE LEASEHOLD DEED OF TRUST AND SECURITY AGREEMENT WITH ASSIGNMENT OF RENTS AND FIXTURE FILING THIS TENTH AMENDMENT TO RESTAURANT PHASE CONSTRUCTION LOAN AGREEMENT, RESTAURANT PHASE PROMISSORY NOTE AND RESTAURANT PHASE LEASEHOLD DEED OF TRUST AND SECURITY AGREEMENT WITH ASSIGNMENT OF RENTS AND FIXTURE FILING (the "Amendment") is made as of this 31st day of October, 1995 by and among CAMELBACK PLAZA DEVELOPMENT L.C., an Arizona limited liability company ("Borrower"), NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association ("Lender"), the successor-by-merger to Caliber Bank, an Arizona banking corporation ("Caliber"), and PERFORMANCE INDUSTRIES, INC., an Ohio corporation ("Guarantor"). WHEREAS, Borrower and Caliber entered into that certain Restaurant Phase Construction Loan Agreement dated as of June 24, 1994, as amended by, among others, Amendment to Restaurant Phase Construction Loan Agreement, Restaurant Phase Promissory Note, and Restaurant Phase Deed of Trust dated September 21, 1994, recorded on September 26, 1994 as Instrument No. 94-0702378, Records of Maricopa County, Arizona, Second Amendment to Restaurant Phase Construction Loan Agreement dated April 26, 1995, Third Amendment to Restaurant Phase Construction Loan Agreement dated May 19, 1995, Fourth Amendment to Restaurant Phase Construction Loan Agreement dated June 19, 1995, Fifth Amendment to Restaurant Phase Construction Loan Agreement dated June 26, 1995, Sixth Amendment to Restaurant Phase Construction Loan Agreement dated July 24, 1995, Seventh Amendment to Restaurant Phase Construction Loan Agreement dated August 18, 1995, Eighth Amendment to Restaurant Phase Construction Loan Agreement dated August 30, 1995 and Ninth Amendment to Restaurant Phase Construction Loan Agreement dated September 26, 1995 (the "Loan Agreement"), pursuant to which Caliber advanced $1,900,000 to Borrower (the "Construction Loan"), which Construction Loan was placed in a reserve deposit account (the "Reserve Account") with Caliber and, simultaneously, Caliber issued an unconditional letter of credit (the "Original Letter of Credit") in favor of Hard Rock Cafe Investors, Ltd. XIV, a California limited partnership ("Tenant"); WHEREAS, the Construction Loan is evidenced by the Loan Agreement and that certain Restaurant Phase Promissory Note dated June 24, 1994 from Borrower in favor of Caliber in the original amount of $1,900,000 (the "Note"), and is secured by, among others, that certain Restaurant Phase Leasehold Construction Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing dated June 24, 1994 from Borrower in favor of Caliber, recorded on July 8, 1994 as Instrument No. 94-0528680, Records of Maricopa County, Arizona, as amended by Amendment to Restaurant Phase Construction Loan Agreement, Restaurant Phase Promissory Note, and Restaurant Phase Deed of Trust dated September 21, 1994, recorded on September 26, 1994 as Instrument No. 94-0702378, Records of Maricopa County, Arizona (collectively, the "Deed of Trust"), which encumbers the Mortgaged Property described therein; WHEREAS, the Original Letter of Credit expired on its own terms without any draws by Tenant thereunder, but, at the request of Borrower, Lender has subsequently advanced, in the aggregate, $1,288,575.88 to Hard Rock America (Phoenix) L.P., a Delaware limited partnership ("HRC"), the assignee of Tenant, from the Reserve Account (the "Prior Advances"); WHEREAS, the remaining balance held in the Reserve Account, $611,424.12, shall be applied as a prepayment under the Restaurant Note (which may be readvanced pursuant to that certain Tri-Party Agreement dated October 31, 1995 among Borrower, Lender and HRC (the "Tri-Party Agreement")); and WHEREAS, in lieu of issuing a replacement letter of credit in favor of HRC in the amount of $611,424.12, Borrower, Guarantor, Lender and HRC executed and delivered the Tri- Party Agreement which provides for the disbursement by Lender, on behalf of Borrower, to HRC of $611,424.12 upon the terms and conditions contained therein; NOW, THEREFORE, in consideration of the premises set forth above and the covenants and agreements contained herein, and other consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower, intending to be legally bound, agree as follows: 1. Interpretation. Except as otherwise defined herein, all capitalized terms used herein shall have the meanings ascribed thereto in the Deed of Trust. In the event of any conflicts between the terms and provisions of this Amendment and the terms and provisions of the Loan Documents, the terms and provisions of this Amendment shall govern and prevail. 2. Conditions Precedent. The effectiveness of this Amendment is subject to the condition precedent that Lender shall have received on or before the date hereof the following, in form and substance satisfactory to Lender: (a) This Amendment, duly executed and delivered by Borrower and Guarantor. (b) Certified copies of the resolutions of the boards of directors of Performance Camelback Development Corp. and Guarantor authorizing the execution, delivery and performance of this Amendment and any other documents, agreements or -2- certificates required by Lender or any other Person in connection with the transactions contemplated by this Amendment. (c) An incumbency certificate from the Secretary or an Assistant Secretary of Performance Camelback Development Corp. and Guarantor, certifying the names and true signatures of the officers of Performance Camelback Development Corp. and Guarantor authorized to sign this Amendment and the other documents to be delivered by them hereunder. (d) Current certificates of good standing for Borrower and Guarantor issued by the applicable governmental agency of their state of formation. (e) An Amendment to the Retail Phase Construction Loan Agreement, Retail Phase Promissory Note and Retail Phase Leasehold Construction Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing from Borrower and Guarantor in favor of Lender, and satisfaction of all conditions to the effectiveness thereof. (f) A Cash Collateral Account Agreement from Borrower and Guarantor in favor of Lender. (g) A Tri-Party Agreement among Borrower, HRC and Lender. (h) A commitment fee of $61,250 for the Mini-Perm Loan (as defined below) commitment (which shall be deemed fully earned upon payment and shall not be applicable to the indebtedness). (i) An opinion of Borrower's and Guarantor's counsel from legal counsel and in form and substance satisfactory to Lender. (j) Such endorsements to Lender's existing title policy as may be requested by Lender insuring the continued priority of Lender's lien, in the same priority as stated in the original title policy, subject only to the exceptions shown in the title policy and current taxes and assessments. (k) A copy of HRC's construction budget and all construction contracts for the improvements on the Mortgaged Property, certified by HRC. (l) A Ground Lessor Estoppel Certificate and Agreement in form and substance satisfactory to Lender. (m) Evidence that HRC has been duly formed and is validly existing as a limited partnership under the laws of the State of Delaware. (n) A copy of the Assignment and Assumption of Lessee's Interest Under Lease between Tenant and HRC. -3- (o) Evidence of compliance with all insurance requirements under the Loan Documents and the Ground Lease. (p) The balance sheets, statements of income and changes in financial position of Borrower for the fiscal year ending December 31, 1994 and the year-to-date ending September 30, 1995, accompanied by a statement from the President or chief financial officer of the managing member of Borrower that the same have been prepared in accordance with GAAP. (q) The balance sheets, statements of income and changes in financial position of Guarantor for the fiscal year ending December 31, 1994 and the fiscal quarter ending September 30, 1995, accompanied by a statement from the President or chief financial officer of Guarantor that the same have been prepared in accordance with GAAP and, with respect to the fiscal year-end information, certified with an unqualified opinion from independent public accountants acceptable to the Lender. (r) Copies of Guarantor's quarterly report on Form 10-Q for the fiscal quarter ending March 31, 1995 and annual report on Form 10-K for the fiscal year ending December 31, 1994, together with all exhibits and schedules thereto, and copies of any reports of Guarantor on Form 8-K, and all exhibits and schedules thereto, not previously provided to Lender. (s) All costs and expenses incurred by Lender in connection with the negotiation, due diligence and documentation of this Amendment and any other agreements relating to the Mortgaged Property. (t) Such other documents, instruments, approvals (and, if requested by the Lender, certified duplicates of executed copies thereof) or opinions as the Lender may request. 3. Representations and Warranties. Borrower and Guarantor, jointly and severally, represent and warrant as follows: (a) Borrower is a limited liability company duly formed and validly existing under the laws of the State of Arizona. (b) Guarantor is a corporation duly formed and validly existing under the laws of the State of Ohio and Guarantor is duly qualified to transact business as a foreign corporation in the State of Arizona. (c) The execution, delivery and performance by Borrower and Guarantor of this Amendment and any other documents, agreements or certificates required by Lender in connection with the transactions contemplated by this Amendment are within their company or corporate powers, have been duly authorized by all necessary action, do not contravene (i) their organizational documents or (ii) any law or contractual restriction binding on or affecting Borrower or Guarantor, and do not result in or require the creation of any lien, security interest or other charge or encumbrance (other than -4- pursuant to this Agreement and the other documents executed in connection herewith) upon or with respect to any of their properties. (d) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by Borrower or Guarantor of this Amendment and any other documents, agreements or certificates required by Lender in connection with the transactions contemplated by this Amendment. (e) This Amendment and any other documents, agreements or certificates required by Lender in connection with the transactions contemplated by this Amendment are the legal, valid and binding obligations of Borrower and Guarantor enforceable against them in accordance with their respective terms (except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors' rights generally or subject to general principles of equity). (f) There is no pending or, to the best of Borrower's or Guarantor's knowledge, threatened action, investigation or proceeding before any court, governmental agency or arbitrator against or affecting Borrower, Guarantor or any of their affiliates which, if adversely determined, would materially adversely affect the financial condition or operations of Borrower or Guarantor or their affiliates. (g) The balance sheet of Borrower and the related statements of income and of changes in financial position of Borrower and for its fiscal year most recently ended, copies of which have been furnished to Lender, present fairly the financial condition of Borrower as of such date and the results of the operations of Borrower for the period ended on such date, all in accordance with GAAP consistently applied; and since the date of such statement, there has been no material adverse change in Borrower's financial condition or operations. The balance sheet of Guarantor, and the related statements of income and changes in financial position of Guarantor, for its fiscal year most recently ended, fairly present the financial condition of Guarantor at such date and the results of operations for the period then ended, all in accordance with GAAP consistently applied; and since such date there has been no material adverse change in Guarantor's financial condition or operations. 4. Amendments to Loan Agreement. (a) Section 1.5 of the Loan Agreement is hereby deleted in its entirety and the following inserted therefor: 1.5 "Completion Date": December 29, 1995. (b) Section 1.18 of the Loan Agreement is hereby deleted in its entirety and the following inserted therefor: 1.18 "Lender": Norwest Bank Arizona, National Association, a national banking association, whose address, for the -5- purpose of this Agreement, and particularly provisions hereof relating to notice is: Norwest Bank Arizona, 3300 North Central Avenue, M.S. 9008, Phoenix, AZ 85012-2501, Attn: Ms. Vicki Slade, Vice President. (c) The first and second paragraphs of Section 2.1 of the Loan Agreement are hereby deleted in their entirety and the following inserted therefor: 2.1 Note. The Construction Loan is evidenced by and payable as to principal, interest and premiums, if any, in accordance with the Note, as it may be amended, modified, supplemented, restated or replaced from time to time. (d) Section 6.4 of the Loan Agreement is hereby deleted in its entirety and the following inserted therefor: 6.4 Records. Borrower shall maintain, and shall cause Guarantor to maintain, proper books of record and account, in which full and correct entries shall be made in accordance with generally accepted accounting principles, of all its business and affairs. Borrower shall furnish to Lender, or cause Guarantor to furnish to Lender: 6.4.1 As soon as available and in any event within forty-five (45) days after the end of each of the first three quarters of each fiscal year of Borrower and as soon as available and in any event within one-hundred twenty (120) days after the end of each fiscal year of Borrower, balance sheets, statements of income and changes in financial position of Borrower for the period commencing at the end of the previous fiscal year and ending with the end of such quarter or fiscal year, as applicable, accompanied by a compliance certificate in the form attached hereto as Exhibit "D" and incorporated herein by this reference (the "Borrower Compliance Certificate"). 6.4.2 As soon as available and in any event within forty-five (45) days after the end of each of the first three quarters of each fiscal year of Guarantor and as soon as available and in any event within one-hundred twenty (120) days after the end of each fiscal year of Guarantor, balance sheets, statements of income and changes in financial position of Guarantor for the period commencing at the end of the previous fiscal year and ending with the end of such quarter or fiscal year, as applicable, accompanied by a statement from the President or chief financial officer of Guarantor that the same have been prepared in accordance with GAAP and, with respect to the fiscal year-end information, certified with an unqualified opinion from independent public -6- accountants acceptable to the Lender, together with a compliance certificate in the form attached hereto as Exhibit "E" and incorporated herein by this reference (the "Guarantor Compliance Certificate"). 6.4.3 On or before fifteen (15) days after delivery to the Securities Exchange Commission, copies of Guarantor's quarterly report on Form 10-Q and annual report on Form 10-K reports, together with all exhibits and schedules thereto. On or before five (5) days after delivery to the Securities Exchange Commission, copies of Guarantor's reports on Form 8-K, and all exhibits and schedules thereto. (e) Section 6 of the Loan Agreement is hereby amended to add the following: 6.14 Negative Covenants. So long as any indebtedness of Borrower or Guarantor to Lender remains unpaid, without the prior written consent of the Lender, Borrower will not do, or permit to be done, the following: (a) Make any loan to an affiliate. (b) Incur any guarantee of any indebtedness of an affiliate. (c) Borrow money from, or otherwise create indebtedness to, any affiliate unless such borrowing or the creation of such indebtedness is specifically subordinated in writing to the indebtedness of Borrower and Guarantor to Lender and the terms and conditions of all such subordinated borrowings and indebtedness shall be subject to prior written approval of Lender. (d) Permit any further encumbrance on the Mortgaged Property. (f) Section 7 of the Loan Agreement is hereby amended to add the following: 7.11 Retail Phase Construction Loan Agreement. An event of default shall occur and be continuing under that certain Retail Phase Construction Loan Agreement dated as of June 24, 1994 between Borrower and Caliber Bank and any documents or instruments now or hereafter evidencing, securing or otherwise relating to the $3,000,000 loan (the "Retail Phase Loan") advanced or to be advances thereunder (together with any amendments, modifications or supplements thereto, or restatements thereof, the "Retail Phase Loan Documents"). -7- and (g) Section 10 of the Loan Agreement is hereby deleted in its entirety and the following inserted therefor: 10. MINI-PERMANENT LOAN. ------------------- Provided that no Event of Default under the Loan Documents or "event of default" under the Retail Phase Loan Documents has occurred and is continuing on December 31, 1995, and provided further that Borrower has complied by such date with the conditions precedent enumerated in the Mini-Perm Loan Documents (as defined below), the maturity date of the Construction Loan and the Retail Phase Loan shall be extended for a period of forty (40) months from December 31, 1995 (the "Mini- Perm Loan"). Borrower and Lender shall execute and deliver loan documents in the form attached hereto as Exhibits "F-1" and "F-2" and incorporated herein by this reference (the "Mini-Perm Loan Documents"). 5. Amendments to Note. (a) Section 3 of the Note is hereby deleted in its entirety and the following inserted therefor: 3. INTENTIONALLY DELETED. (b) Section 4 of the Note is hereby amended to add the following: Holder has applied the remaining funds held in the Reserve Account in the amount of $611,424.12 (the "Reserve Account Prepayment") to the indebtedness evidenced by the Note. Notwithstanding anything to the contrary contained in the Loan Agreement, this Note or the other Loan Documents, Maker shall be deemed to have reborrowed all or any portion of the Reserve Account Prepayment disbursed by Holder to Hard Rock America (Phoenix) L.P. ("Tenant"), pursuant to that certain Tri-Party Agreement dated October 31, 1995 among Maker, Holder and Tenant (the "Tri-Party Agreement"). To the extent that all or any portion of the Reserve Account Prepayment has not been disbursed to Tenant on or before December 31, 1995, Holder shall advance to Maker under the Exchange Note and deposit into a bank- controlled, non-interest bearing account the remainder of the Reserve Account Prepayment. After December 31, 1995, the remainder of the Reserve Account Prepayment shall bear interest and be subject to all of the terms and provisions of the Exchange Note and the Loan Documents. Provided that no demand has been made for the remainder of the Reserve Account Prepayment on or before January 31, 1995 by Tenant, any portion of the Reserve Account Prepayment that has not been disbursed to Tenant on February 8, 1996 shall be applied as a prepayment of the Note in -8- accordance with the terms of the Exchange Note. Notwithstanding the foregoing, in the event that a final, non-appealable order is entered requiring Holder to disburse any portion of the Reserve Account Prepayment applied as a prepayment of the Note in accordance with the terms of the Exchange Note, such disbursement shall be added to the principal amount of the Exchange Note and bear interest and be subject to all of the terms and provisions of the Exchange Note and the Loan Documents. and (c) Exhibits "A" and "B" to the Note are hereby deleted in their entirety. 6. Deed of Trust. (a) Paragraphs "TWO" and "THREE" on page 4 of the Deed of Trust are hereby deleted in their entirety and the following inserted therefor: TWO: Payment of the indebtedness evidenced by that certain Retail Phase Promissory Note dated June 24, 1994 from Trustor payable to Beneficiary in the original amount of $3,000,000 (the "Retail Phase Note"), and any other sums Trustor or any successor in ownership hereafter may borrow from Beneficiary (or any successor or assign of Beneficiary) when evidenced by a promissory note or promissory notes, reciting that it is secured by this Deed of Trust. THREE: Payment of all other monies herein or in the Loan Documents (as defined below) agreed or provided to be paid by Trustor or Performance Industries, Inc. ("Guarantor"). (b) The first paragraph on page 5 of the Deed of Trust is hereby deleted in its entirety and the following inserted therefor: This Deed of Trust, the Note, that certain Tri-Party Agreement dated October 31, 1995 among Trustor, Beneficiary and Hard Rock America (Phoenix) L.P. (the "Tri-Party Agreement"), the Cash Collateral Agreement dated October 31, 1995 among Trustor, Guarantor and Beneficiary (the "Cash Collateral Agreement") and any other agreement given by Trustor or Guarantor to evidence or secure the obligations under the Note are sometimes hereinafter referred to collectively as the "Loan Documents". (c) Section 1.2 of the Deed of Trust is hereby amended to add the following: Trustor shall not, without the prior written approval of Beneficiary, create or suffer to exist any mortgage, lien, charge, encumbrance, easement, or license of any kind on, or pledge of, the Mortgaged Property. -9- (d) Section 1.6.4 of the Deed of Trust is hereby deleted in its entirety and the following inserted therefor: 1.6.4 The architect for the Improvements shall be required to provide architect's professional liability insurance with a limit of liability of not less than $1,000,000.00. This policy shall permit claims to be filed thereunder for a period of not less than three (3) years following the completion of the Improvements. (e) Section 1.10.2 of the Deed of Trust is hereby deleted in its entirety and the following inserted therefor: 1.10.2 Except for leases for premises of less than 1,000 rentable square feet, a default by Trustor in the performance of any lease assigned to Beneficiary, by reason of which default the tenants have the right to cancel such lease or to claim any diminution of or offset against future rents, shall, at the option of Beneficiary, constitute a default hereunder and under the Loan Documents, and Beneficiary shall have all the rights and remedies herein as if such default had occurred under this Deed of Trust. (f) The second paragraph of Section 1.12 of the Deed of Trust is hereby deleted in its entirety and the following inserted therefor: Trustor shall furnish Beneficiary and shall cause Guarantor to furnish to Beneficiary: (a) As soon as available, but in no event later than 45 days after each fiscal quarter (including Borrower's and Guarantor's fiscal year-end quarter), an unaudited balance sheet as of the end of the relevant fiscal quarter and an unaudited statement of income for the same period, setting forth in each case in comparative form the figures for the corresponding periods of the preceding year, all in reasonable detail, prepared in accordance with generally accepted accounting principles consistently applied and certified as complete and correct, subject to changes resulting from year end adjustments, by a principal financial officer of Trustor or Guarantor, as the case may be, together with the Borrower Compliance Certificate or Guarantor Compliance Certificate, as applicable, as required pursuant to the Loan Agreement; and (b) Within 120 days after the end of each fiscal year, an unaudited balance sheet of Trustor and an audited balance sheet of Guarantor, as at the end of such year, setting forth in comparative form the figures for the previous calendar year, all in reasonable detail and, with respect to Guarantor, -10- accompanied by an opinion thereon of independent certified public accounts, who shall have been approved by Beneficiary, which opinion shall state that such financial statements fairly present the financial condition of Guarantor (subject to such reasonable qualifications as may be necessary, so long as the substance of the qualification does not involve a scope limitation imposed by Guarantor on such accountants, their audit, or audit procedures), that such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied (except for changes in application in which such accountants concur), that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and accordingly, included such tests of the accounting records and such other auditing procedures as were considered necessary under the circumstances, and, in the course of such examination such accountants did not become aware of any Event of Default, or act, omission or event that with the giving of notice and/or passage of time would constitute an Event of Default, under the Loan Documents. Trustor will furnish Beneficiary and cause Guarantor to furnish Beneficiary with such other financial information, reports, and statements, pro forma or otherwise, as Beneficiary may from time to time reasonably request concerning the financial affairs and business operations of Trustor or Guarantor. (c) On January 1 and July 1 of each year, current rent rolls and financial and accounting data relative to the Improvements and operation of the business conducted therein, in form and substance satisfactory to Beneficiary. (d) On or before fifteen (15) days after delivery to the Securities Exchange Commission, copies of Guarantor's quarterly report on Form 10-Q and annual report on Form 10-K reports, together with all exhibits and schedules thereto. On or before five (5) days after delivery to the Securities Exchange Commission, copies of Guarantor's reports on Form 8-K, and all exhibits and schedules thereto. (g) Article I of the Deed of Trust is hereby amended to add the following: 1.26 Completion. Construction of the Improvements will be made in accordance with the Completion Schedule and will be completed on or before the Completion Date. 1.27 No Conditions Precedent. There shall be no amendment to or any change or modification in or any termination or curtailment of any document, instrument, or -11- agreement delivered to Beneficiary as a condition precedent to effectiveness of this Deed of Trust without the prior written consent of Beneficiary. 1.28 Construction. All construction of the Improvements will be accomplished in accordance with the Plans and Specifications and this Deed of Trust and the other Loan Documents. (h) Section 2.1.1 of the Deed of Trust is hereby deleted in its entirety and the following inserted therefor: 2.1.1 Breach or default in payment of any principal, interest or other indebtedness evidenced by the Note and/or any other indebtedness or payments of money secured hereby, including, without limitation, that certain Retail Phase Note, which is not cured within ten (10) days after the occurrence of such breach or default; or (i) All notices to Beneficiary under Section 3.6.1 of the Deed of Trust shall be addressed as follows: To Beneficiary: Norwest Bank Arizona 3300 North Central Avenue M.S. 9008 Phoenix, AZ 85012-2501 Attn: Ms. Vicki Slade, Vice President With a copy to: Jay S. Kramer Fennemore Craig Two North Central Avenue Suite 2200 Phoenix, AZ 85004-2390 (j) Section 3.14 of the Deed of Trust is hereby deleted in its entirety and the following inserted therefor: 3.14 Conveyance of Property; Change of Ownership. In order to protect Beneficiary under this Deed of Trust and the other Loan Documents, Trustor agrees that if either (i) Trustor sells, conveys, transfers, disposes, of, or leases (except as provided in Section 1.10.1 of the Deed of Trust) the Property or any portion thereof, either voluntarily, involuntarily, or otherwise, or enters into an agreement so to do so, or (ii) if there is any change in the general partners, shareholders, or members of Trustor without the prior written consent of Beneficiary (other than transfers as a result of death or transfers by a natural person to a member or members -12- of his or her immediate family or transfers by any natural persons in connection with a bona fide estate planning), Trustor shall, not less than thirty (30) days prior to any such event, notify Beneficiary in writing of the occurrence of any such event, and Beneficiary, whether or not it received such notice, upon the occurrence of any one or more of any such events, shall have the right to declare the obligations under that certain Retail Phase Construction Loan Agreement dated as of June 24, 1994 between Trustor and Caliber Bank and any documents or instruments now or hereafter evidencing, securing or relating to the Retail Phase Note (together with any amendments, modifications or supplements thereto, or restatements thereof, the "Retail Phase Loan Documents") and the Loan Documents immediately due and payable, together with all accrued and unpaid interest and other amounts due hereunder and under the other Loan Documents and under the Retail Phase Loan Documents, which sum shall be applied, after being applied to payment of all other sums secured hereby then due and payable in such order as Beneficiary may determine, to the reduction of the unpaid principal balance of the Note and the Retail Phase Note. In the event that Beneficiary's obligations under the Tri-Party Agreement have not expired prior to the declaration by Beneficiary that the obligations under the Retail Phase Loan Documents and the Loan Documents are immediately due and payable, Trustor shall deposit with Beneficiary an amount equal to the then remaining obligation of Beneficiary under the Tri-Party Agreement, which Beneficiary shall hold in a bank-controlled, non-interest bearing account for payment of any obligations of Beneficiary to HRC under the Tri- Party Agreement. Trustor agrees to submit or cause to be submitted to Beneficiary within thirty (30) days after December 31 of each calendar year after the date hereof, without further request from Beneficiary, and within ten (10) days after any written request by Beneficiary for the same, a sworn, notarized certificate signed by Trustor or the general partners or officer of Trustor stating whether (i) the property encumbered by this Deed of Trust or any part thereof has been conveyed, transferred, assigned, sold or leased, and (ii) there has been any change in the general partners, shareholders, or members of Trustor. and (k) Article III of the Deed of Trust is hereby amended to add the following: 3.18 General Indemnification. Trustor agrees to indemnify and hold Beneficiary harmless from and against any claim, liability, expense, or cause of action arising out of Trustor's ownership of the Mortgaged Property (including environmental -13- liabilities and claims related to any Hazardous Substance or otherwise), Trustor's construction, use, and occupancy of the Improvements and the mortgaging of the Mortgaged Property to Beneficiary. 7. Lien Priority. Borrower and Lender acknowledge and agree that the lien of the Deed of Trust and any other document evidencing, securing or guaranteeing the Note and all advances made thereunder are, and shall remain, junior and inferior in lien and in payment to the lien and payment of that certain Retail Phase Leasehold Construction Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing dated June 24, 1994 from Borrower in favor of Lender, recorded on September 26, 1994 as Instrument No. 94-0702374, Records of Maricopa County, Arizona, as amended by Amendment to Retail Phase Construction Loan Agreement, Retail Phase Promissory Note, and Retail Phase Deed of Trust dated September 21, 1994, recorded on September 26, 1994 as Instrument No. 94-0702377, Records of Maricopa County, Arizona, and Second Amendment to Retail Phase Construction Loan Agreement, Retail Phase Promissory Note, and Retail Phase Deed of Trust dated October 31, 1995 between Borrower and Lender, and recorded concurrently herewith, and the promissory note secured thereby and all advances made thereunder. 8. Release Of Lender and Caliber. ----------------------------- (a) As additional consideration for the agreements by Lender as set forth in this Amendment, Borrower and Guarantor hereby release and forever discharge Lender and Caliber, and their agents, servants, employees, directors, officers, attorneys, branches, affiliates, subsidiaries, successors and assigns and all persons, firms, corporations, and organizations in their behalf, of and from all damage, loss, claims, demands, liabilities, obligations, actions and causes of action whatsoever which Borrower or Guarantor may now have or claim to have against Lender or Caliber, whether presently known or unknown, and of every nature and extent whatsoever on account of or in any way touching, concerning, arising out of or founded upon the Note, the Loan Documents or upon this Amendment, including, without limitation, all such loss or damage of any kind heretofore sustained, or that may arise as a consequence of the dealings between the parties prior to the date hereof. The release set forth above shall not extend to any claim arising after the date hereof to the extent based on acts or omissions of Lender or Caliber occurring after such date, except that such release is specifically intended by the parties to include the transactions leading up to the execution of this Amendment. This Amendment and the covenants contained in this Section 8 are contractual, and not a mere recital, and the parties hereto acknowledge and agree that no liability whatsoever is admitted on the part of any party, except as provided for by the Loan Documents and this Amendment. (b) Borrower and Guarantor acknowledge and agree that Lender is not, and shall not be, obligated in any way to continue or undertake any loan, financing or other credit arrangement with Borrower, including, without limitation, any renewal of the indebtedness evidenced by the Note, beyond the maturity date thereof as set forth therein. 9. Miscellaneous Provisions. -14- (a) Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Arizona. (b) Counterparts. This Amendment may be executed in one or more counterparts, each of which shall constitute an original and all of which combined shall constitute one and the same instrument. (c) Headings. Paragraph or other headings contained in this Amendment are for reference purposes only and are not intended to affect in any way the meaning or interpretation of this Amendment. (d) Binding Effect. All of the provisions of this Amendment shall be binding upon and inure to the benefit of Borrower and Lender and their permitted successors and assigns, including without limitation any successor trustor or beneficiary under this Deed of Trust. 10. Amendment. The Deed of Trust and all other Loan Documents, including without limitation the Guaranty and Subordination Agreement, shall remain in full force and effect, except as modified by this Amendment, and the liability thereunder, the liens and security interests granted therein and the priority thereof, and the continued enforceability thereof, is hereby acknowledged, confirmed and ratified by Borrower and Guarantor. By execution of this Amendment, Guarantor acknowledges and agrees that it remains jointly and severally liable for all of the debts and obligations of Borrower and all debts of Borrower to Guarantor shall remain subordinate and inferior in all respects to the indebtedness evidenced by the Reimbursement Agreement. 11. ARBITRATION. EXCEPT FOR "CORE PROCEEDINGS" UNDER THE UNITED STATES BANKRUPTCY CODE, THE PARTIES AGREE TO SUBMIT TO BINDING ARBITRATION ALL CLAIMS, DISPUTES AND CONTROVERSIES BETWEEN OR AMONG THEM, WHETHER IN TORT, CONTRACT OR OTHERWISE (AND THEIR RESPECTIVE EMPLOYEES, OFFICERS, DIRECTORS, ATTORNEYS, AND OTHER AGENTS) ARISING OUT OF OR RELATING TO IN ANY WAY THIS AMENDMENT OR THE LOAN DOCUMENTS. ANY ARBITRATION PROCEEDING WILL (A) PROCEED IN PHOENIX, ARIZONA; (B) BE GOVERNED BY THE FEDERAL ARBITRATION ACT (TITLE 9 OF THE UNITED STATES CODE); AND (C) BE CONDUCTED IN ACCORDANCE WITH THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA"). THIS ARBITRATION REQUIREMENT DOES NOT LIMIT THE RIGHT OF ANY PARTY TO (I) FORECLOSE AGAINST REAL OR PERSONAL PROPERTY COLLATERAL; (II) EXERCISE SELF-HELP REMEDIES RELATING TO COLLATERAL OR PROCEEDS OF COLLATERAL SUCH AS SETOFF OR REPOSSESSION; OR (III) OBTAIN PROVISIONAL ANCILLARY REMEDIES SUCH AS REPLEVIN, INJUNCTIVE RELIEF, ATTACHMENT OR THE APPOINTMENT OF A RECEIVER, BEFORE, DURING OR AFTER THE PENDENCY OR ANY ARBITRATION PROCEEDING. THIS EXCLUSION DOES NOT CONSTITUTE A WAIVER OF THE RIGHT OR OBLIGATION OF ANY PARTY TO SUBMIT ANY DISPUTE TO ARBITRATION, INCLUDING THOSE ARISING FROM THE EXERCISE OF THE ACTIONS DETAILED -15- IN CLAUSES (I), (II) AND (III) ABOVE. ANY ARBITRATION PROCEEDING WILL BE BEFORE A SINGLE ARBITRATOR SELECTED ACCORDING TO THE COMMERCIAL ARBITRATION RULES OF THE AAA. THE ARBITRATOR WILL BE A NEUTRAL ATTORNEY WHO HAS PRACTICED IN THE AREA OF COMMERCIAL LAW FOR A MINIMUM OF TEN YEARS. THE ARBITRATOR WILL DETERMINE WHETHER OR NOT AN ISSUE IS ARBITRABLE AND WILL GIVE EFFECT TO THE STATUTES OF LIMITATION IN DETERMINING ANY CLAIM. JUDGMENT UPON THE AWARD RENDERED BY THE ARBITRATOR MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. IN ANY ARBITRATION PROCEEDING, THE ARBITRATOR WILL DECIDE (BY DOCUMENTS ONLY OR WITH A HEARING AT THE ARBITRATOR'S DISCRETION) ANY PRE-HEARING MOTIONS WHICH ARE SIMILAR TO MOTIONS TO DISMISS FOR FAILURE TO STATE A CLAIM OR MOTIONS FOR SUMMARY ADJUDICATION. IN ANY ARBITRATION PROCEEDING DISCOVERY WILL BE PERMITTED AND WILL BE GOVERNED BY THE ARIZONA RULES OF CIVIL PROCEDURE. ALL DISCOVERY MUST BE COMPLETED NO LATER THAN 20 DAYS BEFORE THE HEARING DATE AND WITHIN 180 DAYS OF THE COMMENCEMENT OF ARBITRATION PROCEEDINGS. ANY REQUESTS FOR AN EXTENSION OF THE DISCOVERY PERIODS, OR ANY DISCOVERY DISPUTES, WILL BE SUBJECT TO FINAL DETERMINATION BY THE ARBITRATOR UPON A SHOWING THAT THE REQUEST FOR DISCOVERY IS ESSENTIAL FOR THE PARTY'S PRESENTATION AND THAT NO ALTERNATIVE MEANS FOR OBTAINING INFORMATION IS AVAILABLE. THE ARBITRATOR SHALL AWARD COSTS AND EXPENSES OF THE ARBITRATION PROCEEDING IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT. EXCEPT AS OTHERWISE PROVIDED HEREIN, THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ARIZONA, WITHOUT REGARD TO ITS CONFLICT OF LAWS RULES. ------- ------- ------- INITIAL INITIAL INITIAL -16- IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. BORROWER: CAMELBACK PLAZA DEVELOPMENT L.C., an Arizona limited liability company By: Performance Camelback Development Corp., an Arizona corporation Managing Member By: /s/ James W. Brown ----------------------- Name: James W. Brown ----------------------- Title: Secretary ----------------------- LENDER: NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association By: /s/ Timothy J. Stouffer ---------------------------- Name: Timothy J. Stouffer ---------------------------- Title: Vice President ---------------------------- GUARANTOR: PERFORMANCE INDUSTRIES, INC., an Ohio corporation By: /s/ James W. Brown ----------------------- Name: James W. Brown ----------------------- Title: Treasurer ----------------------- -17- STATE OF ARIZONA ) ) ss. County of Maricopa ) On this 14th day of March, 1996, before me, the undersigned notary public, in and for said state, personally appeared James W. Brown, the Secretary of Performance Camelback Development Corp., an Arizona corporation, the managing member of CAMELBACK PLAZA DEVELOPMENT L.C., an Arizona limited liability company, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. Terri L. Smith ------------------- Notary Public My Commission Expires: August 18, 1999 STATE OF ARIZONA ) ) ss. County of Maricopa ) On this 14th day of March, 1996, before me, the undersigned notary public, in and for said state, personally appeared Timothy J. Stouffer, the Vice President of NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. Terri L. Smith ------------------- Notary Public My Commission Expires: August 18, 1999 -18- STATE OF ARIZONA ) ) ss. County of Maricopa ) On this 14th day of March, 1996, before me, the undersigned notary public, in and for said state, personally appeared James W. Brown, the Treasurer of PERFORMANCE INDUSTRIES, INC., an Ohio corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. Terri L. Smith ------------------- Notary Public My Commission Expires: August 18, 1999 -19- EXHIBIT "D" BORROWER COMPLIANCE CERTIFICATE The undersigned, the [President/Chief Financial Officer] of Performance Camelback Development Corp., the managing member of Camelback Plaza Development L.C., an Arizona limited liability company (the "Company"), hereby certifies as follows: 1. I am familiar with the agreements and instruments evidencing, securing or otherwise relating to the Restaurant Phase Construction Loan Agreement dated as of June 24, 1994 between the Company and Caliber Bank ("Caliber"), as amended, including, without limitation, the Restaurant Phase Promissory Note dated June 24, 1994 from the Company in favor of Caliber in the original amount of $1,900,000, as amended (the "Note"), and the Restaurant Phase Leasehold Construction Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing dated June 24, 1994 from the Company in favor of Caliber, recorded on July 8, 1994 as Instrument No. 94-0528680, Records of Maricopa County, Arizona, as amended (collectively, the "Loan Documents"). 2. I am familiar with the Ground Lease dated December 15, 1976 between Bill J. Davis and Betty Davis, Ida E. Davis, William S. Davis and Robert J. Davis (collectively, "Ground Lessor"), as Lessor, and Douglas P. Simpson and Janice C. Simpson, d/b/a Bayshore Development Company ("Ground Lessee"), as Lessee, as amended (the "Ground Lease"). 3. In connection with this Certificate, I have reviewed the books and records of the Company and I am familiar with the affairs of the Company. 4. The financial statements provided together with this Certificate present fairly, in all material respects, the financial position of the Company as of [insert appropriate date] and the results of its operations and cash flows for the period then ended in conformity with generally accepted accounting principles. 5. To the undersigned knowledge, after diligent investigation, except as indicated below, the Company is not in default of any of its representations, warranties, covenants or agreements under the Loan Documents or the Ground Lease [if any Event of Default, or act, omission or event that with the passage of time and/or giving of notice would constitute an Event of Default, has occurred and is continuing, set forth details of such Event of Default or incipient Event of Default below and the action which the Company proposes to take with respect thereto]: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DATE: , 199 . --------------------------------- ---- --------------------------------- [Name], [title] EXHIBIT "E" GUARANTOR COMPLIANCE CERTIFICATE The undersigned, the [President/Chief Financial Officer] of Performance Industries, Inc., an Ohio corporation (the "Company"), hereby certifies as follows: 1. I am familiar with the agreements and instruments evidencing, securing or otherwise relating to the Restaurant Phase Construction Loan Agreement dated as of June 24, 1994 between the Company and Caliber Bank ("Caliber"), as amended, including, without limitation, the Restaurant Phase Promissory Note dated June 24, 1994 from the Company in favor of Caliber in the original amount of $1,900,000, as amended (the "Note"), and the Restaurant Phase Leasehold Construction Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing dated June 24, 1994 from the Company in favor of Caliber, recorded on July 8, 1994 as Instrument No. 94-0528680, Records of Maricopa County, Arizona, as amended, and the Unconditional Guarantee of Payment dated June 24, 1994 from the Company in favor of Caliber (collectively, the "Loan Documents"). 2. In connection with this Certificate, I have reviewed the books and records of the Company and I am familiar with the affairs of the Company. 3. The financial statements provided together with this Certificate present fairly, in all material respects, the financial position of the Company as of [insert appropriate date] and the results of its operations and cash flows for the period then ended in conformity with generally accepted accounting principles. 4. To the undersigned knowledge, after diligent investigation, except as indicated below, the Company is not in default of any of its representations, warranties, covenants or agreements under the Loan Documents [if any Event of Default, or act, omission or event that with the passage of time and/or giving of notice would constitute an Event of Default, has occurred and is continuing, set forth details of such Event of Default or incipient Event of Default below and the action which the Company proposes to take with respect thereto]: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DATE: , 199 . --------------------------------- ---- --------------------------------- [Name], [title] EX-10.61 6 CASH COLLATERAL AGREEMENT CASH COLLATERAL AGREEMENT THIS CASH COLLATERAL AGREEMENT (as the same may be amended, supplemented or otherwise modified from time to time, the "Agreement") is made as of this 31st day of October, 1995 by and among CAMELBACK PLAZA DEVELOPMENT L.C., an Arizona limited liability company ("Borrower"), PERFORMANCE INDUSTRIES, INC., an Ohio corporation ("Pledgor"), and NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association ("Lender"), the successor-by-merger to Caliber Bank, an Arizona banking corporation ("Caliber"). R E C I T A L S: WHEREAS, Borrower and Caliber entered into that certain Retail Phase Construction Loan Agreement dated June 24, 1994, as amended by Amendment to Retail Phase Construction Loan Agreement, Retail Phase Promissory Note, and Retail Phase Deed of Trust dated September 21, 1994, recorded on September 26, 1994 as Instrument No. 94-0702377, Records of Maricopa County, Arizona, and Second Amendment to Retail Phase Construction Loan Agreement, Retail Phase Promissory Note, and Retail Phase Deed of Trust of even date herewith (as hereafter amended, modified, supplemented or restated from time to time, the "Retail Loan Agreement"), pursuant to which Caliber made a construction loan of up to $3,000,000.00 to Borrower (the "Retail Loan"); WHEREAS, Borrower and Caliber entered into that certain Restaurant Phase Construction Loan Agreement dated as of June 24, 1994, as amended by, among others, Amendment to Restaurant Phase Construction Loan Agreement, Restaurant Phase Promissory Note, and Restaurant Phase Deed of Trust dated September 21, 1994, recorded on September 26, 1994 as Instrument No. 94-0702378, Records of Maricopa County, Arizona, Second Amendment to Restaurant Phase Construction Loan Agreement dated April 26, 1995, Third Amendment to Restaurant Phase Construction Loan Agreement dated May 19, 1995, Fourth Amendment to Restaurant Phase Construction Loan Agreement dated June 19, 1995, Fifth Amendment to Restaurant Phase Construction Loan Agreement dated June 26, 1995, Sixth Amendment to Restaurant Phase Construction Loan Agreement dated July 24, 1995, Seventh Amendment to Restaurant Phase Construction Loan Agreement dated August 18, 1995, Eighth Amendment to Restaurant Phase Construction Loan Agreement dated August 30, 1995 and Ninth Amendment to Restaurant Phase Construction Loan Agreement dated September 26, 1995 and Tenth Amendment to Restaurant Phase Construction Loan Agreement, Restaurant Phase Promissory Note, and Restaurant Phase Deed of Trust of even date herewith (the "Restaurant Loan Agreement"), pursuant to which Caliber advanced $1,900,000 to Borrower (as hereafter amended, modified, supplemented or restated from time to time, the "Restaurant Loan"), which Restaurant Loan was placed in a reserve deposit account (the "Reserve Account") with Caliber and, simultaneously, Caliber issued an unconditional letter of credit (the "Original Letter of Credit") in favor of Hard Rock Cafe Investors, Ltd. XIV, a California limited partnership ("Tenant"); WHEREAS, the Restaurant Loan is evidenced by the Loan Agreement and that certain Restaurant Phase Promissory Note dated June 24, 1994 from Borrower in favor of Caliber in the original amount of $1,900,000, as amended (the "Restaurant Note"), and is secured by, among others, that certain Restaurant Phase Leasehold Construction Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing dated June 24, 1994 from Borrower in favor of Caliber, recorded on July 8, 1994 as Instrument No. 94-0528680, Records of Maricopa County, Arizona, as amended by Amendment to Restaurant Phase Construction Loan Agreement, Restaurant Phase Promissory Note, and Restaurant Phase Deed of Trust dated September 21, 1994, recorded on September 26, 1994 as Instrument No. 94-0702378, Records of Maricopa County, Arizona (collectively, the "Restaurant Deed of Trust"); WHEREAS, Lender succeeded to the interest of Caliber through the merger of Caliber with and into Lender; WHEREAS, the Original Letter of Credit expired on its own terms without any draws by Tenant thereunder, but, at the request of Borrower, Lender has subsequently advanced, in the aggregate, $1,288,575.88 to Hard Rock America (Phoenix) L.P., a Delaware limited partnership ("HRC"), the assignee of Tenant, from the Reserve Account (the "Prior Advances"); WHEREAS, the remaining balance held in the Reserve Account, $611,424.12, shall be applied as a prepayment under the Restaurant Note (which may be readvanced pursuant to that certain Tri-Party Agreement dated October 31, 1995 among Borrower, Lender and HRC (the "Tri-Party Agreement")); and WHEREAS, in lieu of issuing a replacement letter of credit in favor of HRC in the amount of $611,424.12, Borrower, Pledgor, Lender and HRC executed and delivered the Tri- Party Agreement which provides for the disbursement by Lender, on behalf of Borrower, to HRC of $611,424.12 upon the terms and conditions contained therein; WHEREAS, Pledgor executed and delivered that certain Unconditional Guarantee of Payment dated June 24, 1994 in favor of Lender (the "Guarantee"); WHEREAS, Pledgor has, or will, benefit directly or indirectly from the making of the Retail Loan, the Restaurant Loan, the Prior Advances and any disbursements under the Tri-Party Agreement; WHEREAS, it is a condition precedent to the effectiveness of the Tenth Amendment to the Restaurant Phase Construction Loan Agreement Construction, Restaurant Phase Promissory Note and Restaurant Phase Leasehold Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing (the "Tenth Amendment") and the Second Amendment to the Retail Phase Construction Loan Agreement Construction, Retail Phase Promissory Note and Retail Phase Leasehold Deed of Trust and Security Agreement with Assignment of Rents and Fixture -2- Filing (the "Second Amendment") that Borrower and Pledgor execute and deliver this Agreement to Lender; NOW, THEREFORE, in consideration of TEN AND NO/100 DOLLARS, the recitals above and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Borrower, Pledgor and Lender, intending to be legally bound, agree as follows: 1. Definitions. Except as otherwise defined herein, all capitalized terms used herein shall have the meanings ascribed thereto in the Retail Loan Agreement or the Restaurant Loan Agreement. 2. Establishment of Cash Collateral Account. Borrower, Pledgor and Lender agree that concurrently with the execution and delivery of this Agreement, there is established and shall be maintained at Norwest Bank Arizona, an interest-bearing cash collateral account with account number 3000507868 in the name of Lender and designated as the "Camelback Plaza Collateral Account" (the "Cash Collateral Account") in which Pledgor or Borrower has, or shall, deposit $1,000,000 (the "Pledged Funds"). From time to time Lender may establish additional interest-bearing cash collateral accounts for the receipt of Pledged Funds, which accounts shall be deemed to be included within the Cash Collateral Account and shall be subject to the terms and conditions hereof. 3. Grant of Security Interest. As collateral security for the prompt and complete payment when due of all the obligations of Borrower and Pledgor to Lender under the Retail Loan and the Restaurant Loan and all other obligations and liabilities of Borrower and Pledgor to Lender, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, arising under, out of, or in connection with, the Retail Loan, the Tri-Party Agreement, the Guarantee, this Agreement and all other documents evidencing, securing or otherwise relating to the Retail Loan or the Restaurant Loan (collectively, the "Loan Documents"), Pledgor does hereby grant, bargain, sell, assign, pledge, transfer and set over unto the Lender, and its successors and assigns, all of Pledgor's right, title and interest in and to any Pledged Funds now or hereafter held or deposited in the Cash Collateral Account. 4. Terms and Conditions. a. The Cash Collateral Account and all amounts deposited therein shall be held in the sole dominion and control of Lender and shall be administered by Lender as a collateral account for the benefit of Lender, and neither Borrower nor Pledgor shall have any rights or powers with respect to, or control over, the Cash Collateral Account or any part thereof. Pledgor's sole right with respect to the Pledged Funds shall be as provided herein. b. Prior to the occurrence of an Event of Default, the Pledged Funds shall be applied by Lender for the purposes provided in, and pursuant to, this Agreement and Lender shall make withdrawals from the Cash Collateral Account in connection with such application of Pledged Funds. From and after the occurrence and during the continuation of an Event of -3- Default, Lender may continue to withdraw and apply the Pledged Funds as if no Event of Default has occurred and is continuing or, in the sole and absolute discretion of Lender, Lender may apply the Pledged Funds to the Obligations in the following order: (i) all outstanding costs, expenses, fees and late charges due to Lender, (ii) interest at the rate or rates specified in the Loan Documents and (iii) the principal amount of the Obligations. All interest and other amounts from time to time accrued and paid on the Pledged Funds (i) shall be paid to Pledgor so long as no Event of Default has occurred and is continuing, or (ii) if the conditions set forth in clause (i) of this sentence are not satisfied, shall be retained in the Cash Collateral Account and shall be applied in accordance with this Agreement. c. Lender shall have, with respect to the Pledged Funds, all rights and remedies of a secured party under Article 9 of the Arizona Uniform Commercial Code and other applicable laws. 5. Release of Pledged Funds. Provided that no Event of Default has occurred and is continuing, Lender shall release the Pledged Funds from the Collateral Account upon receipt of the following: a. Upon execution and delivery of this Agreement and any documents and instruments to be delivered concurrently herewith, Lender shall release, for the account of Borrower from the Collateral Account, $100,000 to be directly applied by Lender, first, to the commitment fee of $61,250 for the Mini-Perm Loan; second, to Lender's attorneys' fees and costs in the approximate amount of $30,000, and the remainder, if any, to accrued and unpaid interest under the Loans. b. Upon Lender's receipt of the executed Ground Lessor Estoppel Certificate and Agreement and a copy of the fully executed arbitration agreement between Borrower and Ground Lessor with respect to the sidewalk easement, in form and substance reasonably satisfactory to Lender, and Lender's receipt of evidence satisfactory to Lender that Borrower or Pledgor has paid $66,667 or more to Balducci's for tenant improvements to the property securing the Retail Loan, together with invoices or other evidence satisfactory to Lender showing that such tenant improvements were purchased and/or installed into the property securing the Retail Loan and evidence that the cost of such tenant improvements have been fully paid, Lender shall release to Pledgor from the Collateral Account the actual amount paid by Borrower or Pledgor to Balducci's for such tenant improvements, but not to exceed the lesser of (i) $66,667 and (ii) the remaining Pledged Funds then held in the Collateral Account. c. Upon satisfaction of the conditions in Section 5.b. above and Lender's receipt of evidence satisfactory to Lender that Borrower or Pledgor has paid $133,333 or more to Balducci's for tenant improvements to the property securing the Retail Loan, together with invoices or other evidence satisfactory to Lender showing that such tenant improvements were purchased and/or installed into the property securing the Retail Loan and evidence that the cost of such tenant improvements have been fully paid, Lender shall release to Pledgor from the Collateral Account the actual amount paid by Borrower or Pledgor to Balducci's for such tenant -4- improvements less the amount released to Pledgor from the Collateral Account pursuant to clause b. above, but not to exceed the lesser of (i) $66,667 and (ii) the remaining Pledged Funds then held in the Collateral Account. d. Upon satisfaction of the conditions in Section 5.b. above and Lender's receipt of evidence satisfactory to Lender that Borrower or Pledgor has paid $220,000 or more to Balducci's for tenant improvements to the property securing the Retail Loan, together with invoices or other evidence satisfactory to Lender showing that such tenant improvements were purchased and/or installed into the property securing the Retail Loan and evidence that the cost of such tenant improvements have been fully paid, Lender shall release to Pledgor from the Collateral Account the actual amount paid by Borrower or Pledgor to Balducci's for such tenant improvements less the amounts released to Pledgor from the Collateral Account pursuant to clauses b. and c. above, but not to exceed the lesser of (i) $86,666 and (ii) the remaining Pledged Funds then held in the Collateral Account. e. On or before ten (10) business days after satisfaction of the conditions in Section 5.b. above, receipt of final certificates of occupancy for all building shells and tenant improvements for the Property and receipt of operating statements for the Project and a Debt Retirement Coverage Certificate in the form attached hereto as Exhibit "A" and incorporated herein by this reference (the "Debt Retirement Coverage Certificate"), certified as true, correct and complete by the chief financial officer or President of the managing member of Borrower, together with such additional information as Lender shall request, for any three-month period ending no earlier than the end of the third full calendar month of operation of HRC, demonstrating that the real property and improvements located at or about 26th Street and Camelback Road and including, HRC, Just For Feet, Sound Warehouse and Balducci's (collectively, the "Project"), has achieved a "Debt Retirement Coverage Ratio" of 1.5:1.0, in the aggregate, Lender shall release to Pledgor from the Collateral Account $90,000, and, thereafter, on or before ten (10) business days after receipt of operating statements for the Project and a Debt Retirement Coverage Certificate, certified as true, correct and complete by the chief financial officer or President of the managing member of Borrower, together with such additional information as Lender shall request, for three (3) subsequent months (whether or not consecutive) demonstrating that the Project has achieved a "Debt Retirement Coverage Ratio" of 1.5:1.0 individually for such month, Lender shall release to Pledgor from the Collateral Account $30,000 per month, but in no event more than $90,000 in the aggregate or more than the remaining Pledged Funds then held in the Collateral Account. f. On or before ten (10) business days after satisfaction of the conditions in Section 5.b. above, receipt of final certificates of occupancy for all building shells and tenant improvements for the Property and receipt of operating statements for the Project and a Debt Retirement Coverage Certificate substantiating the below-referenced "Debt Retirement Coverage Ratio", certified as true, correct and complete by the chief financial officer or President of the managing member of Borrower, together with such additional information as Lender shall request, for the six-month period ending upon the latest of (i) October 31, 1996, (ii) the end of the sixth full month after Balducci's commences payment of rent and additional rent at the lease rate, or (iii) the end of the sixth full month after the Project demonstrates a "Debt Retirement Coverage Ratio" of 1.3:1.0 for each of six (6) consecutive months, Lender shall release to -5- Pledgor from the Collateral Account the lesser of (X) $500,000 or (Y) the remainder of the Pledged Funds held in the Collateral Account. For purposes of this Agreement, the following terms shall have the following meanings: The term "Debt Retirement Coverage Ratio" shall mean the ratio of "Net Operating Income" (as hereinafter defined) for each month to the actual monthly scheduled principal and interest payments due under the Retail Loan Documents and the Restaurant Loan Documents, but in no event less than $45,000, and, after December 31, 1995, the actual monthly scheduled principal and interest payments due under the Mini-Perm Loan Documents. The term "Net Operating Income" shall mean the amount by which Gross Rental Income (as hereinafter defined) exceeds Expenses (as hereinafter defined). The term "Gross Rental Income" shall mean the total of all rentals, additional rentals, reimbursements, expense, income, interest and other monies directly or indirectly received by or on behalf of or credited to Borrower from any person or entity with respect to Borrower's ownership, use, development, operation, leasing, franchising, marketing or licensing of the Property, including, without limitation, price index increases and other rental adjustments to leases, but, for purposes of subsection f. above, specifically excluding any percentage rent income, and for both subsections e. and f., specifically excluding gain on the sale of assets and extraordinary income. All rentals, sums or other considerations which are to be included in Gross Rental Income shall be computed on a cash accounting basis and shall include for each month all amounts actually received in such month which are attributable to a charge arising in such month. Gross Income shall exclude any prepaid rent or prepaid expense reimbursements. The term "Expenses" shall mean the sum of all expenses accrued or paid by or on behalf of Borrower in connection with or related to the ownership, development, operation and maintenance of the Property, including, without limitation, (i) the amount of any taxes and assessments imposed on the Property required to be paid by Borrower; (ii) all amounts paid on account of insurance premiums for insurance carried in connection with the Property, provided that if insurance on the Property is maintained as part of a blanket policy covering the Property and other properties, the insurance premium included in this subparagraph shall be the premium fairly -6- allocable to the Property; (iii) all operating expenses for the management, operation, cleaning, leasing, marketing, maintenance and repair of the Property, properly chargeable against income according to generally accepted accounting practice, including wages and payroll costs, management company fees, outside accounting fees for preparation of tax returns, attorneys' fees incurred in connection with leasing the Property or resolving tenant disputes, advertising costs, utility and heating charges, material costs, maintenance costs, costs of services, water and sewer charges, and license fees and business taxes; (iv) leasing commissions; (v) ground lease rental payments and any other payments required under the terms of any ground lease in respect of the Property; and (vi) a reserve for replacements or improvements of a capital nature equivalent to $0.40 per gross square foot of the Project per year, but in no event less than $20,000 per year. Expenses shall not include any allocation or allowance for depreciation or amortization. Expenses shall be calculated on a cash accounting basis with the exception of property taxes, insurance, replacement reserves, operating expenses payable on other than a monthly basis, and ground lease payments, all of which shall be calculated on an annual accrual basis and expensed as if paid in equal monthly installments. Expenses that are payable monthly shall be deemed paid on the date due, notwithstanding the actual date of payment. 6. Further Assurances. Borrower or Pledgor will, at any time and from time to time, execute and deliver such further documents and do such further acts as shall be required by law or be reasonably requested by Lender to confirm or further assure the interest of Lender hereunder. 7. No Liability for Lawful Actions. Neither Lender nor any of their respective officers, directors, employees, agents, attorneys-in-fact or affiliates shall be liable for any action lawfully taken or omitted to be taken by any of them under or in connection with this Agreement (except for gross negligence or willful misconduct). 8. Notices. All notices, requests, demands or other communications to or upon the parties hereto shall be deemed to have been given or made when mailed, delivered or transmitted in accordance with the requirements of Section 9.5 of the Restaurant Loan Agreement. 9. No Failure, etc. No failure to exercise and no delay in exercising on the part of Lender of any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof, or the exercise of any other power or right. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. -7- 10. Waiver; Amendments. None of the terms and provisions of this Agreement may be waived, altered, modified or amended except by an instrument in writing executed by the parties hereto. 11. Representations and Warranties; Covenants. a. Pledgor hereby represents and warrants to Lender, effective upon the date hereof and each deposit of Pledged Funds to the Cash Collateral Account, that: (1) No filing, recordation, registration or declaration with or notice to any person or entity is required in connection with the execution, delivery and performance of this Agreement by Pledgor or in order to preserve or perfect the first priority lien and charge intended to be created hereunder in the Pledged Funds. (2) Except for the security interest granted to Lender pursuant to this Agreement, Pledgor is the sole owner of the Pledged Funds, having good and marketable title thereto, free and clear of any and all mortgages, liens, security interests, encumbrances, claims or rights of others. (3) No security agreement, financing statement, equivalent security or lien instrument or continuation statement covering all or any part of the Pledged Funds is on file or of record in any public office, except such as may have been filed by Pledgor in favor of Lender. (4) This Agreement constitutes a valid and continuing first lien on and first security interest in the Pledged Funds in favor of Lender, prior to all other liens, encumbrances, security interests and rights of others, and is enforceable as such as against creditors of and purchasers from Pledgor. b. Without the prior written consent of Lender, Pledgor hereby covenants and agrees that it will not sell, assign, transfer, exchange or otherwise dispose of, or grant any option with respect to, the Pledged Funds, nor will it create, incur or permit to exist any pledge, lien, mortgage, hypothecation, security interest, charge, option or any other encumbrance with respect to any of the Pledged Funds, or any interest therein, except for the security interest provided for by this Agreement. c. Pledgor hereby covenants and agrees that it will defend Lender's right, title and security interest in and to the Pledged Funds against the claims and demands of all persons whomsoever except to the extent which arise out of the willful misconduct or gross negligence of Lender. 12. Lender's Expenses and Liabilities. Borrower and Pledgor shall pay all costs and out-of-pocket expenses of Lender in connection with the maintenance and operation of the Cash -8- Collateral Account. Borrower and Pledgor also agree to pay all costs of Lender, including, without limitation, reasonable attorneys' fees, incurred with respect to the enforcement of Lender's rights hereunder. 13. ARBITRATION. EXCEPT FOR "CORE PROCEEDINGS" UNDER THE UNITED STATES BANKRUPTCY CODE, THE PARTIES AGREE TO SUBMIT TO BINDING ARBITRATION ALL CLAIMS, DISPUTES AND CONTROVERSIES BETWEEN OR AMONG THEM, WHETHER IN TORT, CONTRACT OR OTHERWISE (AND THEIR RESPECTIVE EMPLOYEES, OFFICERS, DIRECTORS, ATTORNEYS, AND OTHER AGENTS) ARISING OUT OF OR RELATING TO IN ANY WAY THIS AGREEMENT. ANY ARBITRATION PROCEEDING WILL (A) PROCEED IN PHOENIX, ARIZONA; (B) BE GOVERNED BY THE FEDERAL ARBITRATION ACT (TITLE 9 OF THE UNITED STATES CODE); AND (C) BE CONDUCTED IN ACCORDANCE WITH THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA"). THIS ARBITRATION REQUIREMENT DOES NOT LIMIT THE RIGHT OF ANY PARTY TO (I) FORECLOSE AGAINST REAL OR PERSONAL PROPERTY COLLATERAL; (II) EXERCISE SELF- HELP REMEDIES RELATING TO COLLATERAL OR PROCEEDS OF COLLATERAL SUCH AS SETOFF OR REPOSSESSION; OR (III) OBTAIN PROVISIONAL ANCILLARY REMEDIES SUCH AS REPLEVIN, INJUNCTIVE RELIEF, ATTACHMENT OR THE APPOINTMENT OF A RECEIVER, BEFORE, DURING OR AFTER THE PENDENCY OR ANY ARBITRATION PROCEEDING. THIS EXCLUSION DOES NOT CONSTITUTE A WAIVER OF THE RIGHT OR OBLIGATION OF ANY PARTY TO SUBMIT ANY DISPUTE TO ARBITRATION, INCLUDING THOSE ARISING FROM THE EXERCISE OF THE ACTIONS DETAILED IN CLAUSES (I), (II) AND (III) ABOVE. ANY ARBITRATION PROCEEDING WILL BE BEFORE A SINGLE ARBITRATOR SELECTED ACCORDING TO THE COMMERCIAL ARBITRATION RULES OF THE AAA. THE ARBITRATOR WILL BE A NEUTRAL ATTORNEY WHO HAS PRACTICED IN THE AREA OF COMMERCIAL LAW FOR A MINIMUM OF TEN YEARS. THE ARBITRATOR WILL DETERMINE WHETHER OR NOT AN ISSUE IS ARBITRABLE AND WILL GIVE EFFECT TO THE STATUTES OF LIMITATION IN DETERMINING ANY CLAIM. JUDGMENT UPON THE AWARD RENDERED BY THE ARBITRATOR MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. IN ANY ARBITRATION PROCEEDING, THE ARBITRATOR WILL DECIDE (BY DOCUMENTS ONLY OR WITH A HEARING AT THE ARBITRATOR'S DISCRETION) ANY PRE-HEARING MOTIONS WHICH ARE SIMILAR TO MOTIONS TO DISMISS FOR FAILURE TO STATE A CLAIM OR MOTIONS FOR SUMMARY ADJUDICATION. IN ANY ARBITRATION PROCEEDING DISCOVERY WILL BE PERMITTED AND WILL BE GOVERNED BY THE ARIZONA RULES OF CIVIL PROCEDURE. ALL DISCOVERY MUST BE COMPLETED NO LATER THAN 20 DAYS BEFORE THE HEARING DATE AND WITHIN 180 DAYS OF THE COMMENCEMENT OF ARBITRATION PROCEEDINGS. ANY REQUESTS FOR AN EXTENSION OF THE DISCOVERY PERIODS, OR ANY DISCOVERY DISPUTES, WILL BE SUBJECT TO FINAL DETERMINATION BY THE ARBITRATOR UPON A -9- SHOWING THAT THE REQUEST FOR DISCOVERY IS ESSENTIAL FOR THE PARTY'S PRESENTATION AND THAT NO ALTERNATIVE MEANS FOR OBTAINING INFORMATION IN AVAILABLE. THE ARBITRATOR SHALL AWARD COSTS AND EXPENSES OF THE ARBITRATION PROCEEDING IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT. EXCEPT AS OTHERWISE PROVIDED HEREIN, THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ARIZONA, WITHOUT REGARD TO ITS CONFLICT OF LAWS RULES. ------- ------- ------- INITIAL INITIAL INITIAL 14. WAIVER OF RIGHT TO JURY TRIAL. IN THE EVENT THAT ANY PARTY EXERCISES ITS RIGHTS TO JUDICIALLY FORECLOSE UPON REAL OR PERSONAL PROPERTY COLLATERAL OR SEEK PROVISIONAL ANCILLARY REMEDIES SUCH AS REPLEVIN, INJUNCTIVE RELIEF, ATTACHMENT OR THE APPOINTMENT OF A RECEIVER, THE PARTIES AGREE THAT ANY LAWSUIT ARISING OUT OF ANY SUCH CONTROVERSY SHALL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. ------- ------- ------- INITIAL INITIAL INITIAL 15. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 16. Successors and Assigns. This Agreement and all obligations of Borrower and Pledgor hereunder shall be binding upon the successors or assigns of Borrower and Pledgor, and shall, together with the rights and remedies of Lender hereunder, inure to the benefit of Lender and its successors and assigns. 17. Termination. This Agreement shall terminate and, upon request of Pledgor, all monies (if any) remaining in the Cash Collateral Account shall be returned to Pledgor upon the earlier of the following to occur: (i) all amounts payable to Lender under the Loan Documents have been paid in full and Lender has no further obligation to make any loans or advances to Borrower or HRC pursuant to the Loan Documents, including, without limitation, the Tri-Party Agreement, or (ii) all Pledged Funds held in the Collateral Account have been released to Pledgor and neither Borrower nor Pledgor has any further obligations or liabilities under this Agreement. -10- IN WITNESS WHEREOF, the parties hereto have executed or caused this instrument to be duly executed and delivered as of the date first above written. LENDER: NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association By: /S/ Timothy J. Stouffer ---------------------------- Name: Timothy J. Stouffer ---------------------------- Title: Vice President ---------------------------- BORROWER: CAMELBACK PLAZA DEVELOPMENT L.C., an Arizona limited liability company By: Performance Camelback Development Corp., an Arizona corporation Managing Member By: /s/ James W. Brown ----------------------- Name: James W. Brown ----------------------- Title: Secretary ----------------------- PLEDGOR: PERFORMANCE INDUSTRIES, INC., an Arizona corporation By: /s/ James W. Brown ---------------------- Name: James W. Brown ----------------------- Title: Treasurer ----------------------- -11- EXHIBIT "A" DEBT RETIREMENT COVERAGE CERTIFICATE RENTS MONTH/DAY Tenants ------- Just For Feet 16,292 sq. ft. ---------- Sound Warehouse (Blockbuster) 14,925 sq. ft. ---------- Restaurant of America (Balducci's) 6,500 sq. ft. ---------- Kelly's Specialty Group, Inc. 960 sq. ft. ---------- Other sq.ft. ---------- Hard Rock Cafe/Base Rent 8,500 sq. ft. ---------- Hard Rock Cafe/Percentage Rent ---------- TOTAL GROSS RENTAL INCOME ========== (Less) EXPENSES Common Area Maintenance Expense (Amounts due in excess of reimbursement actually received) ---------- Real Estate Taxes (Assume payable monthly) ---------- Insurance (Assume payable monthly) ---------- Operating Expenses (Attach schedule showing itemization) ---------- Ground Lease (Assume payable monthly) ---------- Replacement Reserves (The greater of $0.40 per gross sq. ft. or $1,666.67) ---------- TOTAL EXPENXES ========== NET OPERATING INCOME ========== DEBT SERVICE REQUIREMENT (Use $45M through 12/31/95 and actual P&I payment on Mini-Perm after 1/1/96) ========== DEBT RETIREMENT COVERAGE RATIO (Net Operating Income/Debt Service Requirement) ---------- DEBT RETIREMENT COVERAGE RATIO (Without Percentage Rent) (Net Operating Income-Percentage Rent/Debt Service Requirement) ---------- EX-27 7 FDS --
5 1,000 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 411 1,783 3,790 506 293 7,052 16,640 1,989 24,878 4,652 0 31,202 0 0 (19,367) 24,878 20,253 20,253 18,279 19,887 (2) 0 533 (165) (21) (144) 438 0 0 294 (.03) (.03)
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