-----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, EU1FPpXUMfsDF4Q6rE6Vj6OHsaC1lfGkphkeIxeK9tjbNsOjqFYsGm9VB7HnalLR vI0CVS0mM3J4utdEu4CHwQ== 0000912057-00-014998.txt : 20000331 0000912057-00-014998.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-014998 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENCAD INC CENTRAL INDEX KEY: 0000913599 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 953672088 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23034 FILM NUMBER: 587245 BUSINESS ADDRESS: STREET 1: 6059 CORNERSTONE COURT W CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6196775179 MAIL ADDRESS: STREET 1: 6059 CORNERSTONE COURT WEST CITY: SANSAN DIEGO STATE: CA ZIP: 92122 10-K 1 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - ----- ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES - ----- EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM __________________ TO __________________ COMMISSION FILE NUMBER 0-23034 ENCAD, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-3672088 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6059 CORNERSTONE COURT WEST SAN DIEGO, CA 92121 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (858) 452-0882 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE PREFERRED STOCK PURCHASE RIGHTS (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. --- Aggregate market value of the voting stock held by non-affiliates of the registrant, computed using the closing price as reported by Nasdaq for the Company's Common Stock on February 29, 2000: $51,279,316.* Indicate the number of shares outstanding of the registrant's Common Stock as of the latest practicable date:
Outstanding at Class February 29, 2000 ----- ------------------ Common Stock, $.001 par value 11,785,237
DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Definitive Proxy Statement (the "Proxy Statement") to be filed with the Commission pursuant to Regulation 14A in connection with the 2000 Annual Meeting are incorporated herein by reference into Part III of this Report. Certain Exhibits filed with the Registrant's prior registration statements and Forms 10-K and 10-Q are incorporated herein by reference into Part IV of this Report. - --------------------- * Excludes 3,819,518 shares of Common Stock held by executive officers, directors and stockholders whose ownership exceeds 5% of the Common Stock outstanding at February 29, 2000. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant or that such person is controlled by or under common control with the Registrant. ================================================================================ ENCAD, INC FORM 10-K TABLE OF CONTENTS
PAGE NO. PART I ITEM 1: BUSINESS................................................................................1 ITEM 2: PROPERTIES.............................................................................13 ITEM 3: LEGAL PROCEEDINGS......................................................................13 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................13 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................................................14 ITEM 6: SELECTED FINANCIAL DATA................................................................15 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................................16 ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................................................19 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................20 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................................................20 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY........................................20 ITEM 11: EXECUTIVE COMPENSATION.................................................................20 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.........................................................................20 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................................20 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................................................................20 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................F-1
i PART I ITEM 1: BUSINESS THE DISCUSSION OF OUR BUSINESS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K MAY CONTAIN CERTAIN PROJECTIONS, ESTIMATES AND OTHER FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW AT "RISKS AND UNCERTAINTIES." WHILE THIS OUTLOOK REPRESENTS OUR CURRENT JUDGMENT ON THE FUTURE DIRECTION OF THE BUSINESS, SUCH RISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FUTURE PERFORMANCE SUGGESTED BELOW. WE UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES ARISING AFTER THE DATE OF THIS ANNUAL REPORT. NovaJet and CADJET are registered trademarks of ENCAD. Other product names are the trademarks or registered trademarks of their manufacturers. GENERAL We design, develop, manufacture and market wide-format (up to 60"), color inkjet printer systems designed to increase productivity in computer applications requiring quality printed output. Our current printer product line consists of the CADJET-Registered Trademark-, Croma24-TM-, NovaJet-Registered Trademark-, NovaJet PROe, NovaJet PRO600e, 1500 TX-TM-, and the recently introduced NovaJet 700/630/500 series. Typical uses for these printers and their related accessories and supplies are in: - graphic arts production, also known as GAP, such as signage, point-of-sale retail, also known as POS, digital photo imaging, three-dimensional renderings and presentation graphics; - computer-aided design, also known as CAD, used by architects, engineers and construction designers; - geographic information systems, also known as GIS, such as surveying and mapping; and - textiles, such as sampling, personalization and short run manufacturing. To support our wide-format inkjet printers, we offer a variety of accessories, software and supplies, including specialty ink and media. The market for wide-format, color inkjet printers, supplies, software and accessories is relatively new and is still developing as a result of technological advancements in performance and quality and continuing improvements in price/performance ratios. We believe these advancements will make quality wide-format inkjet output more affordable, allowing our products to be more widely used in our existing markets, as well as addressing potential new market applications. MARKET The market for wide-format, color inkjet printers emerged in the early 1990s as a result of the rapid growth in the use of high-powered personal computers by a wide variety of technical professionals. More recently, graphic arts professionals have begun to take advantage of the improved performance and cost features associated with wide-format inkjet printers as a result of expanded use of sophisticated graphics interface software programs. The market for wide-format, color inkjet printers, accessories, and supplies, such as inks, ink cartridges and print media, currently consists of four primary categories: GAP, CAD, GIS and textiles. Users in the GAP category include graphic artists, print shops, photo-labs, sign shops and service bureaus. Applications in the GAP category include backlit and other signs, point-of-sale retail advertising, posters, pre-press proofing, consisting of proofs or other quick output to demonstrate concepts for advertising or graphics layouts, and digital photo imaging. We are a leader in this category. Our product lines are particularly well-suited to the graphic arts category since they are capable of producing a full range of outputs, from single line monochrome to full color, photorealistic images. Graphic arts users require output in three distinct areas of the graphic arts and design process, all of which require performance balanced by low-cost, quickly-produced output. In the pre-press area, graphic arts users require proofs or other quick output to demonstrate concepts for advertising or graphics layouts. Pre-press output involves any output where form, shape or color is emphasized. In the quick print area, graphic arts users include print shops, service bureaus and corporate graphic arts departments that produce signs or posters. Quick print output includes backlit and wall-mount signs and point-of-sale displays. In the digital photo category, digitized photo 1 output is used when photographic images are manipulated. Users include photo labs, service bureaus and corporate graphic arts departments that produce high-resolution digitized photographs. Within the GAP category is the POS retail market, a sub-segment of the Print-for-Pay category, where the end user desires a printing system that is simple to use, convenient, has fast output and excellent print quality. POS systems are usually used by national brand distributors or manufacturers wanting to control their brand image centrally, while allowing their retailers localized professional looking signage that sells. The NovaJet product line provides a convenient and quick way to produce advertising signs or art for product promotions for a fraction of the cost and time of traditional techniques. The CAD category includes architectural, engineering and construction design users. This is a diverse group that uses technical graphics applications to automate the design process and includes architects, mechanical engineers, electrical engineers and users involved in many aspects of building design and construction. Historically, output for the CAD category consisted mostly of two-dimensional monochrome line drawings. With the introduction of wide-format inkjet printers, CAD users are now able to create full-color and three-dimensional output. CAD and other design users often require spot color and speed in their output and look for productivity enhancement in producing the output. The NovaJet product line offers a full range of color outputs and our CADJET product line offers a CAD user spot color in addition to excellent line quality. GIS users are a more specialized group that uses technical graphics applications similar to those used in the CAD category, primarily for mapping. GIS users include civil engineers, mining engineers and geologists working for government agencies, utilities and natural resource companies. GIS involves a distinct use of CAD databases to manage, analyze and present data in a three-dimensional "mapping" format. Generally, these users require more color than CAD users since their output involves the use of color fills and varied fonts for richer presentations. This category, although smaller than the other markets we serve, represents opportunities for our product lines since these applications require, in some instances, both three-dimensional renderings and color fills to differentiate acreage, objects and topographical features. With the 1500 TX Digital Textile System-TM-, textile designers are able to print their designs directly to fabric, make quick changes and have the fabric cut and sewn into a sample immediately. This provides the benefit of significant time and cost savings, as well as in-house control of proprietary designs. Specialty inks and fabric treatments simplify the post-processing required after printing and make the inks washable. Customers who desire to reduce inventory and risk and response time from design to delivery should favor this system. The system would also be useful to users who customize their output to the image and programs of their individual customers. PRINTING TECHNOLOGIES There are a number of printing technologies, including thermal inkjet, electrostatic, thermal, and piezo inkjet, that allow users to produce wide-format output. Each of these technologies has specific qualities that can be critical to any given application, including resolution, speed, accuracy, color fill capability, the ability to render a three-dimensional image free of banding or striping, reliability and cost. A combination of characteristics has made thermal inkjet the fastest growing technology in the wide-format printer market over the past decade. These characteristics include relatively low cost, high speed and the ability to print high-quality color images. Thermal inkjet printers form images, lines and other characters by placing very small dots of heated ink as the print head moves horizontally, called a raster scan, while the media is scrolled vertically. Because thermal inkjet print heads move above the paper and never actually make contact with the paper, there is less mechanical wear and tear than experienced by technologies such as pen plotters which move across the paper. Thermal inkjet printers can print on a wide variety of media. Electrostatic printers operate by creating a dot pattern of electric charges on special paper or other media. The colors are attracted to the media as it passes across the color fountains. Although this technology offers some advantages to users requiring enhanced color, color fills and high-speed characteristics, it is generally more expensive than inkjet printers. Electrostatic printers are considered production machines and typically used for larger runs. The current market for this technology is small in size. 2 Thermal transfer machines use wax- or resin-coated ribbons instead of inks and generally require special media to take advantage of the thermal print head. Thermal printers cost considerably more than inkjet printers. Piezo inkjet technology forces small droplets of ink on to the media through the use of a crystal that contracts the walls of the ink-holding chamber when electricity is applied. As a result, this technology could yield potentially faster printer performance and easier compatibility with pigmented inks. Industry analysts predict that there is likely to be substantial growth in this sector as the technology matures. Other technologies that can be adapted to wide-format use include light emitting diode, photographic output, electrophotographic output and dot matrix printers. Each of these other technologies has disadvantages for the markets we serve, including relatively poor resolution or high costs when compared to inkjet technology. OUR PRODUCTS We have designed a variety of wide-format hard copy peripherals, including color inkjet printers and pen plotters. Our product families include: - the recently introduced CADJET 3D, the third generation of the CADJET product line, the first of which was introduced in November 1994; - four series of the NovaJet product line, first introduced in October 1991, and most recently, the NovaJet 700/630/500 series; - the NovaXsell System; - the Croma24; and - the Digital Textile System. All of our products support at least one, and typically several, emulation graphics languages and interfaces, including the industry standard, HP-GL-Registered Trademark-, HP-GL/2-Registered Trademark-, and HP-RTL-Registered Trademark-, to provide compatibility and utility for the end user. In addition, our products allow users to print in a variety of sizes from standard small-format to wide-format. Our automatic media sensing feature also permits our products to accommodate some special sizes. Our products have an easy-to-operate keyboard and display, with drop-down menus to set printer parameters and stored pre-set configurations. We currently offer the following products in our product families.
- -------------------------------------------------------------------------------------------------------------------- PRODUCT FAMILY/ DATE PRODUCT NAME DESCRIPTION CAPABILITIES TARGETED CUSTOMERS INTRODUCED - -------------------------------------------------------------------------------------------------------------------- CADJET 2 Designed to give users low Print resolution of CAD users, creative June 1997 cost, advanced inkjet 300 x 300 dpi (dots professionals or performance, available in per inch), 600x600 first-time wide-format 24" or 36" wide models. dpi is addressable users. through ADI driver. - ------------------------------------------------------------------------------------------------------------------- CADJET 3D Designed from NovaJet Color print Technical designer/ March 2000 technology, using resolution of 300x600 architect in CAD and Micro-burst(TM)inkjet dpi, 210 sfph GIS markets. technology. Available in 36" (square feet per model. hour) in supercharge mode. - -------------------------------------------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------------------------------------------- PRODUCT FAMILY/ DATE PRODUCT NAME DESCRIPTION CAPABILITIES TARGETED CUSTOMERS INTRODUCED - -------------------------------------------------------------------------------------------------------------------- NovaJet Family/ Graphics-oriented printer Print resolution of Sophisticated February 1996 NovaJet 4 engineered for 300x300 dpi. mid-range and high-end high-performance output and pen plotter and exceptional graphics thermal printer GAP quality, available in 24" users, as well as and 36" wide models. electrostatic printer GAP users. - -------------------------------------------------------------------------------------------------------------------- NovaJet PRO Series/ PRO series designed for the Print resolution of Sophisticated November 1995 NovaJet PRO and professional graphics artist 300x300 dpi. mid-range and high-end NovaJet PRO 50 and other short run printer GAP users, as production-oriented users, well as electrostatic PRO available in 36" wide printer GAP users and model and PRO 50 in 50" in the graphic arts model. market. - -------------------------------------------------------------------------------------------------------------------- NovaJet PROe Series Designed for print-for-pay Print resolution of High-volume producers May 1997 GAP users that require a 300x300 dpi. of large high quality, fast and photo-realistic productive printer, prints, murals, and available in both 42" and point-of-sale displays. 60" wide models. - -------------------------------------------------------------------------------------------------------------------- NovaJet PRO 600e Include all features found Print resolution of GAP users who May 1998 Series on PROe series plus the 300x300 dpi or specialize in photo ability to switch between 600x600 dpi. enlargements, 300 dpi and 600 dpi, signmaking and available in both 42" and reproduction 60" wide models. enlargements - -------------------------------------------------------------------------------------------------------------------- NovaJet Family/ Fastest printer at the Print resolution of Sophisticated June 1999 NovaJet 500 lowest possible cost, 300x300 dpi, 97 sfph high-range and professional's choice for in normal mode. mid-range pen plotter high-production printing and and thermal printer lower dpi quality, available GAP users. in 42" and 60" wide models. - -------------------------------------------------------------------------------------------------------------------- NovaJet Family/ Designed for digital color Print resolution of Sophisticated June 1999 NovaJet 630 images and high productivity 600x600 dpi, 62 sfph high-range pen plotter output, available in 42" and in normal mode. and thermal printer 60" wide models. GAP users who need speedy output. - -------------------------------------------------------------------------------------------------------------------- NovaJet Family/ High-end printer of NovaJet Print resolution of Sophisticated June 1999 NovaJet 700 family, professional's 600x600 dpi, 75 sfph high-range and choice for high-production in normal mode. high-end pen plotter printing, available in 42" and thermal printer and 60" wide models. GAP users. - -------------------------------------------------------------------------------------------------------------------- NovaXsell System/ Easy to use signage system, Print resolution of POS users who desire October 1999 NovaJet 505 produces POS signage quickly 300x300 dpi. to have a complete and efficiently to meet system for their signage requirements, signage needs. utilizes Posterizer software, available in 42" and 60" wide models. - -------------------------------------------------------------------------------------------------------------------- Croma24 Industry's first Print resolution of CAD users, creative June 1997 cost-effective color inkjet 300x300 dpi, 600x600 professionals or printer which produces 24" dpi is addressable first-time wide-format photo-realistic images. through ADI driver. users. - --------------------------------------------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------------------------------------------- PRODUCT FAMILY/ DATE PRODUCT NAME DESCRIPTION CAPABILITIES TARGETED CUSTOMERS INTRODUCED - -------------------------------------------------------------------------------------------------------------------- Digital Textile Alternative to traditional 300x300 dpi Textile designers. March 1998 System/ screen printing, targeted to 1500 TX textile designers who require a faster, more productive way to design and handle sampling needs, available in 60" wide model. - --------------------------------------------------------------------------------------------------------------------
Inventory of Croma24 was fully reserved at the end of 1998. 1999 sales were made primarily through our Internet site and in volume quantities through our existing distributors. In the second quarter of 1999 we concluded that we were too early to the textile market and that our product, although excellent as currently designed, was not fully responsive to the needs of end-users. While we intend to stay in the market with our current product offering and develop new products to fit the emerging textile market opportunity, we have directed our limited resources to support our other end-users and partners. ENCAD QUALITY IMAGING SUPPLIES-TM- Our line of supplies, launched in 1995, provides a comprehensive output system for our printer owners. Because they are designed to ensure the highest quality output possible from our printers, these supplies are branded ENCAD Quality Imaging Supplies. Sales of supplies accounted for 32%, 36% and 22% of net sales in 1999, 1998 and 1997, respectively. The ENCAD Quality Imaging Supplies product line consists of both outdoor and indoor solutions. The outdoor line of products includes fade-resistant pigmented inks and a broad line of water-resistant and durable banner and sign materials. Because outdoor solutions are new to the inkjet printing market, we provide a guarantee for most of our outdoor products. The outdoor line of products allows us to better compete in the sign-making market and also provides new applications for traditional printer owners. The indoor line of products includes specially formulated dye-based inks optimized for our printers and our custom ink cartridges. In order to fulfill the broad needs of our marketplace, we provide three ink options: - - Graphic Arts Ink, for colors beyond the traditional color palette, which is usually used for posters and photo-realistic images; - - Graphic Standard Ink, for colors that mirror press-quality output, which is more appropriate for color proofing; and - - Graphic Extend Ink, for ultra violet protection, which is used in indoor applications that require special fading resistance. Our broad range of Quality Imaging Supplies media feature a proprietary inkjet coating that is optimized for use with our inks. The coatings control ink absorption for images that are vibrantly colorful and high in print quality. The media line consists of numerous media options, from photo-based papers to adhesive-backed vinyl, two types of canvas and three types of film. All Quality Imaging Supplies media are made with a recyclable, water-based coating. SOFTWARE AND ACCESSORIES Our print utilities and drivers provide the user with the power to control color output by providing several screening options and print quality modes, user-selectable color device tables, gamma correction and the ability to set ink drying times. The ENCAD FastPort 3400X Micro Print Server allows a printer or plotter to be available to users of multiple network protocols simultaneously. In order to minimize the need for costly on-board printer memory and increase print speed, we provide software to run on the host computer which converts the vector output (HP-GL, HP-GL/2) of third party application programs into raster data. 5 Our products are supported by leading Raster Image Processor, or RIP, manufacturers that allow our printers to be compatible with most hardware and software RIPs for both Macintosh and PC platforms. These RIPs support a wide variety of applications from photo-realistic image reproductions to signage, poster making and CAD/GIS. In addition, we co-brand a Fiery-Registered Trademark- X2-W hardware RIP from Electronics for Imaging that is exclusively designed for optimum performance with the latest NovaJet family of printers. THIRD PARTY INTERFACES Third party PostScript-Registered Trademark- hardware and software developers have created products that interface with our NovaJet product line. These products allow the various NovaJet products to output near photo-realistic color images in an enhanced mode. In addition, numerous software packages, such as AutoCAD-Registered Trademark-, Adobe Photoshop-Registered Trademark-, VersaCAD-Registered Trademark-, Adobe Print Shop-Registered Trademark-, Adobe Illustrator-Registered Trademark-, Quark XPress-Registered Trademark- and ARC/INFO-Registered Trademark-, are used with our products in Macintosh-Registered Trademark-, DOS-Registered Trademark- and Windows-Registered Trademark- platforms. RESEARCH, PRODUCT DEVELOPMENT AND ENGINEERING Since our founding in 1981, we have been an industry leader in delivering innovation to the wide-format printing marketplace. We have focused our research, product development and engineering efforts on printers based on thermal inkjet printing technology. Inkjet printers have been the fastest growing segment of the wide-format printing market due to the ability to form high quality color images at relatively low cost and high performance. We pioneered wide-format inkjet photo realistic printing, extended ink delivery systems and lightfast inks for outdoor signage. We believe timely development and introduction of new products which satisfy customer requirements are critical to our success. We strive to anticipate and respond to user demands in selected wide-format printing markets and to provide solutions with distinct competitive advantages for those customers. We focus our research and development efforts on solutions emphasizing superior performance, outstanding image quality, simplicity of design, system productivity and low total cost of ownership for the end user. We develop wide-format inkjet printers, inks, media, RIPs, and software. We maintain a staff with expertise in design of mechanical systems, electronics, control systems, firmware, software, chemistry, physics, fluid dynamics and color science, which has enabled us to develop a significant patent portfolio in inkjet printing. We augment our development staff through strategic partnerships with industry leaders for the development of components and subsystems. In some cases, we elect to outsource the development of complete products to these partners. Additionally, we employ industry consultants and contract engineering firms when specific expertise or additional resources are required. Research and development expenses were $12,078,000, $10,894,000 and $10,544,000 in 1999, 1998 and 1997, respectively, which represent approximately 10%, 10% and 7% of net sales in those respective periods. MANUFACTURING AND SUPPLIERS Our printer manufacturing operations consist of subassembly, final assembly and testing, quality assurance, packaging and shipping. We contract with various outside vendors for printed circuit board fabrication and assembly and for fabrication of metal and plastic parts. We then perform the final assembly of our printer products in our San Diego facility. Most materials for printer manufacturing operations are available locally in Southern California from multiple vendors, and the majority is produced in the United States. For our supplies business, we partner with large multi-national companies for the acquisition of inks and media. Inks are acquired from three sources and the various forms of media from multiple sources. Assembly of refill and accessory ink kits are outsourced prior to distribution. Selected components used in our products are available only from single sources. Although we primarily buy components under purchase orders and do not have long-term agreements with most of our suppliers, we anticipate that our suppliers will be able to continue to satisfy our requirements. Although alternative suppliers are readily available for most of these components, for some components the process of qualifying replacement suppliers, replacing existing tooling, or ordering and receiving replacement components could take up to six additional months. 6 Any difficulty in receiving components on time could have a material adverse effect on our financial condition and results of operations. Any significant increase in component prices or decrease in component availability could also have a material adverse effect on our financial condition and results of operations. Certain key components of our products are supplied indirectly by our principal competitor, Hewlett-Packard Company, and the inkjet cartridge, used in some of our older generation products, are purchased from Hewlett-Packard resellers. We believe that Hewlett-Packard supplies these components to many other companies. Because we place strong emphasis on product quality and customer satisfaction, we design our quality into products, components and the manufacturing processes. As a result, we have developed quality control programs with our suppliers in our product development and manufacturing operations. Suppliers are encouraged to participate in new product designs. Many of our suppliers' manufacturing capabilities are statistically evaluated to allow for certification and direct shipment to the production floor. We use a "Just-in-Time" program for delivery of some raw materials and subassemblies to manufacturing to minimize these types of inventories. We also use a material requirements planning system that is intended to aid in making "Just-in-Time" decisions. We maintain raw materials which include printer parts for manufacturing and service, ink and media. MARKETING, SALES AND DISTRIBUTION We market and sell our products throughout the world primarily through specialty distributors, value-added resellers, also known as VARs, dealers and Original Equipment Manufacturers, also known as OEMs. DISTRIBUTORS, VARS AND DEALERS In 2000, we will begin to move from a two-tier to a single-tier distribution network. This strategy will initially only affect our North American distribution and shift some of the sales from distributors to VARs. As a result, the Company will sell its products directly to a network of approximately 70 major VARs. This model will allow us to increase our knowledge of our customers and their channel inventory and improve end-user customer satisfaction. As VARs normally do not carry inventory, and existing distributor inventory needs to sell through the distribution channel, there may be a temporary negative impact on sales. Although VARs are, in general, not as well financed as distributors, any collection risk we may have will be spread over more accounts. Our total distribution network of approximately 300 active domestic dealers remains a critical channel to deliver our products to end-users. In addition to our sales and marketing headquarters located in San Diego, California, we have field salespersons residing in Illinois, Texas, New York, California, and Canada. These salespersons work closely with our regional and local VARs and dealers. Internationally, we generally utilize one major distributor in each market. Over 50 international distributors sell to dealers, specialized systems integrators and VARs. Our international distributor network provides us with a presence in Canada, Mexico, Europe, the Pacific Rim, the Middle East, Central and South America, South Africa, China and India. We maintain Pacific Rim sales offices in Hong Kong and Beijing. We also have subsidiaries located in France, Germany and England to which we pay commissions for sales to customers in countries that they serve. Their revenues, operating profits and identifiable assets are not material. Our dependence on international sales subjects us to the risks associated with conducting business internationally, including currency fluctuations, to the extent they affect local office expenses and product pricing in local markets, general international market conditions, export and import controls, and other governmental regulations. All export sales accounted for the percentages of net sales as follows:
1999 1998 1997 ------- ------- ------- Europe, Middle East, Africa 40% 39% 32% Americas, excluding United States 6 9 8 Asia Pacific 19 15 19 ------- ------- ------- Total 65% 63% 59%
7 Our agreements with our worldwide distributors and VARs generally grant each distributor and VAR the non-exclusive right to distribute our products in its market. Our international distribution agreement provides for payment net 45 days after shipment, by irrevocable letter of credit or by prepayment by wire transfer for international distributors, unless otherwise agreed to by us. In the case of domestic distributors, payment generally is net 30 days upon credit approval, unless otherwise agreed to by us. Any outstanding amounts remain owing subsequent to termination of the agreement. We provide price protection to some of our distributors so that if we reduce the price of our products, a distributor is entitled to a credit for the difference between the reduced price and the price it previously paid for products purchased within a specified time period, and which remain in inventory at the time of the price reduction. As a result, price reductions of our products could have a material adverse effect on results of operations, depending on distributor inventory levels at the time of such price reductions. We support the marketing and sales efforts of our worldwide distributors, VARs and dealers through participation at worldwide computer industry trade shows as well as specialized trade shows targeted at specific applications for our products. We believe that we maintain good relationships with our worldwide distributors, VARs and dealers. Domestically, we have developed an authorized dealer network through an active dealer-support campaign consisting of advertising, lead referrals, product literature, promotional pricing, training and telephone support. Internationally, we assist our distributors in the larger markets through active advertising and trade show participation. We offer our distributors a cooperative advertising program that partially reimburses them for expenses spent in advertising and promoting our products. Such reimbursements are determined based upon the distributor's sales levels. In 1999 one customer, Tekgraf, Inc., accounted for 13% of net sales. In 1998 and 1997, no one customer accounted for more than 10% of net sales. OEMS To expand our distribution channels, we have entered into several OEM arrangements that allow us to better address specific market applications or geographical areas. Sales from OEM arrangements accounted for 18%, 18% and 26% of net sales in 1999, 1998 and 1997, respectively. We annually assess the success of each individual arrangement and believe that, in the aggregate, they will continue to represent a substantial portion of our revenue. We may not be able to retain these existing arrangements or to obtain additional ones. If we are not able to acquire additional OEM partners, the loss of existing OEM partners could adversely affect our financial condition and results of operations. E-COMMERCE Another emerging distribution strategy in 2000 is the development and implementation of our Internet site - encad-direct.com. The site's content will include information regarding our products; business solutions; technical solutions and answers to frequently asked questions. The web site will also include an online community specifically for our end-users to share moneymaking ideas, discuss potential product improvements, dialog about trends in the industry, or communicate directly with our engineering, sales, and marketing team. A location on the site will be reserved for our resellers to meet and share information. By facilitating an online community for our end-users and resellers, we believe we will develop stronger long-term relationships with them. Initially, the end-user portion of the web site will be restricted to users located in the United States and will sell simple to use solutions. The initial products offered will include a Macintosh solution for the Croma24 and NovaJet 4, and will be followed by CAD solutions and ENCAD ink and media. The majority of content and community areas of the web site are already established and the remaining sections will be launched in stages in 2000 to ensure proper execution. CUSTOMER SUPPORT We consider ongoing support of our products to be an essential element of our business. We have established a customer service and support organization which provides technical support and printer repair to our distributors, VARs, dealers and end-users. Customers have telephone access to technical specialists who respond to printer, software, supplies and applications questions. In addition, we have established Internet access on which we post notes and software updates to provide on-line support and solutions for our customers. We provide a standard one-year warranty against defects in materials and workmanship in our products. We also offer third party, on-site warranty for selected products in the United States and selected European countries. A maintenance agreement for most products 8 sold in the U.S. is also available at additional cost. Our OEM suppliers do their own warranty service. Any product sold domestically that needs to be repaired may be returned directly to us for repair. International distributors repair our products with us supplying the parts to them directly. Since a large number of our products are the sole color inkjet printers in a facility, we offer next day on-site repair for domestic purchases during the warranty period. For selected products, during the warranty period, the domestic end user can return the print head to us for service and, in exchange, we will provide a replacement head within 24 to 48 hours. Warranty expense has constituted less than 3% of net sales on an annual basis, and, to date, has not had a material adverse effect on our financial condition or results of operations. COMPETITION In addition to the direct competition from products using inkjet technology, our products face competition from other technologies that are offered by several companies. The competition to sell ink, media and software products to the customer is also intense. While we believe that we compete successfully against these other technologies and products, they may compete favorably for specified applications. We may not be able to compete successfully in the future and competitive pressures may have a material adverse effect on our financial condition and results of operations. We compete in the wide-format market mainly on the basis of performance and price. Price competition became intensive during 1998 and remained so in 1999. We expect that competition will accelerate in the future. Historically, we have reduced prices on older generation products upon introduction of the newer generation models and in response to other competitive pressures. Our most recent price reduction took effect in June 1999, and additional price reductions will occur in the future. Price reductions will affect gross margin, and may adversely affect our ability to generate positive financial results. PROPRIETARY RIGHTS We rely on a combination of trade secret, copyright, trademark and patent protection, as well as confidentiality and non-disclosure agreements, in order to protect our proprietary rights. We have pursued, and intend to continue to pursue, patent protection for inventions we consider important. We believe our success will also continue to be dependent upon our reputation for unique technology, product innovation, affordability, marketing ability and responsiveness to customers' needs. We currently hold 16 patents related to inkjet technology and design. In 1999, we filed 9 patent applications covering our imaging technology. We may not be successful in protecting our proprietary technology. Our proprietary rights may not preclude competitors from developing products or technology equivalent or superior to ours. From time to time, various competitors, including Hewlett-Packard, have asserted patent rights relevant to our business. We expect that this will continue. We carefully evaluate each assertion relating to our products. If our competitors are successful in establishing that asserted rights have been violated, we could be forced to obtain a license to market or be prohibited from marketing the products that incorporate such rights. We could also incur substantial costs to redesign our products or to defend any legal action taken against us. If our products should be found to infringe upon the intellectual property rights of others, we could be enjoined from further infringement and be liable for any damages. The measures adopted by us for the protection of our intellectual property may not be adequate to protect our interests. In addition, our competitors may independently develop technologies that are substantially equivalent or superior to our technologies. For additional discussion concerning ongoing litigation related to our intellectual property, please see "Item 3-- Legal Proceedings" which follows. EMPLOYEES As of February 29, 2000, we employed approximately 431 persons, including 117 in sales, marketing and related activities, 153 in manufacturing and operations, 65 in research, product development and engineering, 39 in technical support and service, and 57 in management, administration and finance. Our success is highly dependent on our ability to attract and retain qualified employees. Competition for employees is intense in our industry and our locale. None of our employees is represented by a labor union or is the subject of a collective bargaining agreement. We have never experienced a work stoppage and believe that our employee relations are good. 9 RISKS AND UNCERTAINTIES OUR QUARTERLY OPERATING RESULTS CAN FLUCTUATE SIGNIFICANTLY. Our quarterly operating results can fluctuate significantly depending on a number of factors. Any one of these factors could have a material adverse effect on our financial condition or results of operations. Factors affecting net sales include: - the timing of product announcements and subsequent introductions of products by us and our competitors; - timing of shipments of our products, including the mix of product families shipped; - market acceptance of new products; - seasonality; - changes in prices by us and our competitors; and - price protection for price reductions offered to customers. In addition, the availability and cost of components, the timing of expenditures for staffing and related support costs, marketing programs and research and development can have an effect on our operating results. Of course, changes in general economic conditions and currency fluctuations can also affect quarterly performance. We may experience significant quarterly fluctuations in net sales as well as operating expenses with respect to future new product introductions. Our component purchases, production and spending levels are based upon forecast demand for our products. Accordingly, any inaccuracy in forecasting could adversely affect our financial condition and results of operations. Demand for our products could be adversely affected by a slowdown in the overall demand for computer systems, printer products or digitally printed images. Quarterly results are not necessarily indicative of future performance for any particular period. THE MARKETS FOR OUR PRODUCTS ARE HIGHLY COMPETITIVE AND RAPIDLY CHANGING AND WE MAY NOT BE SUCCESSFUL IN COMPETING IN THIS MARKET. The markets for our printers and supplies are highly competitive and rapidly changing. Several new competitors have entered the market. Our principal competitor is Hewlett-Packard, which dominates the CAD category of the wide-format inkjet markets and is our principal competition in the graphic arts category. In addition to direct competition in inkjet printers and related supplies, our products also face competition from other technologies in the wide-format market. The competition to sell ink, media and software products to the customer is also intense. Some of our current and prospective competitors, particularly Hewlett-Packard, have significantly greater financial, technical, manufacturing and marketing resources than us. Our ability to compete in the wide-format inkjet market depends on a number of factors within and outside our control, including: - the success and timing of product introductions by us and our competitors; - selling prices; - product performance; - product distribution; - marketing ability; and - customer support. THE MARKETS IN WHICH WE COMPETE ARE CHARACTERIZED BY SHORT PRODUCT LIFE CYCLES AND REDUCTIONS IN UNIT SELLING PRICES. The markets for wide-format printers and related supplies are characterized by rapidly evolving technology, frequent new product introductions and significant price competition. Consequently, short product life cycles and reductions in unit selling prices due to competitive pressures over the life of a product are common. Our financial condition and results of operations could be adversely affected if we are unable to develop and manufacture new, competitive products in a timely manner. Our future success will depend on our ability to develop and manufacture technologically competitive products, price them competitively, and achieve cost reductions for our existing products. Advances in technology will require increased investment to maintain our market position. 10 THE GROWTH OF OUR BUSINESS WILL REQUIRE SUBSTANTIAL CAPITAL RESOURCES THAT MAY NOT BE AVAILABLE WHEN NEEDED. The growth of our business will require the commitment of substantial capital resources. If funds are not available from operations, we will need additional funds. Such additional funds may not be available when required on terms acceptable to us. Insufficient funds may require us to delay, reduce or eliminate some or all of our planned activities. OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES AND CONSULTANTS. Our success is dependent, in part, on our ability to attract and retain qualified management and technical employees. Competition for such personnel is intensifying. The inability to attract additional key employees or the loss of key employees could adversely affect our ability to execute our business strategy. We do not have employment agreements with members of senior management. We may not be able to retain our key personnel. We rely heavily on industry consultants and other specialists to assist and influence decisions, keep abreast of technological and industry advances, and assist in other processes. MANY OF OUR COMPONENTS ARE SUPPLIED BY SINGLE-SOURCE SUPPLIERS THAT MAY NOT BE ABLE TO BE REPLACED WITHOUT DISRUPTING OUR OPERATIONS. Selected components used in our products are only available from single sources. We generally do not have long-term agreements with our suppliers. Although alternate suppliers are readily available for many of these components, for some components the process of qualifying replacement suppliers, replacing tooling or ordering and receiving replacement components could take up to six months and cause substantial disruption to our operations. If a supplier is unable to meet our needs or supplies parts which we find unacceptable, we may not be able to meet production demands. Key components of our products are supplied indirectly by our principal competitor, Hewlett-Packard. IF OUR COMPETITORS PROVE THAT OUR PRODUCTS VIOLATE THEIR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS WOULD BE ADVERSELY AFFECTED. From time to time, various competitors, including Hewlett-Packard, have asserted patent rights relevant to our business. We expect that this will continue. We carefully evaluate each assertion relating to our products. If our competitors are successful in establishing that asserted rights have been violated, we could be prohibited from marketing the products that incorporate such rights. We could also incur substantial costs to redesign our products or to defend any legal action taken against us. If our products should be found to infringe upon the intellectual property rights of others, we could be enjoined from further infringement and be liable for any damages. The measures adopted by us for the protection of our intellectual property may not be adequate to protect our interests. In addition, our competitors may independently develop technologies that are substantially equivalent or superior to our technologies. A SIGNIFICANT PORTION OF OUR NET SALES IS DERIVED FROM SALES TO COUNTRIES OUTSIDE THE UNITED STATES AND FACTORS OUTSIDE OUR CONTROL COULD ADVERSELY AFFECT THOSE SALES. For the years ended December 31, 1999 and 1998, sales outside the United States represented approximately 65% and 63% of our net sales, respectively. We expect export sales to continue to represent a significant portion of our sales. All of our products sold in international markets are denominated in U.S. dollars; therefore an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in these markets. International sales and operations may also be subject to risks such as: - currency exchange fluctuations; - difficulties in staffing and managing international operations; - collecting accounts receivable; - restrictions on the export of critical technology; - changes in tariffs; - trade restrictions; - export license requirements; - political instability; and - the imposition of governmental controls. 11 In addition, the laws of some countries do not protect our products and intellectual property rights to the same extent as the laws of the United States. As we continue to pursue our international business, these factors may have an adverse effect on our net sales and, consequently, on our business. WE ARE DEPENDENT ON OUR DISTRIBUTORS, VARS, DEALERS AND OEMS TO SELL AND MARKET OUR PRODUCTS AND THEY MAY NOT DEVOTE SUFFICIENT RESOURCES TO THIS TASK TO ENSURE OUR SUCCESS. Our sales are principally made through independent distributors, VARs and dealers, which may carry competing product lines. We believe that our future growth and success will continue to depend in large part upon our distribution channels. They could reduce or discontinue sales of our products, which could have a material adverse effect on our business. They may not devote the resources necessary to provide effective sales, service and marketing support of our products. In addition, we are dependent upon their continued viability and financial stability, and many of them are organizations with limited capital. They, in turn, are substantially dependent upon general economic conditions and other unique factors affecting the wide-format printer market. In 2000, we will begin to move from a two-tier to a single-tier distribution network. This strategy will initially only affect our North American distribution and shift some of the sales from distributors to VARs. As a result, the Company will sell its products directly to a network of approximately 70 major VARs. This model will allow us to increase our knowledge of our customers and their channel inventory and improve end-user customer satisfaction. As VARs normally do not carry inventory, and existing distributor inventory needs to sell through the distribution channel, there may be a temporary negative impact on sales. Although VARs are, in general, not as well financed as distributors, any collection risk we may have will be spread over more accounts. Actual bad debts may in the future exceed recorded allowances resulting in a material adverse effect on our business. In order to prevent inventory write-downs, to the extent that OEM and private label customers do not purchase products as anticipated, we may need to convert such products to make them salable to other customers. Such a conversion would increase product costs and would likely result in a delay in selling such products. MANAGEMENT OF THE GROWTH OF OUR BUSINESS MAY PLACE STRAINS ON OUR OPERATIONS. We have experienced growth in the past which placed, and, if continued, will continue to place, a significant strain on our management, employees, systems and operations. Our future operating results will depend on our ability to continue to broaden our senior management group, attract, hire and retain skilled employees and enhance or replace existing operational information and financial control systems. We may encounter difficulties in successfully integrating new personnel into the organization, and changes to our information and financial control systems may not be effective. AS THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE IN THE PAST AND MAY CONTINUE TO DO SO IN THE FUTURE, AN INVESTMENT IN OUR COMMON STOCK MAY YIELD UNCERTAIN RESULTS. The market price of our common stock has fluctuated significantly since our initial public offering in December 1993. We believe factors such as the following could cause further significant volatility in the price of the common stock: - general stock market trends; - adverse results of pending litigation; - announcements of developments related to our business; - fluctuations in our operating results; - general conditions in the computer peripheral market or the markets we serve; - general economic conditions; - shortfalls in sales or earnings from securities analysts' expectations; - announcements of technological innovations, new inkjet products or enhancements by us or our competitors; - developments in patents or other intellectual property rights; and - developments in our relationships with our customers or suppliers. 12 In addition, in recent years the stock market in general, and the market for shares of technology stocks in particular, have experienced extreme volatility, which have often been unrelated to the operating performance of affected companies. The market price of the common stock may continue to experience significant fluctuations that are unrelated to our operating performance. WE DO NOT PAY DIVIDENDS ON THE COMMON STOCK AND YOU WILL HAVE TO RELY ON INCREASES IN ITS PRICE TO GET A RETURN ON YOUR INVESTMENT. We have not paid dividends on the common stock. We currently intend to continue this policy to retain earnings, if any, for use in our business. In addition, our line of credit arrangement prohibits the payment of cash dividends without prior bank approval if amounts are outstanding under such line of credit. OUR CHARTER DOCUMENTS AND RIGHTS PLAN MAY PREVENT A CHANGE OF CONTROL WHICH IS IN YOUR BEST INTERESTS. The stockholder rights plan and some of our charter provisions may discourage transactions involving an actual or potential change in control of your company, including transactions in which you might otherwise receive a premium for your shares over then-current market prices. These provisions may limit your ability to approve transactions that you deem to be in your best interests. ITEM 2: PROPERTIES In January 2000, we received cash proceeds of approximately $12.0 million for a transaction in which we sold our headquarters buildings, located in San Diego, California, and simultaneously leased the property back for a period of seven years. The property consists of two buildings of approximately 51,000 and 47,000 square feet and houses the principal administrative, research and manufacturing facility. We also lease a 62,000 square foot warehouse near our headquarters. We consider our facilities adequate for our current needs and believe that additional space can be obtained in the future if necessary. ITEM 3: LEGAL PROCEEDINGS From time to time, we may be involved in litigation relating to claims arising out of our operations in the usual course of business. In February 1998, Hewlett-Packard filed a lawsuit against us in the U.S. District Court for the District of Idaho, alleging that some of our products infringe two of Hewlett-Packard's patents. Hewlett-Packard filed an amended complaint alleging infringement of a third patent and seeking monetary damages and injunctive relief. We have filed a counter-claim, alleging that our products do not infringe the Hewlett-Packard patents, and that the Hewlett-Packard patents are invalid. In November 1998, a class action lawsuit was filed against us in the U.S. District Court for the District of Colorado, alleging antitrust violations pertaining to our sales of a specified printer product. Class members seek damages caused by the allegedly faulty ink, including the cost of the ink, the cost of the third party replacement ink, and damage to printing projects caused by the ink. The outcomes of these lawsuits cannot be determined; however, we believe that the claims are without merit. We intend to vigorously defend against such claims. No amounts have been reported in the financial statements for any losses that may result from these lawsuits. In January 1999, we filed a lawsuit against Hewlett-Packard in the California Superior Court for the County of San Francisco, alleging sales of competitive products below cost and as loss leaders, in violation of the California Unfair Trade Practices Act. We have obtained a preliminary injunction enjoining Hewlett Packard's sale of printer products below cost. We are currently seeking permanent injunctive relief and treble damages. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders during the quarter ended December 31, 1999. 13 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Shares of common stock are traded on the Nasdaq National Market under the symbol "ENCD." The following table presents the quarterly high and low sales prices of the common stock as reported by Nasdaq. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.
1999 1998 -------------------------------------------------------------- HIGH LOW HIGH LOW --------------------------------------------------------------------------------------- First Quarter $ 6.813 $ 3.50 $ 28.50 $ 12.438 Second Quarter $ 7.469 $ 5.344 $ 15.375 $ 8.688 Third Quarter $ 9.50 $ 4.50 $ 15.125 $ 6.219 Fourth Quarter $ 7.00 $ 4.438 $ 6.50 $ 1.875 ---------------------------------------------------------------------------------------
We had 208 stockholders of record and approximately 10,000 beneficial stockholders as of February 29, 2000. DIVIDEND POLICY Please see "Item 1 - Business - Risks and Uncertainties - We do not pay dividends on the common stock and you will have to rely on increases in its price to get a return on your investment" for a discussion of our dividend policy. 14 ITEM 6: SELECTED FINANCIAL DATA FIVE YEAR FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA, PERCENTAGES AND EMPLOYEES)
1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net sales ............................. $117,712 $110,055 $149,041 $ 107,437 $ 65,548 Cost of sales ......................... 66,171 80,646 78,259 56,021 36,471 Gross profit .......................... 51,541 29,409 70,782 51,416 29,077 Research and development .............. 12,078 10,894 10,544 8,794 5,578 Operating income (loss) ............... 4,184 (23,668) 26,493 19,572 11,619 Interest (expense) income ............. (203) (412) 35 183 307 Pretax income (loss) .................. 3,981 (23,081) 26,528 19,755 11,926 Tax provision ......................... 917 (4,775) 9,099 6,902 4,069 Net income (loss) ..................... 3,064 (18,306) 17,429 12,853 7,857 Earnings (loss) per share - basic .... $ 0.26 $ (1.58) $ 1.53 $ 1.15 $ 0.72 Earnings (loss) per share - diluted .. $ 0.26 $ (1.58) $ 1.45 $ 1.08 $ 0.70 MARGINS Gross profit .......................... 44% 27% 47% 48% 44% Research and development .............. 10 10 7 8 9 Operating income ...................... 4 (22) 18 18 18 Pretax income ......................... 3 (21) 18 18 18 Net income ............................ 3 (17) 12 12 12 YEAR END FINANCIAL POSITION Cash and cash equivalents ............. $ 3,953 $ 586 $ 1,265 $ 6,949 $ 3,067 Short-term investments ................ -- -- -- -- 6,072 Accounts receivable - net ............. 30,546 29,603 36,800 19,762 13,029 Inventories ........................... 11,992 16,205 29,155 13,630 8,047 Property - net ........................ 14,264 15,604 14,825 10,881 3,138 Total assets .......................... 68,479 72,143 90,295 57,467 36,128 Total current liabilities ............. 15,972 23,787 24,300 14,246 7,450 Stockholders' equity .................. 51,244 47,543 64,722 43,042 28,678 Working capital ....................... 35,822 31,320 47,818 30,326 25,304 CAPITAL MANAGEMENT Depreciation expense .................. $ 3,266 $ 4,093 $ 3,709 $ 2,726 $ 1,599 Capital expenditures .................. $ 1,926 $ 4,872 $ 7,653 $ 10,469 $ 2,513 Operating return on average assets .... 6% (29%) 36% 42% 39% Return on average equity .............. 6% (33%) 32% 36% 32% Current ratio ......................... 3.2 2.3 3.0 3.1 4.4 Inventory turnover .................... 4.7 3.6 3.7 5.2 5.8 Average days receivable ............... 92 109 69 56 60 HUMAN RESOURCE MANAGEMENT Average number of employees ........... 413 427 467 355 272 Average assets per employee ........... 170 190 158 132 111 Sales per employee .................... 285 258 319 303 241 COMMON SHARES OUTSTANDING* Weighted average shares - basic ....... 11,707 11,572 11,390 11,217 10,971 Weighted average shares - diluted ..... 11,883 11,572 12,044 11,871 11,192 Number of shares outstanding at year end ................................... 11,780 11,636 11,501 11,300 11,100
* Common shares outstanding are adjusted for the two-for-one stock split in the form of a 100% stock dividend that occurred on May 31, 1996. 15 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except percentages) This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Item 1 -Business - Risks and Uncertainties." We undertake no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date hereof. The following table sets forth, as a percentage of net sales, various consolidated statements of income data for the periods indicated. CONSOLIDATED STATEMENTS OF INCOME
1999 1998 1997 --------------------------------------------------------------------------- NET SALES 100% 100% 100% COST OF SALES 56 73 53 --------------------------------------------------------------------------- GROSS PROFIT 44 27 47 MARKETING AND SELLING 20 24 16 RESEARCH AND DEVELOPMENT 10 10 7 GENERAL AND ADMINISTRATIVE 10 12 6 RESTRUCTURING CHARGES - 3 - --------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS 4 (22) 18 INTEREST INCOME - NET - - - OTHER INCOME - 1 - --------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES 4 (21) 18 PROVISION FOR INCOME TAXES 1 (4) 6 --------------------------------------------------------------------------- NET INCOME (LOSS) 3% (17%) 12% ---------------------------------------------------------------------------
RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999 AND 1998 Our 1999 net sales increased 7% over 1998 net sales. This increase was due to strong sales generally throughout our GAP printer product line. In 1999, supplies sales decreased 3% from 1998, and accounted for approximately 32% of 1999 net sales versus 36% in 1998. The decrease in supplies sales was due primarily to our de-emphasis of lower margin media products. We plan to continue to focus our supplies selling efforts on higher margin ink products. An increase in OEM performance also contributed to the overall increase in net sales for 1999, accounting for 18% of product sales during both 1999 and 1998. One customer accounted for 13% of product sales in 1999 while no one customer accounted for 10% of product sales in 1998. International sales accounted for approximately 65% and 63% of our product sales in 1999 and 1998, respectively. Cost of sales includes standard costs related to product shipments, including materials, labor and overhead, inventory reserves and manufacturing variances, and other direct or allocated costs involved in the manufacture, delivery, support and maintenance of products. Cost of sales as a percentage of net sales decreased to 56% in 1999, from 73% in 1998, causing a comparable increase in gross margin percentages. During 1998 we incurred total charges of $8,928 related to inventory and related charges for unprofitable products, including Croma24 and several lines of media. This improvement reflects the result of our efforts to reduce material costs, as well as the higher gross margins we are realizing on our newly introduced products. Our future success will depend on our ability to continue to develop and manufacture competitive higher margin products and achieve cost reductions for our existing products. 16 Marketing and selling expenses were 20% of net sales compared to 24% in 1998 and decreased by 7% in absolute dollars from 1998. This decrease was due to decreased spending for advertising and tradeshows and an overall decrease in spending as a result of the consolidation of our supplies and textile business units into our core business. 1999 research and development spending grew by 11% in absolute dollars over 1998 and remained flat at 10% as a percentage of net sales. The increase in spending was driven by new product development. We expect to continue to invest significant resources in our strategic programs and enhancements to existing products and consequently expect that research and development expenses will remain at levels consistent with prior periods. General and administrative expenses were 10% of net sales in 1999 compared to 12% in 1998. This decrease was primarily related to a lower amount of bad debt expense and lower staffing costs offset somewhat by higher than normal legal expenses associated with litigation, which is more fully described in the section of this report entitled "Legal Proceedings." There was no significant other income in 1999. The product development and manufacturing license agreement signed in 1998 was terminated in 1999. Interest expense in 1999 totaled $227 compared to $437 in 1998. Decreased borrowings under our line of credit arrangement caused the decrease in interest expense. Interest income in 1999 totaled $25 compared to $25 in 1998. The effective income tax rate in 1999 was 23%, compared to 21% in 1998. The higher rate was due primarily to the recording of the deferred tax asset allowance previously described in 1998. The previously described elements caused 1999 net income to stand at $3,064 compared to a 1998 net loss of $18,306. YEARS ENDED DECEMBER 31, 1998 AND 1997 Our 1998 net sales decreased 26% from 1997 net sales. This decrease was primarily due to decreased unit sales and average selling prices across all printer product lines, with the exception of the NovaJet PRO 600e which was introduced in May 1998. Also contributing to the decline was the introduction of various rebate programs which were required to match competitive offerings. In 1998, supplies sales increased 19% over 1997, and accounted for approximately 36% of 1998 net sales versus 22% in 1997. A shortfall in OEM performance also contributed to the decrease in net sales for 1998, accounting for 18% of product sales as compared to 26% for 1997. No one customer accounted for 10% of product sales in either 1998 or 1997. International sales accounted for approximately 63% and 59% of our product sales in 1998 and 1997, respectively. Cost of sales as a percentage of net sales increased to 73% in 1998, from 53% in 1997, causing a comparable decrease in gross margin percentages. The increase in the cost of sales was due to a large increase to inventory reserves related to selected unprofitable media product lines, Croma24, and products which are reaching end-of-life status, unfavorable manufacturing overhead variances, and the write-off of various Croma24 assets. Also contributing to the increased cost of sales percentage were the decrease in average selling price and the implementation of rebate programs previously discussed. Marketing and selling expenses were 24% of net sales compared to 16% in 1997 and grew by 3% in absolute dollars over 1997. Most of the increase was related to costs associated with increased staffing, primarily in the supplies and textiles areas, offset by decreases in advertising and trade show activity compared to 1997. 1998 research and development spending grew by 3% in absolute dollars over 1997 and increased as a percentage of net sales from 7% in 1997 to 10% in 1998. The increase in spending was driven by new product development. General and administrative expenses were 12% of net sales in 1998 compared to 6% in 1997. The 55% increase in absolute dollars was due in large part to the increase in the allowance for doubtful accounts. We increased the allowance to reflect the worsening accounts receivable balances of a few specific customers, the gradual worsening 17 condition of balances of some Asian and European customers, and our adoption of a more conservative method in assessing the creditworthiness of our smaller customers. In the fourth quarter of 1998 we recorded a $2,934 restructuring charge to cover the planned cost of our reorganization and related workforce reduction. These charges reflect steps we took to consolidate business units, focus on niche markets, and improve future growth and profitability. Other income for the year ended December 31, 1998 included payments received under a product development and manufacturing license agreement signed during the first quarter of 1998. Under this agreement, we assisted in the development of a wide-format color inkjet product targeted for markets outside of our focus. We received additional reimbursements for engineering expenses. Interest expense in 1998 totaled $437 compared to $140 in 1997. Increased borrowings under our line of credit arrangement caused the increase in interest expense. Interest income in 1998 totaled $25 compared to $175 in 1997. The effective income tax rate in 1998 was 21%, compared to 34% in 1997. The low rate was due primarily to the recording of the deferred tax asset allowance in 1998 as previously described. The previously described elements caused 1998 net loss to stand at $18,306 compared to a 1997 net income of $17,429. LIQUIDITY AND CAPITAL RESOURCES We fund our operations primarily through cash flow provided from operations. As of December 31, 1999, we had cash and cash equivalents totaling $3,953, and working capital of $35,822. In comparison, we had cash and cash equivalents totaling $586, and working capital of $31,320 as of December 31, 1998. The increase in cash and cash equivalents was due primarily to the net income before depreciation and amortization of $6,330, a reduction in inventory of $4,713, and a reduction in income taxes receivable of $2,122, offset by a $6,000 paydown of our line of credit and capital expenditures of $1,926. We have received and anticipate we will continue to receive the majority of our cash from collections of accounts receivable from our distributors, dealers, VARs and OEMs. These groups in general have a history of timely payments; however, an increasing percentage of international sales can increase accounts receivable balances due to traditionally slower payments by international customers. At December 31, 1999, net accounts receivable increased by $1,483 over 1998's year end balance of $29,063. The increase was related to increased sales in 1999 and, more directly, increased sales in the fourth quarter of 1999. We invest our excess cash in money market accounts and have established guidelines relative to diversification and maturities to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. We have not experienced, to date, any losses on our short-term investments. During 1999, we invested cash in short-term investments which generated interest income of $25. Inventory levels decreased by $4,213 at December 31, 1999 from $16,205 at the end of 1998. This decrease was primarily attributable to a more focused effort to reduce finished goods inventories while maintaining required availability to meet demand. In the years ended December 31, 1999 and 1998, we made capital expenditures of $1,926 and $4,872, respectively. 1998 expenditures included consulting and other expenses related to the initial implementation of the enterprise-wide information system software purchased in 1997. During 2000, we plan to increase our capital expenditures, especially for computers and related systems, and tooling relating to new products. At December 31, 1999, the Company had available a $15,000 revolving line of credit which expired in January 2000. The bank has agreed to extend the maturity date of the line until April 30, 2000, at which time we plan to replace it with another line. The line bears interest at the bank's prime rate (8.50% at December 31, 1999) or at the Company's option, a rate based on the London Interbank Overnight Rate (6.50% at December 31, 1999) plus 2.25% 18 on outstanding balances. The Company pays a commitment fee on the unused portion of the line. The line is secured by specified assets with a borrowing base limited to eligible accounts receivable and inventory. In addition, the availability of the line is subject to our maintaining financial covenants including working capital and tangible net worth ratios. No amounts were outstanding under the line of credit at December 31, 1999 and $6,000 was outstanding under a prior agreement with the same bank at December 31, 1998. The Company is currently negotiating a new line of credit with a new bank. In January 2000, we received cash proceeds of approximately $12,000 for a transaction in which we sold our headquarters property in San Diego, California, and leased the property back for a period of seven years. The leaseback will be accounted for as an operating lease. The transaction resulted in a gain of $5,472, which will be deferred and amortized over the term of the lease. We believe that our existing cash, cash equivalents, cash generated, and funds available under the bank line of credit will be sufficient to satisfy our currently anticipated working capital needs. Actual cash requirements may vary from planned amounts, depending on the timing of the launch and extent of acceptance of new products. There can be no assurances that future cash requirements to fund operations will not require us to seek additional capital, or that such additional capital will be available when required on terms acceptable to us. To date, inflation has not had a significant effect on our operating results. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our only financial instruments with market risk exposure are domestic revolving line of credit borrowings, of which no amounts were outstanding at December 31, 1999. The amount of variable rate debt fluctuates during the year based upon our cash requirements. Maximum borrowings at any fiscal quarter end during fiscal 1999 were $2,500,000. Based on the outstanding balance at December 31, 1999, an adverse 10% change in the interest rate underlying these borrowings would result in no annual change in our pre-tax earnings and cash flow. These instruments are non-trading in nature and carry interest at the bank's prime rate (8.50% at December 31, 1999) or at our option, a rate based on the London Interbank Overnight Rate (6.50% at December 31, 1999 plus 2.25%). Our objective in maintaining these variable rate borrowings is the flexibility obtained regarding early repayment without penalties and lower overall cost as compared with fixed rate borrowings. Foreign Currency Risk. We conduct business on a global basis and all of our products sold in international markets are denominated in U.S. dollars. Historically, export sales have represented a significant portion of our sales and we expect export sale to continue to represent a significant portion of our sales. Our international business is subject to risks typical of an international business, including, but not limited to: - currency exchange fluctuations; - difficulties in staffing and managing international operations; - collecting accounts receivable; - restrictions on the export of critical technology; - changes in tariffs; - trade restrictions; - export license requirements; - political instability; and - the imposition of government controls. Accordingly, our future results could be materially adversely impacted by changes in these or other factors. Our sales offices in France, Germany, the United Kingdom, China and Japan, incur costs which are denominated in local currencies. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability. The effect of exchange rate fluctuations on our 1999 results was not material. 19 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is included in Part IV, Item 14(a)(1) and (2). ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information required by this item is incorporated by reference from the Proxy Statement in the sections entitled "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11: EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Proxy Statement in the section entitled "Compensation of Executive Officers." ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Proxy Statement in the section entitled "Security Ownership of Certain Beneficial Owners and Management." ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Proxy Statement in the section entitled "Certain Relationships and Related Transactions." PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF, OR INCORPORATED BY REFERENCE INTO, THIS ANNUAL REPORT ON FORM 10-K: (1) FINANCIAL STATEMENTS. The following Consolidated Financial Statements of ENCAD, Inc. and Independent Auditors' Report are included in a separate section of this Report beginning on page F-1:
Page Description Number ----------- ------ Independent Auditors' Report ................................................................F-2 Consolidated Balance Sheets as of December 31, 1999 and 1998 ................................F-3 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 ........................................................F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 ..................................................F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 ........................................................F-6 Notes to Consolidated Financial Statements ..................................................F-7
20 (2) FINANCIAL STATEMENT SCHEDULES. Financial statement schedules have been omitted because they are either not required, not applicable or the information is otherwise included. (3) Exhibits:
Exhibit Number Description ------ ----------- 2.1 Agreement and Plan of Merger between ENCAD Delaware and ENCAD California dated January 5,1998 (filed as Exhibit 2.1). (1) 3.1 Certificate of Incorporation of the Company (filed as Exhibit 3.1). (1) 3.2 Bylaws of the Company (filed as Exhibit 3.2). (1) 3.3 Certificate of Designation for Series A Junior Participating Preferred Stock (filed as Exhibit 3.2).(2) 4.1 Rights Agreement, dated as of March 19, 1998, between the Company and Harris Trust Company of California, which includes the Form of Certificate of Designation for the Series A Preferred Stock as Exhibit A, the Form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Shares as Exhibit C. (2) 4.2 First Amendment to the Company's Rights Plan.(3) 10.1 Form of Distributor Agreement (Domestic) (filed as Exhibit 10.14). (4) 10.2 Form of International Distributor Agreement (filed as Exhibit 10.15). (4) 10.3 Form of OEM Agreement (filed as Exhibit 10.16). (4) + 10.8 The Company's 1993 Stock Option/Stock Issuance Plan, as amended (filed as Exhibit 99.1). (5) + 10.9 Form of Notice of Grant of Stock Option and Stock Option Agreement (filed as Exhibit 10.34). (4) + 10.10 Form of Stock Issuance Agreement (filed as Exhibit 10.35). (4) + 10.11 1993 Employee Stock Purchase Plan, as amended (filed as Exhibit 99.1). (6) + 10.12 Form of Stock Purchase Agreement (filed as Exhibit 10.37). (4) 10.13 Form of Non-Disclosure Agreement (filed as Exhibit 10.38). (4) 10.14 Form of Employee Proprietary Information Agreement (filed as Exhibit 10.39). (4) + 10.15 Form of Indemnification Agreements between the Company and each of its directors. (7) + 10.16 Form of Indemnification Agreements between the Company and each of its officers. (7) + 10.17 Form of Severance Letter Agreements between the Company and each of its officers. (8) + 10.18 Amendment to Form of Severance Letter Agreements between the Company and David A. Purcell. + 10.19 Amendment to Form of Severance Letter Agreements between the Company and each of its officers. + 10.20 Form of Severance Letter Agreements between the Company and each of its vice presidents. + 10.21 Form of Senior Executive 1998 Annual Performance Bonus between the Company and each of its officers.(10) + 10.22 Select Compensation, Non-Qualified Deferred Compensation Plan and related documents.(8) 10.23 1997 Supplemental Stock Option Plan (filed as Exhibit 99.2). (5) 10.24 Form of Notice of Grant of Stock Option (filed as Exhibit 99.3.) (5) 10.25 Form of Stock Option Agreement (filed as Exhibit 99.4).(5) + 10.26 Non-Statutory Stock Option Agreement between the Company and Richard L. Diamond (filed as Exhibit 99.5). (5) + 10.27 1998 Stock Option Plan (filed as Exhibit 99.1).(9) + 10.28 Form of Notice of Grant of Stock Option (filed as Exhibit 99.2).(9) + 10.29 Form of Stock Option Agreement (filed as Exhibit 99.3).(9) + 10.30 Non-Statutory Stock Option Agreement between the Company and Michael J.T. Steep (filed as Exhibit 99.5).(9)
21 + 10.31 Form of Senior Executive 1999 Annual Performance Bonus between the Company and each of its Officers. (10) + 10.32 ENCAD, Inc. 1999 Stock Option/Stock Issuance Plan (filed as Exhibit 99.1).(11) + 10.33 Form of Notice of Grant of Stock Option (filed as Exhibit 99.2).(11) + 10.34 Form of Stock Option Agreement (filed as Exhibit 99.3). (11) + 10.35 Form of Addendum to Stock Option Agreement - Involuntary Termination Following Corporate Transaction/Change in Control (filed as Exhibit 99.4). (11) + 10.36 Form of Addendum to Stock Option Agreement - Limited Stock Appreciation Right (filed as Exhibit 99.5). (11) + 10.37 Form of Stock Issuance Agreement (filed as Exhibit 99.6). (11) + 10.38 Form of Addendum to Stock Issuance Agreement - Involuntary Termination Following Corporate Transaction/Change in Control (filed as Exhibit 99.7). (11) + 10.39 Form of Notice of Grant of Non-Employee Director - Initial (filed as Exhibit 99.8). (11) + 10.40 Form of Notice of Grant of Non-Employee Director - Annual (filed as Exhibit 99.9). (11) + 10.41 Form of Automatic Stock Option Agreement (filed as Exhibit 99.10). (11) + 10.42 Executive Life Program, Collateral Assignment Split Dollar Agreement Between the Company and David A. Purcell, dated December 1, 1999. + 10.43 Split Dollar Collateral Assignment Between the Company and David A. Purcell, dated December 1, 1999. 10.44 Agreement for Purchase and Sale of Real Property and Escrow Instructions, ENCAD Corporate Headquarters ("Agreement for Purchase and Sale"), Between the Company and Birtcher Properties, a California Corporation, dated August 5, 1999, as amended pursuant to the First Amendment to Agreement for Purchase and Sale, dated effective as of September 30, the Second Amendment to Agreement for Purchase and Sale, dated October 18, 1999, the Third Amendment to Agreement for Purchase and Sale, dated October 26, 1999, the Fourth Amendment to Agreement for Purchase and Sale, dated November 9, 1999, the Fifth Amendment to Agreement for Purchase and Sale, dated November 16, 1999, the Sixth Amendment to Agreement for Purchase and Sale, dated November 19, 1999, and the Seventh Amendment to Agreement for Purchase and Sale, dated November 23, 1999. 10.45 Lease Agreement dated October 15, 1999 between the Company and Birtcher Cornerstone, L.P., a Delaware Limited Partnership. + 10.46 Offer of Employment Letter from the Company to Michael Liess + 10.47 Offer of Employment Letter from the Company to Charles Sharp + 10.48 Offer of Employment Letter from the Company to Guri Stark 21.1 Subsidiaries. 23.1 Independent Auditors' Consent, Deloitte & Touche LLP. 24.1 Power of Attorney. (See page 24) 27.1 Financial Data Schedule for fiscal year end 1999.
----------------------- (1) Filed as an exhibit to Registrant's Current Report on Form 8-K dated January 5, 1998 and incorporated herein by reference. (2) Filed as an exhibit to Registrant's Current Report on Form 8-K dated March 20, 1998 and incorporated herein by reference. (3) Filed as exhibit to the Registrant's Registration Statement on Form 8-A12G/A (No. 000-23034) and incorporated herein by reference. (4) Filed as exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-70220) or amendments thereto and incorporated herein by reference. (5) Filed as exhibit to the Registrant's Registration Statement on Form S-8 (No. 333-44923) and incorporated herein by reference. (6) Filed as exhibit to the Registrant's Registration Statement on Form S-8 (No. 333-45327) and incorporated herein by reference. (7) Filed as exhibit to the Registrant's annual report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. (8) Filed as an exhibit to the Registrant's annual report on Form 10-K for the (8) Filed as an exhibit to the Registrant's annual report on Form 10-K for the year ended December 31, 1996, as amended, and incorporated herein by reference. (9) Filed as exhibit to the Registrant's Registration Statement on Form S-8 (No. 333-59779) and incorporated herein by reference. 22 (10) Filed as exhibit to the Registrant's annual report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference (11) Filed as exhibit to Registrant's Registration Statement on Form S-8 (No. 333-85143) and incorporated herein by reference. + Management compensatory plan. (b) REPORTS ON FORM 8-K None (c) EXHIBITS The exhibits required by this Item are listed under Item 14(a)(3). (d) FINANCIAL STATEMENT SCHEDULES The consolidated financial statement schedules required by this Item are listed under Item 14(a)(2). 23 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. ENCAD, Inc. By /s/ David A. Purcell --------------------------- March 30, 2000 David A. Purcell Chief Executive Officer By /s/ Todd W. Schmidt --------------------------- March 30, 2000 Todd W. Schmidt Chief Financial Officer POWER OF ATTORNEY Know all men by these presents, that each person whose signature appears below constitutes and appoints David A. Purcell or Thomas L. Green, his attorney-in-fact, with power of substitution in any and all capacities, to sign any amendments to this annual report on Form 10-K, and to file the same with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that the attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ David A. Purcell Chairman of the Board, President March 30, 2000 - -------------------------------- and Chief Executive Officer (David A. Purcell) (Principal Executive Officer) /s/ Robert V. Adams Director March 30, 2000 - -------------------------------- (Robert V. Adams) /s/ Craig S. Andrews Director March 30, 2000 - -------------------------------- (Craig S. Andrews) /s/ Ronald J. Hall Director March 30, 2000 - -------------------------------- (Ronald J. Hall) /s/ Howard L. Jenkins Director March 30, 2000 - -------------------------------- (Howard L. Jenkins) /s/ Charles E. Volpe Director March 30, 2000 - -------------------------------- (Charles E. Volpe)
24 ENCAD, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report.................................................F-2 Consolidated Balance Sheets..................................................F-3 Consolidated Statements of Operations........................................F-4 Consolidated Statements of Stockholders' Equity..............................F-5 Consolidated Statements of Cash Flows........................................F-6 Notes to Consolidated Financial Statements...................................F-7
F-1 ENCAD, INC. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of ENCAD, Inc. We have audited the accompanying consolidated balance sheets of ENCAD, Inc. and its subsidiaries (collectively, the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP SAN DIEGO, CALIFORNIA FEBRUARY 18, 2000 F-2 ENCAD, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,953 $ 586 Accounts receivable - net 30,546 29,063 Income taxes receivable 281 2,403 Inventories 11,992 16,205 Deferred income taxes 4,004 6,025 Prepaid expenses 1,018 825 - ------------------------------------------------------------------------------------------------------------- Total current assets 51,794 55,107 Property - net 14,264 15,604 Other assets 2,421 1,432 - ------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 68,479 $ 72,143 ============================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 7,882 $ 11,785 Accrued expenses and other liabilities 8,090 6,002 Borrowings under line of credit - 6,000 - ------------------------------------------------------------------------------------------------------------- Total current liabilities 15,972 23,787 OTHER LIABILITIES 1,263 813 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock - $.001 par value, 5,000 shares authorized: Series A Junior Participating Preferred Stock - no shares issued and outstanding - - Common stock - $.001 par value, 60,000 shares authorized, 11,780 and 11,636 shares issued and outstanding in 1999 and 1998 respectively 12 12 Additional paid-in capital 19,341 18,704 Retained earnings 31,891 28,827 - ------------------------------------------------------------------------------------------------------------- Total stockholders' equity 51,244 47,543 - ------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 68,479 $ 72,143 =============================================================================================================
See Notes to Consolidated Financial Statements. F-3 ENCAD, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Net sales $ 117,712 $ 110,055 $ 149,041 Cost of sales 66,171 80,646 78,259 - ------------------------------------------------------------------------------------------------------------------- Gross profit 51,541 29,409 70,782 - ------------------------------------------------------------------------------------------------------------------- Marketing and selling 23,983 25,745 25,023 Research and development 12,078 10,894 10,544 General and administrative 11,296 13,504 8,722 Restructuring charges - 2,934 - - ------------------------------------------------------------------------------------------------------------------- Operating costs and expenses 47,357 53,077 44,289 - ------------------------------------------------------------------------------------------------------------------- Income (loss) from operations 4,184 (23,668) 26,493 Interest (expense) income - net (203) (412) 35 Other income - 999 - - ------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 3,981 (23,081) 26,528 Provision for income taxes 917 (4,775) 9,099 - ------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 3,064 $ (18,306) $ 17,429 =================================================================================================================== Earnings (loss) per share - basic $ 0.26 $ (1.58) $ 1.53 =================================================================================================================== Earnings (loss) per share - diluted $ 0.26 $ (1.58) $ 1.45 =================================================================================================================== Weighted average common shares outstanding - basic 11,707 11,572 11,390 =================================================================================================================== Weighted average common and common equivalent shares outstanding - - diluted 11,883 11,572 12,044 ===================================================================================================================
See Notes to Consolidated Financial Statements. F-4 ENCAD, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON STOCK --------------------------- ADDITIONAL PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL - ------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 11,300 $ 13,338 - $ 29,704 $ 43,042 Conversion to $.001 par value stock (13,326) 13,326 - - Common stock issued under stock option and purchase plans, including related tax benefits 201 - 4,251 - 4,251 Net income 17,429 17,429 - ------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 11,501 12 17,577 47,133 64,722 Common stock issued under stock option and purchase plans, including related tax benefits 135 - 1,127 - 1,127 Net loss (18,306) (18,306) - ------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 11,636 12 18,704 28,827 47,543 Common stock issued under stock option and purchase plans, including related tax benefits 144 637 - 637 Net income 3,064 3,064 - ------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 11,780 $ 12 $ 19,341 $ 31,891 $ 51,244 ===================================================================================================================
See Notes to Consolidated Financial Statements. F-5 ENCAD, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 3,064 $ (18,306) $ 17,429 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 3,266 4,093 3,709 Provision for losses on accounts receivable and inventories (1,444) 12,479 198 Tax benefit from exercise of stock options 25 267 2,568 Changes in assets and liabilities: Accounts receivable (539) 4,208 (17,546) Income taxes receivable 2,122 (2,403) - Inventories 4,713 4,000 (15,215) Deferred income taxes 2,021 (1,641) 154 Prepaid expenses and other assets (1,182) 1,609 (2,159) Accounts payable (3,903) (584) 4,125 Accrued expenses and other liabilities 2,538 (3,128) 3,762 - ------------------------------------------------------------------------------------------------------------------------ Cash provided by (used in) operating activities 10,681 594 (2,975) - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property (1,926) (4,872) (7,653) - ------------------------------------------------------------------------------------------------------------------------ Cash used in investing activities (1,926) (4,872) (7,653) - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Exercise of stock options and sale of stock under employee stock purchase plan 612 860 1,683 Net borrowings under line of credit (6,000) 2,739 3,261 - ------------------------------------------------------------------------------------------------------------------------ Cash (used in) provided by financing activities (5,388) 3,599 4,944 - ------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 3,367 (679) (5,684) Cash and cash equivalents at beginning of year 586 1,265 6,949 - ------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,953 $ 586 $ 1,265 ======================================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash received (paid) during the year for income taxes $ 3,412 $ (1,426) $ (4,234) Cash paid during the year for interest (250) (379) (140) ========================================================================================================================
See Notes to Consolidated Financial Statements. F-6 ENCAD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY ENCAD, Inc. and its subsidiaries (collectively, the "Company") is engaged principally in the design, development, manufacture and sale of wide-format color inkjet printers and related supplies for the graphic arts, computer-aided design, geographic information systems and textile markets. The Company markets and sells its products domestically and internationally primarily through specialty distributors, dealers, value-added resellers and original equipment manufacturers. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company. All significant intercompany balances have been eliminated in consolidation. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTY Property is stated at cost. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives of the property: buildings and related improvements - 40 years; computer equipment, software, machinery, equipment, furniture and fixtures - three to five years. REVENUE RECOGNITION Revenue from product sales is recognized at the time of shipment. Price protection adjustments for customers are accrued when the anticipated price reduction is published. WARRANTY The Company warrants its products against defects, generally for one year. Management evaluates the Company's warranty experience and adjusts its warranty reserves accordingly. PRODUCT RETURNS In the event the Company terminates any of its distribution agreements, the terminated distributor may return products purchased within a specified timeframe for a refund. The Company has not experienced any significant terminations or product returns to date. INCOME TAXES The Company adopted the Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This statement requires that deferred income taxes be reported in the Company's financial statements utilizing the asset and liability method. Under this method, deferred income taxes are determined based on enacted tax rates applied to the differences between the financial statement and tax bases of assets and liabilities. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's foreign operations are translated into U.S. dollars at the exchange rate in effect at the balance sheet date, and revenue and expenses are translated at the average exchange rate for the year. Translation gains or losses of the Company's foreign subsidiaries historically have not been material. All of the Company's worldwide sales are transacted in U.S. dollars. Gains and losses on transactions in denominations other than the functional currency of the Company's foreign operations, while not material in amount, are included in the results of operations. The Company has not entered into foreign exchange transactions to hedge certain balance sheet exposures and intercompany balances against movements in foreign exchange rates as these balances have historically not been material. CONCENTRATION OF CREDIT RISK The Company sells its products primarily to customers in the United States, Europe and Asia. The Company maintains a reserve for potential credit losses and such actual losses, to date, have been minimal. To date, the Company has not recorded any losses on its cash accounts. F-7 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ACCOUNTING FOR STOCK-BASED COMPENSATION SFAS No. 123, "Accounting for Stock-Based Compensation" requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock-based compensation awards to employees and has disclosed the required pro forma effect on the net income and earnings per share. See Note 7. EARNINGS PER SHARE Basic earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the year. Diluted earnings per share are calculated to give effect to all potentially dilutive common shares that were outstanding during the year. The following table is a reconciliation of the basic and diluted earnings per share computations for the years ended December 31, 1999, 1998 and 1997 (in thousands):
1999 1998 1997 =============================================================================================== Net income (loss) $ 3,064 $ (18,306) $ 17,429 ----------------------------------------------------------------------------------------------- Earnings (loss) per share - basic $ 0.26 $ (1.58) $ 1.53 =============================================================================================== Basic weighted average common shares outstanding 11,707 11,572 11,390 Effect of dilutive securities: Stock options 176 - 654 ----------------------------------------------------------------------------------------------- Diluted weighted average common and common equivalent shares outstanding 11,883 11,572 12,044 ----------------------------------------------------------------------------------------------- Earnings (loss) per share - diluted $ 0.26 $ (1.58) $ 1.45 ===============================================================================================
COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. Comprehensive income is defined as "the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners." There are no material current differences between net income and comprehensive income and, accordingly, no amounts have been reflected in the accompanying consolidated financial statements. ACCOUNTING CHANGES Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal reporting that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect results of operations or the financial position of the Company. Effective January 1, 1999, the Company adopted AICPA SOP 98-5, "Reporting on the Costs of Start-up Activities." The statement requires costs of start-up activities and organization costs to be expensed as incurred. The adoption of SOP No. 98-5 did not have a material impact on the Company's results of operations, financial position or cash flows. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal F-8 quarters of all fiscal years beginning after June 15, 1999. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if it is, the type of hedge transaction. In July 1999, the Financial Accounting Standards Board issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities- Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No. 133 until the Company's first quarter beginning after January 1, 2001. The Company does not expect that the adoption of SFAS No. 133 will have a material impact on its consolidated financial statements. STOCKHOLDERS' EQUITY In July 1997, the Company's stockholders approved an Agreement and Plan of Merger whereby the Company merged with and into a newly incorporated Delaware corporation ("ENCAD, Inc.") which was the surviving corporation. In conjunction with the merger, each share of the Company's common stock, no par value, and options or rights to acquire shares of common stock were exchanged for one share of ENCAD, Inc. Delaware common stock, par value $.001, options or rights to acquire common stock. The change in par value did not affect any of the existing rights of the stockholders and has been recorded as an adjustment to additional paid-in capital as of December 31, 1997. In July 1997, the Company's stockholders approved an increase in the number of shares of common stock authorized for issuance by the Delaware company from 15,000,000 to 60,000,000 shares, concurrently with the Company's reincorporation in Delaware. STOCKHOLDER RIGHTS AGREEMENT In March 1998, the Company's Board of Directors adopted a preferred stockholder rights plan which provides for a dividend distribution of one preferred share purchase right (a "Right") on each outstanding share of the common stock. On March 19, 1998, the Company's Board of Directors declared a dividend of one Right for each outstanding share of common stock, payable on April 2, 1998 to stockholders of record on that date. Each Right entitles stockholders to buy 1/1000th of a share of ENCAD Series A Junior Participating Preferred Stock at an exercise price of $80, subject to adjustment. The Rights will become exercisable on the close of business on the first day a person or group announces an acquisition of 15% or more of the common stock or on the tenth day after a person or a group commences or announces commencement of a tender offer, the consummation of which would result in ownership by the person or group of 15% or more of the common stock. The Company will be entitled to redeem the Rights at $0.01 per Right at any time on or before the close of business on the first date of a public announcement that a person has acquired beneficial ownership of 15% or more of the common stock. The Company amended the plan on November 18, 1998 to eliminate those provisions requiring that certain actions may only be taken by directors who were Board members at the time the plan was adopted. RECLASSIFICATIONS Certain items in the 1998 and 1997 financial statements have been reclassified to conform to the 1999 presentation. F-9 2. BALANCE SHEET DETAILS (in thousands)
DECEMBER 31, ----------------------------- 1999 1998 ------------------------------------------------------------------------------------------ ACCOUNTS RECEIVABLE: Trade receivables $ 32,159 $ 29,928 Allowance for doubtful accounts (2,500) (4,092) ------------------------------------------------------------------------------------------ Net trade accounts receivable 29,659 25,836 Receivables from vendors 743 2,770 Other accounts receivable 144 457 ------------------------------------------------------------------------------------------ Total $ 30,546 $ 29,063 ========================================================================================== INVENTORIES: Raw materials $ 6,017 $ 5,061 Work-in-process 131 269 Finished goods 5,844 10,875 ------------------------------------------------------------------------------------------ Total $ 11,992 $ 16,205 ========================================================================================== PROPERTY: Computer equipment and software $ 12,363 $ 11,623 Machinery and equipment 6,488 6,619 Buildings and improvements 6,210 6,028 Furniture and fixtures 2,398 2,385 Land 1,250 1,250 ------------------------------------------------------------------------------------------ 28,709 27,905 Accumulated depreciation and amortization (14,445) (12,301) ------------------------------------------------------------------------------------------ Total $ 14,264 $ 15,604 ========================================================================================== ACCRUED EXPENSES AND OTHER LIABILITIES: Compensation and vacation pay $ 4,021 $ 1,864 Warranty 2,573 1,225 Other 695 29 Co-op programs 582 739 Restructuring charges 219 2,097 Income taxes payable - 48 ------------------------------------------------------------------------------------------ Total $ 8,090 $ 6,002 ==========================================================================================
3. REVOLVING LINE OF CREDIT (in thousands) At December 31, 1999, the Company had available a $15,000 revolving line of credit which expired in January 2000. The bank has agreed to extend the maturity date of the line until April 30, 2000, at which time we plan to replace it with another line with a different entity. The line bears interest at the bank's prime rate (8.50% at December 31, 1999) or at the Company's option, a rate based on the London Interbank Overnight Rate (6.50% at December 31, 1999) plus 2.25% on outstanding balances. The Company pays a commitment fee on the unused portion of the line. The line is secured by specified assets with a borrowing base limited to eligible accounts receivable and inventory. In addition, the availability of the line is subject to our maintaining financial covenants including working capital and tangible net worth ratios. No amounts were outstanding under the line of credit at December 31, 1999 and $6,000 was outstanding under a prior agreement with the same bank at December 31, 1998. F-10 4. OPERATING LEASE COMMITMENTS (in thousands) The Company leases certain facilities and equipment under operating leases which expire over the next five years. Most of these operating leases provide the Company with the option after the initial lease term to renew its lease at the then fair rental value of periods ranging from one month to four years. Generally, management expects that leases will be renewed in the normal course of business. Minimum payments for operating leases having initial or remaining noncancelable terms of one year are as follows: 2000 - $884; 2001 - $847; 2002 - $770; 2003 - $625; 2004 - $521; Total - $3,647. Total rent expense under operating leases was approximately $796, $982 and $416 for the years ended December 31, 1999, 1998 and 1997, respectively. 5. RESTRUCTURING COSTS (in thousands) On October 26, 1998, the Company's Board of Directors agreed to a plan of reorganization and the restructuring of its printer and supplies business units into one business unit, the Digital Imaging Systems business unit. In the quarter ended December 31, 1998, the Company estimated and recorded a restructuring charge of $2,934. The plan of reorganization and restructuring, which was deemed necessary to facilitate the Company's strategy of developing and delivering value-added digital imaging solutions directed at niche vertical market applications, included costs of workforce reductions, including the elimination of senior management positions, of approximately 60 people and the consolidation of excess sales facilities. While selling and marketing staff were the primary focus of the reduction, research and development and administrative staff were also affected. As of December 31, 1999, the restructuring was substantially completed. The following table summarizes the Company's reorganization and restructuring activity for the years ended December 31, 1998 and 1999:
Employee Lease and Related Facility Other Total =========================================================== Restructuring charges $ 2,741 $ 81 $ 112 $ 2,934 Cash paid during the period (796) - (41) (837) ----------------------------------------------------------- RESERVE BALANCE, DECEMBER 31, 1998 1,945 81 71 2,097 Cash paid during the period (1,732) (75) (71) (1,878) ----------------------------------------------------------- RESERVE BALANCE, DECEMBER 31, 1999 $ 213 $ 6 $ - $ 219 ===========================================================
F-11 6. INCOME TAXES (in thousands except for percentages) The tax effects of items comprising the Company's net deferred income tax asset are as follows:
DECEMBER 31, -------------------------- 1999 1998 ------------------------------------------------------------------------------------------- Non deductible reserves and accruals $ 5,326 $ 7,261 Restructuring accrual 124 739 Differences between book and tax basis in inventory and 1,134 1,403 property Accrued co-op advertising 237 301 State taxes (731) (650) Tax losses and credits 797 459 Other 517 112 ------------------------------------------------------------------------------------------- Total deferred tax asset 7,404 9,625 Valuation allowance (3,400) (3,600) ------------------------------------------------------------------------------------------- Net deferred tax asset $ 4,004 $ 6,025 ===========================================================================================
The net deferred tax asset is classified entirely as a current asset. As of December 1999, the Company had a state operating loss carry forward of approximately $2,814 which expires in 2003 and 2004. Deferred income taxes are provided to reflect the future tax consequences of differences between the book and tax basis of assets and liabilities. The Company's deferred tax asset consists primarily of book and tax differences in accruals and reserves. Under SFAS No. 109, "Accounting for Income Taxes," the Company is required to place a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. The valuation allowance is principally composed of future tax benefits that are not expected to be available for a carry back to offset the taxable income in 1997 and future taxable income. To the extent that future taxable income is dependent on new products, the Company believes it would not be prudent to rely on the related future income for the realization of deferred tax benefits and accordingly has an allowance recorded. The components of income before income tax expense and income taxes attributable to foreign operations are not material. The components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ========================================================================================== CURRENT (BENEFIT) EXPENSE: Federal $ (1,181) $ (3,314) $ 7,626 State 78 180 1,521 DEFERRED EXPENSE (BENEFIT): Federal 2,184 (1,272) (22) State (164) (369) (26) ------------------------------------------------------------------------------------------ Total $ 917 $ (4,775) $ 9,099 ==========================================================================================
F-12 The effective rate of the provision for income taxes differs from the federal statutory rate because of the effect of the following items:
YEAR ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ========================================================================================== Statutory rate 34.0% 34.0% 35.0% State income taxes, net of federal benefit 4.5 3.3 4.5 Benefit of foreign sales corporation, net of (2.1) - (4.1) tax Research and development tax credit (4.5) - (0.9) Valuation allowance (5.5) (15.6) - Other (3.4) (1.0) (0.2) ------------------------------------------------------------------------------------------ Effective rate 23.0% 20.7% 34.3% ==========================================================================================
7. EMPLOYEE BENEFIT PLANS (in thousands except for percentages and average and per share data) The number of shares authorized under the following plans and the number of shares outstanding under those plans will be appropriately adjusted in the event of certain changes in the Company's capital structure, such as stock dividends or splits, or other recapitalizations. 1993 EMPLOYEE STOCK PURCHASE PLAN Under this plan, for which 520 shares of common stock have been reserved for issuance, eligible employees may elect up to 10% of their base cash compensation to be deducted each pay period for the purchase of the Company's common stock. On the last business day of each calendar quarter, shares of common stock are purchased with the employees' payroll deductions, at a price per share of 85% of the lesser of the closing market price of the common stock on the purchase date, or the closing market price on the first day of the purchase period. Participants may not purchase more than 2 shares of common stock and not more than $25 worth of common stock in any one calendar year. The plan will terminate on January 1, 2003. In 1999, 1998 and 1997, 99, 80, and 45 shares, respectively, were issued, at average prices ranging from $3.08 to $4.89, $3.08 to $11.05, and $7.44 to $35.06, respectively. 1993 STOCK OPTION/STOCK ISSUANCE PLAN Under this plan, for which 1,799 shares of common stock have been reserved for issuance, employees, officers, directors and consultants may be granted incentive or non-qualified stock options. All outstanding options under any of the Company's previous stock option plans were incorporated into this plan but will continue to be governed by the terms and conditions under which those options were granted. To date, only non-qualified stock options have been granted under this plan at prices not less than fair market value on the date of grant. The options granted under this plan as of December 31, 1999 are exercisable quarterly over four years and expire in ten years. 1997 SUPPLEMENTAL STOCK OPTION PLAN On October 13, 1997, the Company's Board of Directors adopted the 1997 Supplemental Stock Option Plan. Under this plan, for which 255 shares of common stock have been reserved for issuance, employees other than executive officers, consultants and independent advisors, may be granted non-qualified stock options. To date, only non-qualified stock options have been granted under this plan at prices not less than fair market value on the date of grant. The options granted under this plan as of December 31, 1999 are exercisable quarterly over four years and expire in ten years. 1998 STOCK OPTION PLAN On June 9, 1998, the Company's stockholders approved the 1998 Stock Option Plan. Under this plan, for which 575 shares of common stock have been reserved for issuance, employees, including officers, consultants, independent advisors and directors of the corporation, may be granted incentive or non-qualified stock options. To date, only non-qualified stock options have been granted under this plan at prices not less than fair market value on the date of grant. The options granted under this plan as of December 31, 1999 are exercisable quarterly over four years and expire in ten years. NON-PLAN OPTIONS On January 26, 1998 and July 24, 1998 the Company filed S-8 registration statements, pursuant to which options were granted to the Company's Chief Information Officer and the General Manager, Digital Imaging Solutions, respectively. The Chief Information Officer was granted 30 shares at an exercise price of $26.13, F-13 the fair market value on the date of the grant, of which all shares were subsequently canceled subject to his termination of employment with the Company. The General Manager, Digital Imaging Solutions business unit, was granted 75 shares at an exercise price of $13.88, the fair value on the date of the grant. The options granted under both of these agreements are exercisable quarterly over four years and expire in ten years. RE-GRANTING OF STOCK OPTIONS On May 12, 1998, the Stock Option Committee of the Board of Directors approved a stock option re-granting program pursuant to which employees, excluding officers, of the Company could elect to cancel certain unexercised stock options in exchange for new stock options with an exercise price equal to the closing price of the Company's common stock on May 22, 1998. Approximately 200 shares were eligible for repricing, of which 198 were repriced at an exercise price of $10.56. The new options vested quarterly over four years from the date of re-grant and expire in ten years and would have become fully vested on May 22, 2002. These options were subsequently canceled because on November 13, 1998, the Stock Option Committee of the Board of Directors approved a stock option re-granting program pursuant to which employees could elect to cancel certain unexercised stock options in exchange for new stock options with an exercise price equal to the closing price of the Company's common stock on November 30, 1998. Approximately 1,046 shares were eligible for repricing, of which 820 were repriced at an exercise price of $5.75. The new options vest quarterly over four years from the date of re-grant and expire in ten years. The options issued under the re-grant program will become fully vested on November 30, 2002. Certain executive officers that participated in the re-grant program were required to forfeit a portion of stock options previously granted. 1999 STOCK OPTION/STOCK ISSUANCE PLAN Under this plan, for which 580 shares of common stock have been reserved for issuance, employees, officers, directors and consultants may be granted incentive or non-qualified stock options. All outstanding options under any of the Company's previous stock option plans were incorporated into this plan but will continue to be governed by the terms and conditions under which those options were granted. To date, only non-qualified stock options have been granted under this plan at prices not less than fair market value on the date of grant. The options granted under this plan as of December 31, 1999 are exercisable quarterly over four years and expire in ten years. A summary of option activity under all the Company's stock option plans and non-plan option grants is as follows:
OPTIONS OUTSTANDING (IN THOUSANDS, EXCEPT PER SHARE DATA) -------------------------------------------------- WEIGHTED AVAILABLE AVERAGE EXERCISE AGGREGATE FOR GRANT SHARES PRICES PRICE =========================================================================================================== BALANCES, DECEMBER 31, 1996 89 942 $ 8.36 $ 7,874 Authorized 380 - - - Options granted (371) 371 30.42 11,297 Options exercised - (156) 5.05 (786) Options canceled 42 (42) 19.25 (811) ----------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1997 140 1,115 15.75 17,574 Authorized 765 - - - Options granted (1,857) 1,857 9.38 16,916 Options exercised - (55) 5.95 (328) Options canceled 1,471 (1,471) 16.75 (24,433) ----------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1998 519 1,446 6.81 9,729 Authorized 580 - - - Options granted (711) 711 5.39 3,832 Options exercised - (41) 4.59 (188) Options canceled 443 (443) 7.68 (3,403) ----------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1999 831 1,673 $ 5.96 $ 9,970 Exercisable at December 31, 1997 378 $ 8.84 Exercisable at December 31, 1998 422 $ 8.50 EXERCISABLE AT DECEMBER 31, 1999 537 $ 6.38 ===========================================================================================================
F-14 The following table summarizes outstanding stock option information at December 31, 1999:
WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE ========================================================================================================== $ 2.81 - $ 5.56 503 8.35 $ 4.04 155 $ 3.76 $ 5.62 - $ 7.13 830 8.99 $ 5.85 217 $ 5.79 $ 7.25 - $13.75 331 7.86 $ 8.51 158 $ 8.79 $ 17.44 - $39.13 9 7.06 $ 29.49 7 $ 27.30 ---------------------------------------------------------------------------------------------------------- $ 2.81 - $39.13 1,673 8.56 $ 5.96 537 $ 6.38 ==========================================================================================================
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans. Had compensation expense for the Company's stock option plans and stock purchase plan been determined based upon the fair value at the grant date for awards under those plans consistent with the methodology prescribed under SFAS No. 123, the Company's net income, earnings per share - -basic and earnings per share - diluted for 1999 would have been decreased by approximately $1,328, or $0.11 and $0.11 per share, respectively. The Company's net income, earnings per share - basic and earnings per share - diluted for 1998 and 1997 would have been reduced by approximately $1,875 or $0.16 and $0.16 per share and $1,217 or $0.11 and $0.10 per share, respectively. The weighted-average fair value of the options granted during 1999, 1998 and 1997 is estimated to be $1,662, $8,800 and $4,999, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997, respectively: no dividend yield; expected volatility of 77%, 77% and 65%; risk-free interest rate of 6.0%, 6.0% and 6.1% and expected life of 3.29, 3.41 and 3.40 years. 8. SEGMENT AND GEOGRAPHIC INFORMATION (in thousands) For the years ended December 31, 1997 and 1998, and during the first quarter of 1999 the Company's business was organized, managed and internally reported as two segments: the Digital Imaging Solutions business unit and the Textile business unit. Due to the similarity of production processes, distribution methods, customers and products, the segment information for the Digital Imaging Solutions and Textile business units had been aggregated into one segment. On April 22, 1999, the Company consolidated its Digital Imaging Solutions and Textile business units in order to further leverage the Company's resources in support of its solutions-based, vertical market strategy. As a result, the Company is managing and internally reporting the Company's business as one reportable segment, principally, the design, development, manufacture and sales of digital imaging solutions, including wide-format color inkjet printers and related supplies, accessories, software and service for the graphic arts and computer aided design markets. Additional information regarding revenue by products and service groups for the years ended December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997 ============================================== Printers and accessories $ 73,739 $ 65,070 $ 111,033 Ink and media 37,986 39,243 32,737 Service, royalties and contracts 5,987 5,742 5,271 ---------------------------------------------- Total $ 117,712 $ 110,055 $ 149,041 ==============================================
In 1999 one customer accounted for 13% of net sales. In 1998 and 1997 no one customer accounted for more than 10% of net sales. F-15 The Company has subsidiaries located in France, Germany and England to which it pays commissions for sales to customers that they identify. The revenues, operating profits and identifiable assets of these European subsidiaries are not material. Net sales from principal geographic areas were as follows:
1999 1998 1997 =================================================== Europe, Middle East and Africa $ 46,794 $ 42,770 $ 46,948 Asia Pacific 22,757 16,026 28,412 Americas, excluding the United States 7,213 10,328 12,011 --------------------------------------------------- Export sales 76,764 69,124 87,371 Domestic 40,948 40,931 61,670 --------------------------------------------------- Total net sales $ 117,712 $ 110,055 $ 149,041 ===================================================
Receivables from export sales at December 31, 1999 and 1998 were approximately $23,653 and $15,479 respectively. 9. SUBSEQUENT EVENT (in thousands) In January 2000, the Company received cash proceeds of approximately $12,000 for a transaction in which the Company sold its headquarters buildings and land in San Diego, California and leased the property back for a period of seven years. The leaseback will be accounted for as an operating lease. The sale-leaseback resulted in a gain of $5,472 which will be deferred and amortized to income over the term of the lease. The lease requires the Company to pay customary operating and repair expenses and to observe certain operating restrictions and covenants. Future scheduled minimum rental payments required are as follows: 2000 - $1,121; 2001 - $1,319; 2002 - $1,414; 2003 - $1,465; 2004 - $1,523; thereafter - $3,324; total - $10,166. 10. QUARTERLY FINANCIAL INFORMATION (unaudited; in thousands, except per share data) Summarized quarterly financial information for each of the three years ended December 31, 1999, 1998, and 1997 is as follows:
QUARTER 1 QUARTER 2 QUARTER 3 QUARTER 4 YEAR ------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1999 Net sales $ 28,982 $ 29,253 $ 27,022 $ 32,455 $ 117,712 Gross profit 12,403 12,805 11,920 14,413 51,541 Income from operations 658 1,302 993 1,231 4,184 Net income 349 807 690 1,218 3,064 Earnings per share - basic $ 0.03 $ 0.07 $ 0.06 $ 0.10 $ 0.26 Earnings per share - diluted $ 0.03 $ 0.07 $ 0.06 $ 0.10 $ 0.26 ------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1998 Net sales $ 23,517 $ 34,695 $ 24,201 $ 27,642 $ 110,055 Gross profit 8,898 14,109 5,716 686 29,409 (Loss) income from operations (2,060) 2,215 (5,972) (17,851) (23,668) Net (loss) income (726) 1,374 (3,918) (15,036) (18,306) (Loss) earnings per share - basic $ (0.06) $ 0.12 $ (0.34) $ (1.30) $ (1.58) (Loss) earnings per share - diluted $ (0.06) $ 0.12 $ (0.34) $ (1.30) $ (1.58) ------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1997 Net sales $ 31,511 $ 37,725 $ 38,509 $ 41,296 $ 149,041 Gross profit 15,406 17,665 18,100 19,611 70,782 Income from operations 5,642 6,398 6,811 7,642 26,493 Net income 3,694 4,223 4,443 5,069 17,429 Earnings per share - basic $ 0.33 $ 0.37 $ 0.39 $ 0.44 $ 1.53 Earnings per share - diluted $ 0.31 $ 0.35 $ 0.37 $ 0.42 $ 1.45 ------------------------------------------------------------------------------------------------------------
F-16 EX-10.18 2 EXHIBIT 10.18 EXHIBIT 10.18 AMENDMENT TO FORM OF SEVERANCE LETTER AGREEMENTS BETWEEN THE COMPANY AND DAVID A. PURCELL We are pleased to inform you that the Company's Board of Directors has recently approved an amendment to the special severance benefit program established for you pursuant to your letter agreement with the Company dated February 19, 1997 (the "Severance Agreement"). The changes which have been made to your existing Severance Agreement apply only to the severance benefits to which you may become entitled following a change in control of the Company and may be summarized as follows: (i) The period of time for which you will be protected following a change in control of the Company has been increased so that if your employment now terminates under certain circumstances within twenty-four (24) months following a change in control, you will be eligible to receive your severance benefits under the amended Severance Agreement. (ii) The multiple of salary and bonus to which you may become entitled under the amended Severance Agreement as a cash severance payment in connection with the termination of your employment following a change in control will now be paid to you in a lump sum rather than through a series of payments over a one-year period. (iii) There will no longer be a non-compete covenant or other restrictive covenants in effect following your termination of employment in connection with a change in control of the Company. (iv) The parachute tax gross-up previously provided you under Paragraph 5 of Part Three of your existing Severance Agreement has been eliminated, and any parachute payments attributable to your severance benefits will now be limited to an amount which does not constitute an excess parachute payment under the federal tax laws or (solely in the event of a Hostile Take-Over) the greatest after-tax benefit such severance benefits can provide you after taking into account any excise parachute tax which may be imposed under the federal tax laws. The purpose of this letter agreement is to set forth those changes in more detail so that your Severance Agreement will be formally amended by this new letter agreement. Unless specifically noted in this letter, all of the terms and conditions of your existing Severance Agreement will be preserved, and all capitalized terms in this letter agreement will have the same meanings assigned to those terms in your Severance Agreement as in effect immediately prior to this amendment.. 1. The introductory paragraph to Part Three of your existing Severance Agreement is hereby amended in its entirety to read as follows: PART THREE -- CHANGE IN CONTROL BENEFITS Upon your Termination Without Cause or Resignation for Good Cause within twenty-four (24) months following a Change in Control and seven (7) days after your execution of a General Release in favor of the Company within three (3) days after such Termination Without Cause or Resignation for Good Cause, as the case may be, then (provided such General Release is not revoked by you prior to the end of the Revocation Period), you shall become entitled to receive the special severance benefits provided in this Part Three in substitution of the severance benefits set forth in Part Two hereof. However, your severance benefits under this Part Three shall be subject to the benefit limitation of Paragraph 5 of this Part Three. 2. Paragraph 1 of Part Three of your Severance Agreement is hereby amended and restated in its entirety to read as follows: 1. CIC SEVERANCE PAYMENT. You shall be entitled to the following CIC Severance Payment: AMOUNT. You shall be entitled to a CIC Severance Payment in an amount equal to ** times your Total Compensation determined as of the date of your Termination Without Cause or Resignation for Good Cause. FORM. Your CIC Severance Payment will be paid in a lump sum payment (subject to all applicable withholding taxes) within thirty (30) days after your Termination Without Cause or Resignation for Good Cause. OTHER TERMINATIONS. You will not be entitled to receive any CIC Severance Payment or any other benefits under this letter agreement in the event your employment terminated by reason of your death, disability or your Termination for Cause. 3. The restrictive covenants set forth in Paragraph 4 of Part Three of your Severance Agreement will no longer be applicable in the event you receive benefits under this Part Three following your Termination Without Cause or Resignation for Good Cause within twenty-four (24) months after a Change in Control. 4. In consideration of the additional benefits provided to you under this amendment to your Severance Agreement, your Benefit Tax Protection in Paragraph 5 of Part Three of the existing Severance Agreement is hereby deleted and rendered null and void in its entirety, and the following new benefit limitation is hereby imposed upon your Part Three benefits: 5. BENEFIT LIMITATIONS. The following provisions shall govern the Change in Control benefits payable to you under this Part Three. (a) The following benefit limitations shall be in effect for any Change in Control benefits provided you under Part Three of this letter agreement: CHANGE IN CONTROL OTHER THAN HOSTILE TAKE-OVER. If the Change in Control does not constitute a Hostile Take-Over, the dollar amount of your CIC Severance Payment will be reduced to the extent necessary to assure that the present value of that benefit will not, when added to the present value of your Option Parachute Payment and your Other Parachute Payments, exceed the maximum amount which may be paid under your Severance Agreement (as amended by this letter agreement) without any of those amounts being treated as an excess parachute payment under Code Section 280(G). HOSTILE TAKEOVER.In the event of a Hostile Takeover, no reduction will be made to your CIC Severance Payment (or any other benefits under your Severance Agreement as supplemented by this letter agreement), except and only to the extent necessary to provide you with the maximum after-tax benefit under this Part Three, after taking into account any parachute excise tax that might otherwise be payable by you under Code Section 4999 and any analogous State income tax provision. ** CONFIDENTIAL TREATMENT REQUESTED (b) RESOLUTION OF DISPUTES. In the event there is any disagreement between you and the Company as to whether one or more benefits to which you become entitled (whether under this letter agreement or otherwise) in connection with a Change in Control constitute Option Parachute Payments or Other Parachute Payments or would otherwise result in an excess parachute payment under Code Section 280G, such dispute is to be resolved as follows: (i) In the event temporary, proposed or final Treasury Regulations in effect at the time under Code Section 280G specifically address the status of such benefits or the method for their valuation, the characterization afforded to such benefits by the Regulations, together with the methods prescribed for their valuation, shall be controlling. (ii) In the event such Regulations do not address the status of the benefits in dispute, the matter shall be submitted for resolution to independent counsel mutually acceptable to you and the Company ("Independent Counsel"). The resolution reached by Independent Counsel shall be final and controlling. However, should the Independent Counsel determine that the status of the benefits in dispute can be resolved through the obtainment of a private letter ruling from the Internal Revenue Service, a formal and proper request for such ruling shall be prepared and submitted by Independent Counsel, and the determination made by the Internal Revenue Service in the issued ruling shall be controlling. All expenses incurred in connection with the retention of Independent Counsel and (if applicable) the preparation and submission of the ruling request shall be paid by the Company. The full amount of your severance benefit under Paragraph 1 shall not be paid to you until any amounts in dispute under this Paragraph 5(b) have been resolved in accordance herewith. However, any portion of such severance payment or such accelerated balance of your Performance Plan accounts which would not otherwise exceed the benefit limitation of Paragraph 5(a) even if all amounts in dispute under this Paragraph 5(b) were to be resolved against you will be paid to you in accordance with the applicable provisions of this letter agreement. (c) OVERRIDING LIMITATION. You will in all events be entitled to receive the full amount of your severance payment under Paragraph 1, to the extent that benefit, when added to the present value of your Option Parachute Payment and your Other Parachute Payments (excluding such severance payment), will nevertheless qualify as reasonable compensation within the standards established under Code Section 280G(b)(4). 5. Paragraph 7 of Part Four of the existing Severance Agreement is hereby amended in its entirety to read as follows: 7. ARBITRATION Except for the dispute resolution procedure in Paragraph (b) of Section 5 of Part Three of your Severance Agreement, any controversy that may arise between you and the Company with respect to the construction, interpretation or application of any of the terms, provisions or conditions of your Severance Agreement (as amended by this letter agreement) or any monetary claim arising from or relating to your Severance Agreement will be submitted to final and binding arbitration in San Diego, California in accordance with the rules of the American Arbitration Association then in effect. The prevailing party in the arbitration shall be entitled to the recovery of all reasonable attorney's fees and costs incurred with respect to the arbitration. Both parties understand and agree that the arbitration shall be instead of any civil litigation and that the arbitrator's decision shall be final and binding to the fullest extent permitted by law and enforceable by any court having jurisdiction thereof. This letter agreement will be binding upon the Company, its successors and assigns (including, without limitation, the surviving entity in any Change in Control) and is to be construed and interpreted under the laws of the State of California applicable to agreements executed and to be wholly performed within the State of California. All terms of your February 19, 1997 Severance Agreement shall remain in full force and effect, except to the extent those terms are expressly modified by the terms of this letter agreement. Any severance benefits to which you may become entitled upon the termination of your employment with the Company will be governed solely by the terms of your Severance Agreement (as modified hereby). Please indicate your acceptance of the foregoing amendments to your February 19, 1997 Severance Agreement by signing the enclosed copy of this letter and returning it to the Company not later than February 4, 2000. Very truly yours, ENCAD, INC. By: /s/ Charles E. Volpe ---------------------- Name: Charles E. Volpe Title: Director ACCEPTANCE I hereby agree to and accept all the modifications made by the terms and provisions of the foregoing letter agreement to the severance benefits to which I may become entitled under my existing Severance Agreement upon a termination of my employment under certain prescribed circumstances following a Change in Control of the Company. Dated: , 2000 ---------- /s/ David A. Purcell -------------------------------------- DAVID A. PURCELL EX-10.19 3 EXHIBIT 10.19 EXHIBIT 10.19 AMENDMENT TO FORM OF SEVERANCE LETTER AGREEMENTS BETWEEN THE COMPANY AND EACH OF ITS OFFICERS Mr. ENCAD, Inc. 6059 Cornerstone Court West San Diego, CA 92121 Dear Mr. We are pleased to inform you that the Company's Board of Directors has recently approved an amendment to the special severance benefit program established for you pursuant to your letter agreement with the Company dated February 19, 1997 (the "Severance Agreement"). The changes which have been made to your existing Severance Agreement apply only to the severance benefits to which you may become entitled following a change in control of the Company and may be summarized as follows: (i) The period of time for which you will be protected following a change in control of the Company has been increased so that if your employment now terminates under certain circumstances within _______ (___) months following a change in control, you will be eligible to receive your severance benefits under the amended Severance Agreement. (ii) The multiple of salary and bonus to which you may become entitled under the amended Severance Agreement as a cash severance payment in connection with the termination of your employment following a change in control HAS BEEN INCREASED FROM ONE TIMES YOUR TOTAL COMPENSATION TO [____] TIMES SUCH TOTAL COMPENSATION AND will now be paid to you in a lump sum rather than through a series of payments over a one-year period. (iii) There will no longer be a non-compete covenant or other restrictive covenants in effect following your termination of employment in connection with a change in control of the Company. The purpose of this letter agreement is to set forth those changes in more detail so that your Severance Agreement will be formally amended by this new letter agreement. Unless specifically noted in this letter, all of the terms and conditions of your existing Severance Agreement will be preserved, and all capitalized terms in this letter agreement will have the same meanings assigned to those terms in your Severance Agreement as in effect immediately prior to this amendment. 1. The introductory paragraph to Part Three of your existing Severance Agreement is hereby amended in its entirety to read as follows: PART THREE -- CHANGE IN CONTROL BENEFITS Upon your Termination Without Cause or Resignation for Good Cause within _____________ (____) months following a Change in Control and seven (7) days after your execution of a General Release in favor of the Company within three (3) days after such Termination Without Cause or Resignation for Good Cause, as the case may be, then (provided such General Release is not revoked by you prior to the end of the Revocation Period), you shall become entitled to receive the special severance benefits provided in this Part Three in substitution of the severance benefits set forth in Part Two hereof. However, your severance benefits under this Part Three shall be subject to the benefit limitation of Paragraph 5 of this Part Three. 2. Paragraph 1 of Part Three of your Severance Agreement is hereby amended and restated in its entirety to read as follows: 1. CIC SEVERANCE PAYMENT. You shall be entitled to the following CIC Severance Payment: AMOUNT. You shall be entitled to a CIC Severance Payment in an amount equal to _____ (__) times your Total Compensation determined as of the date of your Termination Without Cause or Resignation for Good Cause. FORM. Your CIC Severance Payment will be paid in a lump sum payment (subject to all applicable withholding taxes) within thirty (30) days after your Termination Without Cause or Resignation for Good Cause. OTHER TERMINATIONS. You will not be entitled to receive any CIC Severance Payment or any other benefits under this letter agreement in the event your employment terminated by reason of your death, disability or your Termination for Cause. 3. The restrictive covenants set forth in Paragraph 4 of Part Three of your Severance Agreement will no longer be applicable in the event you receive benefits under this Part Three following your Termination Without Cause or Resignation for Good Cause within _________ (_____) months after a Change in Control. 4. Paragraph 7 of Part Four of the existing Severance Agreement is hereby amended in its entirety to read as follows: 7. ARBITRATION Except for the dispute resolution procedure in Paragraph (b) of Section 5 of Part Three of your Severance Agreement, any controversy that may arise between you and the Company with respect to the construction, interpretation or application of any of the terms, provisions or conditions of your Severance Agreement (as amended by this letter agreement) or any monetary claim arising from or relating to your Severance Agreement will be submitted to final and binding arbitration in San Diego, California in accordance with the rules of the American Arbitration Association then in effect. The prevailing party in the arbitration shall be entitled to the recovery of all reasonable attorney's fees and costs incurred with respect to the arbitration, as awarded by the arbitrator. Both parties understand and agree that the arbitration shall be instead of any civil litigation and that the arbitrator's decision shall be final and binding to the fullest extent permitted by law and enforceable by any court having jurisdiction thereof. This letter agreement will be binding upon the Company, its successors and assigns (including, without limitation, the surviving entity in any Change in Control) and is to be construed and interpreted under the laws of the State of California applicable to agreements executed and to be wholly performed within the State of California. All terms of your February 19, 1997 Severance Agreement shall remain in full force and effect, except to the extent those terms are expressly modified by the terms of this letter agreement. Any severance benefits to which you may become entitled upon the termination of your employment with the Company will be governed solely by the terms of your Severance Agreement (as modified hereby). Please indicate your acceptance of the foregoing amendments to your February 19, 1997 Severance Agreement by signing the enclosed copy of this letter and returning it to the Company not later than February 4, 2000. Very truly yours, ENCAD, INC. By: /s/ David A. Purcell --------------------------- Title: Chairman, President and CEO ACCEPTANCE I hereby agree to and accept all the modifications made by the terms and provisions of the foregoing letter agreement to the severance benefits to which I may become entitled under my existing Severance Agreement upon a termination of my employment under certain prescribed circumstances following a Change in Control of the Company. Dated: , 2000 ----------------- Signature: --------------------------- Printed Name: ------------------------- EX-10.20 4 EXHIBIT 10.20 EXHIBIT 10.20 FORM OF SEVERANCE LETTER AGREEMENTS BETWEEN THE COMPANY AND EACH OF ITS VICE PRESIDENTS Mr. ENCAD, Inc. 6059 Cornerstone Court West San Diego, CA 92121 Dear We are pleased to inform you that the Company's Board of Directors has recently approved a special severance benefit program for you. The purpose of this letter agreement is to set forth the terms and conditions of your benefit package and to explain the limitations which will govern the overall value of your benefits. Your severance benefits may become payable under if your employment terminates under certain circumstances within a specified time period following a substantial change in ownership or control of the Company. To understand the full scope of your severance benefits, you should familiarize yourself with the definitional provisions of Part One of this letter agreement. The benefits comprising your severance package are detailed in Part Two, and the dollar limitations on the overall value of your benefit package and other applicable restrictions are specified in Parts Three and Four. Part Five deals with ancillary matters affecting your severance arrangement. PART ONE -- DEFINITIONS For purposes of this letter agreement, the following definitions will be in effect: AVERAGE COMPENSATION means the average of your W-2 wages from the Company for the five (5) calendar years (or such fewer number of calendar years of employment with the Company) completed immediately prior to the calendar year in which the Change of Control is effected. Any W-2 wages for a partial year of employment will be annualized, in accordance with the frequency which such wages are paid during such partial year, before inclusion in your Average Compensation. BASE SALARY means the annual rate of base salary in effect for you immediately prior to the Change in Control or (if greater) the annual rate of base salary in effect at the time of the termination of your employment Without Cause. BOARD means the Company's Board of Directors. CAUSE means the following: (i) dishonesty resulting or intending to result, directly or indirectly, in gain or personal enrichment at the expense of the Company; (ii) gross misconduct, including, without limitation, fraud, sexual harassment or misappropriation of Company property or confidential information; (iii) conviction for a felony under the laws of the United States or any state thereof; or (iv) willful and continued failure substantially to perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness), which is not remedied within a reasonable period after a written demand for substantial performance is delivered to you which specifically identifies the manner in which it is believed that you have not substantially performed your duties. CHANGE IN CONTROL means: (i) a merger or consolidation in which securities possessing more than 50% of the total combined voting power of the Company's outstanding voting securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction; (ii) a sale, transfer or other disposition of all or substantially all of the assets of the Company in liquidation or dissolution of the Company; (iii) the acquisition of beneficial ownership, by any person or a group of related persons, of securities possessing twenty-five percent (25%) or more of the total combined voting power of the Company's outstanding voting securities pursuant to a third-party tender or exchange offer made directly to the Company's shareholders, private purchases from one or more of the Company's shareholders, open market purchases or any other transaction; (iv) the acquisition of beneficial ownership, by any person or a group of related persons, of additional securities of the Company that increase the total holdings of such person (or group) to a level of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding voting securities pursuant to a third-party tender or exchange offer made directly to the Company's shareholders, private purchases from one or more of the Company's shareholders, open market purchases or any other transaction; (v) the acquisition of beneficial ownership, by any person or a group of related persons, of securities of the Company possessing sufficient voting power in the aggregate to elect an absolute majority of the members of the Board (rounded up to the nearest whole number) pursuant to a third-party tender or exchange offer made directly to the Company's shareholders, private purchases from one or more of the Company's shareholders, open market purchases or any other transaction; or (vi) a change in the composition of the Board over a period of twenty-four (24) consecutive months or less such that a majority of the Board ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (a) have been Board members continuously since the beginning of such period or (b) have been elected or nominated for election as Board members during such period by at least a two-thirds majority of the Board members described in clause (a) who were still in office at the time such election or nomination was approved by the Board. CODE means the Internal Revenue Code of 1986, as amended. COMMON STOCK means the Company's common stock. COMPANY means ENCAD, Inc. or any successor corporation, whether or not resulting from a Change in Control. FAIR MARKET VALUE means, with respect to any shares of Common Stock subject to any of your Options, the closing selling price per share of Common Stock on the date in question, as reported on the Nasdaq National Market. If there is no reported sale of Common Stock on such date, then the closing selling price on the next preceding day for which there exists such quotation will be determinative of Fair Market Value. GENERAL RELEASE means the form of general release attached to this letter as EXHIBIT A. OPTION means any option granted to you under the Plan which is outstanding at the time of the Change in Control or upon the subsequent termination of your employment. OPTION PARACHUTE PAYMENT means, with respect to any Option, the portion of that Option deemed to be a parachute payment under Code Section 280G and the Treasury Regulations issued thereunder. The portion of such Option which is categorized as an Option Parachute Payment will be calculated in accordance with the valuation provisions established under Code Section 280G and the applicable Treasury Regulations and will include an appropriate dollar adjustment to reflect the lapse of your obligation to remain in the Company's employ as a condition to the vesting of the accelerated installment. In no event, however, will the Option Parachute Payment attributable to any Option (or accelerated installment) exceed the spread (the excess of the Fair Market Value of the accelerated option shares over the option exercise price payable for those shares) existing at the time of acceleration. OTHER PARACHUTE PAYMENT means any payment in the nature of compensation (other than the benefits to which you become entitled under Part Two of this letter agreement) which are made to you in connection with the Change in Control and which accordingly qualify as parachute payments within the meaning of Code Section 280G(b)(2) and the Treasury Regulations issued thereunder. Your Other Parachute Payment will include (without limitation) the Present Value, measured as of the Change in Control, of the aggregate Option Parachute Payment attributable to your Options (if any). PARACHUTE PAYMENT means any payment or benefit provided you under Part Two of this letter agreement which is deemed to constitute a parachute payment within the meaning of Code Section 280G(b)(2) and the Treasury Regulations issued thereunder. PLAN means (i) the Company's 1993 Stock Option/Stock Issuance Plan, as amended or restated from time to time, and (ii) any successor stock incentive plan subsequently implemented by the Company. PRESENT VALUE means the value, determined as of the date of the Change in Control, of any payment in the nature of compensation to which you become entitled in connection with the Change in Control or the subsequent termination of your employment, including (without limitation) any Option Parachute Payment and the additional benefits to which you become entitled under Part Two of this letter agreement. The Present Value of each such payment shall be determined in accordance with the provisions of Code Section 280G(d)(4), utilizing a discount rate equal to one hundred twenty percent (120%) of the applicable Federal rate in effect at the time of such determination, compounded semi-annually to the effective date of the Change in Control. TOTAL COMPENSATION means: (i) if a Change in Control occurs before January 1, 2001 AND prior to the payment of your 2000 annual bonus, the aggregate of: (a) Base Salary; (b) your target annual award in effect at the time of the Change in Control; and (c) the value of all general benefits and all supplemental benefits or perquisites (including, without limitation, financial planning services, annual physical examination, and supplemental disability and life insurance premiums; but excluding any auto allowance) made available to you in the fiscal year immediately preceding the fiscal year of your termination, and in the event that you were not employed during the entire fiscal year described in (c) above, such amounts will be annualized in accordance with the frequency for which the amounts were paid during the partial year; or (ii) if a Change in Control occurs after December 31, 2000 OR subsequent to the payment of your 2000 annual bonus, the aggregate of: (a) Base Salary; (b) the average cash bonuses paid to you by the Company for services rendered during the two (2) fiscal years immediately preceding the fiscal year of your termination; and (c) the value of all general benefits and all supplemental benefits or perquisites (including, without limitation, financial planning services, annual physical examination, and supplemental disability and life insurance premiums; but excluding any auto allowance) made available to you in the fiscal year immediately preceding the fiscal year of your termination, and in the event that you were not employed during the entire period described in (b) or (c) above, such amounts will be annualized in accordance with the frequency for which the amounts were paid during the partial period. WITHOUT CAUSE means that the Company has without Cause and without your written consent: (i) terminated your services with the Company; (ii) materially reduced your job title, duties, and material responsibilities with the Company; (iii) reduced your compensation (including base salary, fringe benefits and participation in non-discretionary bonus programs under which awards are payable pursuant to objective financial or performance standards) by more than fifteen percent (15%); or (iv) required that you be based at a location more than twenty-five (25) miles from the Company's present location. PART TWO -- CHANGE IN CONTROL BENEFITS Subject to the release requirement of Part Four of this letter agreement, should your employment be terminated Without Cause within ___________ months after a Change in Control, then you will become entitled to receive the special severance benefits provided in this Part Two. You will be entitled to a lump sum payment equal to _______ times your Total Compensation and payable within thirty (30) days after your termination Without Cause. Your payments will be subject to the Company's collection of applicable federal and state income and employment withholding taxes. PART THREE -- LIMITATION ON BENEFITS 1. BENEFIT LIMIT. The aggregate Present Value (measured as of the Change in Control) of the severance payment to which you become entitled under Part Two at the time of your termination Without Cause will in no event exceed 2.99 times your Average Compensation, less the Present Value, measured as of the Change in Control, of all Other Parachute Payments to which you are entitled (the "Benefit Limit"). 2. RESOLUTION PROCEDURE. For purposes of the foregoing Benefit Limit, the following provisions will be in effect: (a) In the event there is any disagreement between you and the Company as to whether one or more payments to which you become entitled in connection with either the Change in Control or the subsequent termination of employment Without Cause constitute Parachute Payments, Option Parachute Payments or Other Parachute Payments or as to the determination of the Present Value thereof, such dispute will be resolved as follows: (i) In the event temporary, proposed or final Treasury Regulations in effect at the time under Code Section 280G (or applicable judicial decisions) specifically address the status of any such payment or the method of valuation therefor, the characterization afforded to such payment by the Regulations (or such decisions) will, together with the applicable valuation methodology, be controlling. (ii) In the event Treasury Regulations (or applicable judicial decisions) do not address the status of any payment in dispute, the matter will be submitted for resolution to independent counsel mutually acceptable to you and the Company ("Independent Counsel"). The resolution reached by Independent Counsel will be final and controlling; PROVIDED, however, that if in the judgment of Independent Counsel the status of the payment in dispute can be resolved through the obtainment of a private letter ruling from the Internal Revenue Service, a formal and proper request for such ruling will be prepared and submitted by Independent Counsel, and the determination made by the Internal Revenue Service in the issued ruling will be controlling. All expenses incurred in connection with the retention of Independent Counsel and (if applicable) the preparation and submission of the ruling request shall be shared equally by you and the Company. (iii) In the event Treasury Regulations (or applicable judicial decisions) do not address the appropriate valuation methodology for any payment in dispute, the Present Value thereof will, at the Independent Counsel's election, be determined through an independent third-party appraisal, and the expenses incurred in obtaining such appraisal shall be shared equally by you and the Company. 3. STATUS OF BENEFITS. (a) No severance payment will be made to you under Part Two of this letter agreement until the Present Value of the Option Parachute Payment attributable to your Options (if any) have been determined and the status of any payments in dispute under Paragraph 2 above has been resolved in accordance therewith. (b) Once the requisite determinations under Paragraph 2 have been made, then to the extent the aggregate Present Value, measured as of the Change in Control, of the Parachute Payment attributable to your benefit entitlements under Part Two of this letter agreement would, when added to the Present Value of all your Other Parachute Payments (including the Option Parachute Payment attributable to your Options (if any)), exceed the Benefit Limit, your severance payment will be accordingly reduced. PART FOUR -- RELEASE You will be entitled to receive the special severance benefits provided in Part Two of this letter agreement only upon: (i) execution of the General Release (that is not subsequently revoked within seven (7) days) to the Company within three (3) days of your termination Without Cause and (ii) expiration of the seven (7)-day period following your execution of the General Release. PART FIVE -- GENERAL 1. TERMINATION FOR CAUSE. Should your employment be terminated for Cause, the Company will only be required to pay you (i) any unpaid compensation earned for services previously rendered through the date of such termination and (ii) any accrued but unpaid vacation benefits or sick days, and no benefits will be payable to you under Part Two of this letter agreement. 2. DEATH. Should you die before receipt of the severance payment to which you become entitled under this letter agreement, then that payment will be made to the executors or administrators of your estate. 3. GENERAL CREDITOR STATUS. The payments and benefits to which you become entitled hereunder will be paid, when due, from the general assets of the Company, and no trust fund, escrow arrangement or other segregated account will be established as a funding vehicle for such payment. Accordingly, your right (or the right of the personal representatives or beneficiaries of your estate) to receive any payments or benefits hereunder will at all times be that of a general creditor of the Company and will have no priority over the claims of other general creditors. 4. INDEMNIFICATION. If applicable, the indemnification provisions for Officers and Directors under the Company by-laws will (to the maximum extent permitted by law) be extended to you, during the period following your termination Without Cause, with respect to any and all matters, events or transactions occurring or effected during your employment with the Company. 5. MISCELLANEOUS. This letter agreement will be binding upon the Company, its successors and assigns (including, without limitation, the surviving entity in any Change in Control) and is to be construed and interpreted under the laws of the State of California applicable to agreements executed and to be wholly performed within the State of California. This letter agreement supersedes all prior agreements between you and the Company relating to the subject of severance benefits payable upon a change in control or ownership of the Company, and you will not be entitled to any other severance benefits upon your termination of employment. This letter may only be amended by written instrument signed by you and an authorized officer of the Company. If any provision of this letter agreement as applied to you or the Company or to any circumstance should be adjudged by a court of competent jurisdiction to be void or unenforceable for any reason, the invalidity of that provision will in no way affect (to the maximum extent permissible by law) the application of such provision under circumstances different from those adjudicated by the court, the application of any other provision of this letter agreement, or the enforceability or invalidity of this letter agreement as a whole. Should any provision of this letter agreement become or be deemed invalid, illegal or unenforceable in any jurisdiction by reason of the scope, extent or duration of its coverage, then such provision will be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended without materially altering the intention of the parties, then such provision will be stricken and the remainder of this letter agreement will continue in full force and effect. 6. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this letter agreement is intended to provide you with any right to continue in the employ of the Company (or any subsidiary) for any period of specific duration or interfere with or otherwise restrict in any way your rights or the rights of the Company (or any subsidiary), which rights are hereby expressly reserved by each, to terminate your employment at any time for any reason whatsoever, with or without cause. 7. REMEDIES. All rights and remedies provided pursuant to this letter agreement or by law will be cumulative, and no such right or remedy will be exclusive of any other. A party may pursue any one or more rights or remedies hereunder or may seek damages or specific performance in the event of another party's breach hereunder or may pursue any other remedy at law or in equity, whether or not stated in this letter agreement. 8. ARBITRATION. Except for the dispute resolution procedure in Paragraph 2 of Part Three of this letter agreement, any controversy that may arise between you and the Company with respect to the construction, interpretation or application of any of the terms, provisions or conditions of this agreement or any monetary claim arising from or relating to this agreement will be submitted to final and binding arbitration in San Diego, California in accordance with the rules of the American Arbitration Association then in effect. The prevailing party in the arbitration shall be entitled to the recovery of all reasonable attorney's fees and costs incurred with respect to the arbitration. Both parties understand and agree that the arbitration shall be instead of any civil litigation and that the arbitrator's decision shall be final and binding to the fullest extent permitted by law and enforceable by any court having jurisdiction thereof. 9. EXCLUSIVE BENEFITS. Any severance benefits to which you may become entitled upon the termination of your employment will be governed solely by the terms of this letter agreement. Please indicate your acceptance of the foregoing by signing the enclosed copy of this letter and returning it to the Company. Very truly yours, ENCAD, INC. By: ----------------------------- Name: David Purcell Title: Chief Executive Officer ACCEPTANCE I hereby agree to all the terms and provisions of the foregoing letter agreement governing the special benefits to which I may become entitled upon a termination of my employment under certain prescribed circumstances. Dated: January____, 2000 ------------------------------------------ Name EX-10.42 5 EXHIBIT 10.42 EXHIBIT 10.42 EXECUTIVE LIFE PROGRAM COLLATERAL ASSIGNMENT SPLIT DOLLAR AGREEMENT BETWEEN THE COMPANY AND DAVID A. PURCELL, DATED DECEMBER 1, 1999 This Split Dollar Agreement is entered into as of December 1, 1999, by and between David A. Purcell, (the "Employee" or "Owner" when referred to in that capacity) and ENCAD, Inc. (the "Employer"). RECITALS Whereas, Employee is eligible for and wishes to participate in the Employer's Executive Life Program (the "Program"); and Whereas, Owner will be the sole owner and possessor of the Policy and assign an interest in the Policy's death benefit and cash value to the Employer as collateral to secure repayment of Employer's premium payments with respect to the Policy; and Whereas, it is the intent of the Employer and Owner to define the limited extent of the Employer's security interest in the Policy; Now, therefore, Employer and Owner mutually agree that: SECTION (1): INTERESTS IN THE POLICY CASH VALUES The Policy, which is the subject of this Split Dollar Agreement, is a variable universal life policy issued by Nationwide Life Insurance Company (the "Insurer") Policy Number **, on the life of the Employee. The Employer's interest in the cash value of the Policy (the "Employer's Interest") shall be equal to the sum of (a) plus (b), minus (c) where: (a) equals the total amount of the premium payments made on the Policy during the five Policy Years following the date of this Agreement, (b) equals the excess of the cash value of the Policy over the sum of the premiums paid during the five Policy Years following the date of this Agreement and the Owner's Interest as defined below, and (c) equals the total loans or distributions taken by the Employer as described in Section (4) below. The Owner's interest in the cash value of the Policy (the "Owner's Interest") shall be equal to the cash value of the Policy, if any, in excess of the premium payments made on the Policy during the five years following the date of this Agreement, but in no event greater than, **, and then reduced by the amount of any distributions from the cash value of the Policy made to the Owner as permitted by this Agreement. Notwithstanding anything in this Agreement to the contrary, in the event of the bankruptcy or insolvency of the Employer during the term of this Agreement, the Policy, including the Owner's Interest therein, shall be subject to the claims of creditors of the Employer. SECTION (2): PREMIUM PAYMENTS On or before the due date of each premium payment on the Policies, or within the grace period provided therein, Employer will pay the entire premium due on the Policy. The current intent of the Employer is to make premium payments as they are due until the termination of service of the Employee with the Employer, but the Employer shall have the unrestricted right to cease the payment of any or all premiums due at its discretion upon notice to the Owner of such intent. The Employee shall have imputed income each year in an amount equal to the annual cost of current death benefit protection on the life of the Employee, measured by the lower of (a) the PS 58 rate, as set forth in Revenue Ruling 55-747 (or the corresponding applicable provision of any future Revenue Ruling), or (b) the Insurer's current published premium rate for annually renewable term insurance for standard risks. ** CONFIDENTIAL TREATMENT REQUESTED SECTION (3): DEATH BENEFIT AMOUNTS In the event of the Employee's death prior to the termination of this Agreement, the death benefit payable to the Owner (or the Owner's designated beneficiaries) shall be equal to the present value at the time of Employee's death of the distributions which may be permitted to the Owner under this Agreement as defined in Section (4) below had the Employee survived, reduced by the amount of any distributions payable to the Owner from the cash value during the lifetime of the Employee, except that in no event, shall the amount of the death benefit to be received by the Owner (or the Owner's designated beneficiaries) be less than **. For purposes of this Agreement, the present value of the distributions which may be permitted to the Owner under this Agreement shall be calculated assuming a discount rate of seven percent (7%). In the event of Employee's death prior to the termination of this Agreement, the death benefit payable to the Employer (or the Employer's designated beneficiaries) under this Agreement shall be equal to the excess of the total death proceeds under the Policy less the amount payable to the Owner (or the Owner's designated beneficiaries) as defined above. Owner understands that sufficiency of cash value in the Policy to provide expected amounts of death benefit under this Agreement may vary as a result of Policy performance and duration of premium payments and this is in no event guaranteed by the Employer or the Insurer. The Employer makes no representation or warranty as to the merits or risks of the investment performance of the Policy. SECTION (4): OWNERSHIP AND RIGHTS IN THE POLICY The Policy will be owned exclusively by the Owner or the Owner's Assignee (for purposes of this Agreement, Owner's Assignee shall be included in the definition of Owner). Any rights in the Policy other than those specifically mentioned in this Agreement must be exercised with the written consent of both the Owner and the Employer (for purposes of this Agreement, Employer's Assignee shall be included in the definition of Employer). EMPLOYER'S RIGHTS. While this Agreement is in effect, the Employer has a security interest in the Policy limited exclusively to: (a) that portion of the cash value of the Policy equal to the Employer's Interest in the Policy; or (b) the death benefit payable to the Employer as set forth in Section 3, above. The Employer shall be permitted to receive a distribution from the Policy in the form of a policy loan or withdrawal, but only to the extent of its Interest as set forth in this Agreement. In addition, the Employer shall have the right to make any investment choices permitted by the Policy with respect to the cash value of the Policy, and Owner shall agree to waive this right as long as this Agreement remains in force in accordance with the established procedures of the Insurer. OWNER'S RIGHTS. The Owner's rights include the right to irrevocably assign any of their rights under the Policy, with the consent of the Employer and the Insurer and to select and change beneficiaries to receive Owner's death benefits. The Owner will not be permitted to borrow against, or partially or totally surrender the Policy as long as the Collateral Assignment remains in force. The Owner shall not be permitted to receive a distribution from the cash value of the Policy while the Split Dollar Agreement remains in force, except in accordance with the following rules: the Owner shall not receive a distribution from the cash value of the Policy prior to the termination of the Employee's service with the Employer. Beginning on the first day of the sixth Policy Year, as defined in the Policy, the Owner may begin to receive distributions from the Owner's Interest in the cash value of the Policy. The distribution shall be made annually and shall be limited to an amount of * *, and shall continue for a total of 10 years, or until the Owner's Interest is exhausted. ** CONFIDENTIAL TREATMENT REQUESTED SECTION (5): ASSIGNMENT OF POLICY TO SECURE EMPLOYER'S PAYMENTS To secure Employer's Interest in the Policy under this Agreement, Owner will collaterally assign the Policy to the Employer by signing the separate Collateral Assignment. The Collateral Assignment cannot be altered without the Employer's, Owner's, and Insurer's consent. SECTION (6): TERMINATION OF SPLIT DOLLAR AGREEMENT This Split Dollar Agreement, and all obligations of the Employer to pay premiums under it, will terminate upon the earliest to occur of the following: a) Death of the Employee; b) Written agreement of both the Owner and the Employer to terminate this Agreement; and, c) Failure of the Employee or Owner to complete all necessary requirements for the Insurer to issue a policy, including the waiver of investment choices; and, Upon Termination of this Agreement, the Employer shall receive the Employer's Interest in the Policy as soon as is practical, but in no event shall receipt be later than sixty (60) days from the earliest of the dates listed above. In the event of termination of this Agreement for reason other than the death of the Employee, the Employer's Interest in the Policy and under this Agreement shall be satisfied either directly from the cash value of the Policy or by direct payment by the Owner, at the discretion of the Owner. In this event, the recovery of the Employer's Interest shall be limited to the cash value of the Policy at that time. In the event of Termination of this Agreement by reason of the death of the Employee, the Employer's Interest in the Policy and under this Agreement shall be satisfied through direct payment from the Insurer from the Policy proceeds. SECTION (7): PAYMENT OF PROCEEDS OR CASH VALUE TO EMPLOYER Upon receipt of the Employer's Interest in the Policy, as provided in Section 1 above, whether from the Policy, or from the Owner, the Employer will release the Collateral Assignment. Upon satisfaction of the Employer's Interest in the Policy, the Owner shall have unrestricted ownership to the Policy. Upon termination of this Split Dollar Agreement by reason of the death of the Insured, the Insurer in satisfaction of the Owner's obligations, will issue a check directly to the Employer as collateral assignee in an amount equal to the Employer's Interest in the Policy. SECTION (8): MISCELLANEOUS NOT AN EMPLOYMENT AGREEMENT. This Split Dollar Agreement does not in any way constitute an employment agreement, and the Employer reserves the right to terminate Employee's employment to the same extent as though the Split Dollar Agreement did not exist. This Split Dollar Agreement may be amended at any time by written agreement signed on behalf of the Employer and by the Owner. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Employer and its successors and assigns, and to the Employee and the Employee's successors, assigns, heirs, executor or personal representative, and beneficiaries. NOTICES. Any notice, consent or demand required or permitted under this Agreement shall be made in writing and shall be signed by the party making the notice, consent, or demand. Such notice shall sent by United States certified mail, postage pre-paid and shall be sent to the other party's last known address as shown on the records of the Employer. The date of such mailing shall be deemed to be the date of such notice, consent or demand. AMENDMENT OF AGREEMENT. This Agreement may be altered, amended or modified, including the addition of any additional policy provisions, by a written agreement signed by the Employer and the Owner. It shall be the responsibility of the Employer to notify the Insurer of any amendments or changes to this Agreement. GOVERNING LAW. This Agreement shall be governed by and be construed in accordance with the laws of the State of California. SECTION (9): NAMED FIDUCIARY The Employer is designated as the Named Fiduciary of this Agreement for purposes of the Employee Retirement Income Security Act of 1974, as amended. The business address and telephone number of the Named Fiduciary are as follows: ENCAD, Inc. C/O Sheryl Roland 6059 Cornerstone Court West San Diego CA 92122-3734 The Named Fiduciary shall have the authority to control and manage the operation and administration of the Executive Life Program, of which this Agreement forms a part thereof. The Named Fiduciary is empowered to construe and interpret the terms of the Program and this Agreement, to supply omissions consistent with the intent of the Program and the Agreement, and to make all determinations and resolve all disputes regarding eligibility for and the amount of, benefits under the Program and Agreement, consistent with the terms of the Policy. The Named Fiduciary may delegate some or all of its duties and responsibilities to another person or entity (e.g. a committee designated by the Employer), including persons who are not Named Fiduciaries. Any decisions and determinations made by the Named Fiduciary (or its delegate) shall be conclusive and binding on all parties. The Named Fiduciary shall have the sole discretion of carrying out its responsibilities. Any person or entity claiming a benefit, requesting an interpretation or ruling under the Plan, or requesting information under the Plan (hereinafter referred to as "Claimant") shall present the request in writing to the Employer, which shall respond in writing as soon as practicable. If the claim or request is denied, the written notice of denial shall state the reason for denial, with specific reference to the provisions on which the denial is based, a description of any additional material or information required and an explanation of why it is necessary, and an explanation of the program's claims review procedure. SECTION (10): CLAIMS PROCEDURES Any person or entity claiming a benefit, requesting an interpretation or ruling under the Plan, or requesting information under the Plan (hereinafter referred to as "Claimant") shall present the request in writing to the Employer, which shall respond in writing as soon as practicable. If the claim or request is denied, the written notice of denial shall state the reason for denial, with specific reference to the provisions on which the denial is based, a description of any additional material or information required and an explanation of why it is necessary, and an explanation of the program's claims review procedure. REVIEW OF CLAIM. Any Claimant whose claim or request is denied or who has not received a response within sixty (60) days may request a review by notice given in writing to the Employer. Such request must be made within sixty (60) days after receipt by the Claimant of the written notice of denial, or in the event Claimant has not received a response sixty (60) days after receipt by the Employer of Claimant's claim or request. The claim or request shall be reviewed by the Employer which may, but shall not be required to, grant the Claimant a hearing. On review, the Claimant may have representation, examine pertinent documents, and submit issues and comments in writing. FINAL DECISION. The decision on review shall normally be made within sixty (60) days after the Employer's receipt of Claimant's claim or request. If an extension of time is required for a hearing or other special circumstances, the Claimant shall be notified and the time limit shall be one hundred twenty (120) days. The decision shall be in writing and shall state the reason and the relevant provisions. All decisions on review shall be final and bind all parties concerned. IN WITNESS WHEREOF, the Employer and the Owner or the Owner's Assignee have signed this Split Dollar Agreement, which is effective as of the effective date of the Policy described herein. /s/ Thomas L. Green --------------------------- OFFICER OF CORPORATION V.P. ---------------------------- TITLE /s/ Sheryl Roland /s/ David A. Purcell - -------------------------- --------------------------- WITNESS OWNER 11/8/99 --------------------------- DATE EX-10.43 6 EXHIBIT 10.43 EXHIBIT 10.43 SPLIT DOLLAR COLLATERAL ASSIGNMENT BETWEEN THE COMPANY AND DAVID A. PURCELL, DATED DECEMBER 1, 1999. OWNER: David A. Purcell shall ---------------------------------------------------- refer to the Employee, Third Party, or Trust, and his/her/its successors and assigns; ASSIGNEE: Encad, Inc. shall ---------------------------------------------------- refer to the Employer, And its successors and assigns; INSURER: Nationwide Life Insurance Company; ---------------------------------------------------- POLICY NO.: ** ---------------------------------------------------- INSURED: David A. Purcell; ---------------------------------------------------- SPLIT DOLLAR AGREEMENT: shall refer to the Agreement entered into between the Owner and the Assignee dated December 1, 1999, which is the subject of this Collateral Assignment. In consideration of the Split-Dollar Agreement (the "Agreement") entered into between the above named Assignee and Owner, Assignee and Owner agree as follows: a) The above numbered Policy is assigned by Owner to Assignee as collateral security of Owner's liability to Assignee as defined in the Agreement (the "Assignee's Interest"), subject to all terms and conditions of the Policy and to all superior liens, if any, which the Insurer may have against the Policy. b) The rights of the Owner and Assignee are specified in the Agreement. This Collateral Assignment is intended to provide direction to the Insurer as to the required signatures when either or both parties exercise certain policy rights. In accordance with the Split Dollar Agreement, the parties agree to the following limitations of the ability to exercise the rights provided under the Policy: DEATH BENEFITS The Owner shall have the right to receive from the Policy Proceeds, an amount determined in accordance with the Split Dollar Agreement and this Assignment. The Assignee shall have the right to receive the balance, if any, of the Policy Proceeds. Each Party shall have the right to designate and change the beneficiary or beneficiaries to receive its portion of the Policy Proceeds payable in accordance with the Split Dollar Agreement. Insurer may rely on the Assignee's representation as to the amount so set forth in the Split Dollar Agreement. CASH VALUES 1. INVESTMENT CHOICES: The Assignee shall have the right to exercise any investment choices permitted by the Policy with respect to the cash value of the Policy, and Owner shall agree to waive this right as long as this Agreement remains in force in accordance with the established procedures of the Insurer. 2. SURRENDERS, POLICY LOANS AND PARTIAL WITHDRAWALS: The Assignee shall be permitted to request and receive a distribution from the Policy in the form of a Policy Loan, a withdrawal of cash value or a partial surrender at an time without the prior consent of the Owner, except that such distribution shall ** CONFIDENTIAL TREATMENT REQUESTED 1 be limited to the Assignee's Interest in the Policy as defined in the Split Dollar Agreement. The Owner shall not have the right to request and receive a loan secured by Policy Cash Values without the express, written consent of the Assignee. The Owner shall not have the right to receive a distribution from the cash value of the Policy (in the form of a Cash Withdrawal, Partial Surrender or otherwise) prior to the termination of service by the Insured with the Assignee without the express, written consent of the Assignee. After the termination of service of the Insured with the Assignee, the Owner shall have the right to receive distributions from the Policy Cash Values, but only at the time and in the amount set forth in the Split Dollar Agreement. Insurer may rely on the Assignee's representation as to the amount so set forth in the Split Dollar Agreement and the manner in which the distribution is to be accomplished. 3. TERMINATION OF THE SPLIT DOLLAR AGREEMENT: In the event of the termination of the Split Dollar Agreement in accordance with the provisions thereof, the Assignee shall have the right to receive an amount equal to its Interest in the Policy payable from the cash values of the Policy (in the form of a Cash Withdrawal, Partial or Complete Surrender, Policy Loan or otherwise as chosen by the Assignee with out the consent of the Owner). Pursuant to the Split Dollar Agreement, the Owner may exercise the right to satisfy the Assignee's Interest in the Policy by direct payment to the Assignee. Insurer may rely on the Assignee's representation as to the amount of its Interest in the Policy set forth in the Split Dollar Agreement and the manner in which the distribution is to be accomplished. MISCELLANEOUS RIGHTS 1. Any other rights not provided for in this Collateral Assignment, including the right to surrender the Policy or exercise any non-forfeiture options under the Policy, shall require the written consent of both Owner and Assignee unless otherwise provided. 2. Insurer may rely on the Assignee's representation as to the amount of the Assignee's Interest in the Policy in accordance with the Split Dollar Agreement 3. Insurer may act on any request to exercise any right based on the required signatures as set forth in this Collateral Assignment, and Insurer has no duty to investigate the reason for any such exercise. Upon payment of any amounts from the Policy based on this request, during Insured's lifetime or at death, Insurer shall be fully discharged and released as to its actions. 4. Owner represents that there are no other collateral assignments of the Policy and no proceedings in bankruptcy are pending. 5. This Split-Dollar Collateral Assignment shall be binding upon the parties and their successors, assigns, devisees, personal representatives and other legal representatives. 6. In the event of any conflict between the terms specifying the required signatures in this Split-Dollar Collateral Assignment and the signatures required in the Agreement, the terms of this Split-Dollar Collateral Assignment shall prevail as to signatures. The Owner hereby assigns, transfers, and sets over the Policy to the Assignee, as collateral, to secure the rights of the Assignee as set out in this Collateral Assignment, and for no other purpose. The Policy shall remain subject to this assignment notwithstanding any assignment, transfer or conveyance of the Policy or any interest therein by the Owner. Nothing in this assignment shall change the rights and obligations of the Owner and the Company as set out herein, or in the Split Dollar Agreement as described in the preamble language of this Assignment. - -------------------------------------------------------------------------------- Agreed to this 1st day of December, 1999. If signing for an entity, the undersigned represents that she/he has authority to bind the entity. 2 ENCAD, Inc. - ------------------------------------------------------- ------------------------------------------------------- OWNER (Print name) ASSIGNEE (Print name of entity or individual) /s/ David A. Purcell /s/ Thomas L. Green, V.P. - ------------------------------------------------------- ------------------------------------------------------- SIGNATURE OF OWNER SIGNATURE OF ASSIGNEE (and if an entity print title of authorized signor) 6059 Cornerstone Court West, San Diego, CA 92121 - ------------------------------------------------------- ------------------------------------------------------- ADDRESS ADDRESS
================================================================================ Filed at the Home Office of the Insurer this ______ day of _______, 2000. By ----------------------------------- Authorized Officer 3 EX-10.44 7 EXHIBIT 10.44 EXHIBIT 10.44 AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS (ENCAD CORPORATE HEADQUARTERS) AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS ENCAD CORPORATE HEADQUARTERS BY AND BETWEEN ENCAD, INC, A DELAWARE CORPORATION, "SELLER" AND BIRTCHER PROPERTIES, A CALIFORNIA CORPORATION "BUYER" TABLE OF CONTENTS
Section Page Number Title Number - --------------------------------------------------------------------------------------------------------------------- 1. DEFINED TERMS...................................................................................1 1.1 Definitions..........................................................................1 1.1.1 Assignment of Intangible Property........................................1 1.1.2 Building Documents.......................................................1 1.1.3 Buyer's Conditions.......................................................1 1.1.4 Closing..................................................................1 1.1.5 Closing Date.............................................................1 1.1.6 Closing Office...........................................................1 1.1.7 Contract Period..........................................................2 1.1.8 Deed.....................................................................2 1.1.9 Effective Date...........................................................2 1.1.10 End of the Inspection Period.............................................2 1.1.11 End of the Financing Contingency Period..................................2 1.1.12 Exception Documents......................................................2 1.1.13 Improvements.............................................................2 1.1.14 Intangible Property......................................................2 1.1.15 Land.....................................................................2 1.1.16 Lender...................................................................2 1.1.17 New Lease................................................................3 1.1.18 Permitted Title Exceptions...............................................3 1.1.19 Plans and Specifications.................................................3 1.1.20 Project..................................................................3 1.1.21 Purchase Price...........................................................3 1.1.22 Survey...................................................................3 1.1.23 Title Commitment.........................................................3 1.1.24 Title Insurer............................................................3 1.1.25 Title Policy.............................................................3 2. PURCHASE PRICE..................................................................................4 2.1 Purchase Price.......................................................................4 2.2 Payment of Purchase Price............................................................4 3. INSPECTION OF PROJECT BY BUYER..................................................................4 3.1 Building Inspection and Documents....................................................5 3.1.1 Title Commitment.........................................................5 3.1.2 Survey...................................................................5 3.1.3 Operating Statements.....................................................5 3.1.4 Licenses and Permits.....................................................5 3.1.5 Plans and Specifications.................................................5 3.1.6 Soil Tests and Reports...................................................5 3.1.7 Inspection Reports.......................................................5 3.1.8 Warranties and Guaranties................................................5 3.1.9 Books and Records........................................................6 3.1.10 Agreements, Regulations and Orders.......................................6 3.1.11 Tax Bills................................................................6 3.1.12 Non-Foreign Person Affidavit.............................................6 3.2 Back-Up Information..................................................................6 3.3 Return of Building Documents.........................................................6
(i)
Section Page Number Title Number - --------------------------------------------------------------------------------------------------------------------- 3.4 License to Enter.....................................................................6 4. CONDITIONS TO CLOSING...........................................................................7 4.1 Buyer's Conditions to Closing........................................................7 4.1.1 Condition of Title.......................................................7 4.1.2 Survey Approval and Recertification......................................7 4.1.3 Inspection Approval......................................................8 4.1.4 Due Diligence Approval...................................................8 4.1.5 Investment Committee Approval............................................8 4.1.6 Financing Approval.......................................................8 4.1.7 Leaseback................................................................8 4.1.8 Seller's Deliveries.....................................................10 4.1.9 Subordination Agreement.................................................10 4.1.10 Representations and Warranties..........................................10 4.1.11 Seller's Authorization..................................................10 4.1.12 Title Policy............................................................10 4.1.13 No Change...............................................................10 4.1.14 Seller's Covenants......................................................10 4.2 Failure of Buyer's Conditions.......................................................10 4.3 Seller's Conditions to Closing......................................................10 4.3.1 Board of Director Approval..............................................10 4.3.2 Representations and Warranties..........................................11 4.4 Failure of Seller's Conditions......................................................11 5. COVENANTS OF SELLER............................................................................11 5.1 Seller's Covenants..................................................................11 5.1.1 Leasing Activities......................................................11 5.1.2 Payment of Obligations..................................................11 5.1.3 Insurance...............................................................11 5.1.4 Compliance with Laws....................................................11 5.1.5 Encumbrances............................................................11 5.1.6 Remove Liens............................................................11 5.1.7 Change in Representation and/or Warranty................................12 5.1.8 Maintenance.............................................................12 5.1.9 Permits and Licenses....................................................12 6. CLOSING........................................................................................12 6.1 Agreement to Constitute Escrow Instructions.........................................12 6.2 Closing Date; Closing...............................................................12 6.3 Items to be Delivered by Seller.....................................................12 6.4 Items to be Delivered by Buyer......................................................13 6.5 Directions to Title Insurer.........................................................13 6.6 Prorations and Other Adjustments....................................................13 6.6.1 Items of Expense........................................................13 6.6.2 Remittance Between Parties..............................................14 6.7 Possession..........................................................................14 6.8 Seller's Closing Costs..............................................................14 6.9 Buyer's Closing Costs...............................................................14 7. WARRANTIES.....................................................................................14 7.1 Representations and Warranties of Seller............................................14 7.1.1 Access; Adjacent Development............................................15
(ii)
Section Page Number Title Number - --------------------------------------------------------------------------------------------------------------------- 7.1.2 Leases..................................................................15 7.1.3 Authority...............................................................15 7.1.4 Conformance with Laws...................................................15 7.1.5 Disclosure and Compliance...............................................15 7.1.6 Disclosure of Adverse Change............................................15 7.1.7 No Adverse Soil Conditions..............................................15 7.1.8 No Bankruptcy Proceedings...............................................15 7.1.9 No Default..............................................................16 7.1.10 No Hazardous Wastes.....................................................16 7.1.11 No Infestation..........................................................16 7.1.12 No Litigation...........................................................16 7.1.13 No Notices..............................................................16 7.1.14 No Undisclosed Assessments..............................................16 7.1.15 No Untrue Statements....................................................17 7.1.16 No Violation of Other Agreements........................................17 7.1.17 Operating Statements....................................................17 7.1.18 Operation During Contract Period........................................17 7.1.19 Parking.................................................................17 7.1.20 Improvements............................................................17 7.1.21 Project Condition.......................................................17 7.1.22 Storm Water.............................................................17 7.1.23 Title to Real Property..................................................17 7.1.24 Utilities Available.....................................................18 7.1.25 Zoning and Other Governmental Information...............................18 7.2 Representations and Warranties of Buyer.............................................18 7.2.1 Required Approvals......................................................18 7.2.2 No Conflicts............................................................18 7.2.3 Adverse Change..........................................................18 7.2.4 Securities Compliance...................................................18 8. TERMINATION OF AGREEMENT.......................................................................18 8.1 Termination.........................................................................18 8.2 Liquidated Damages..................................................................19 9. REAL ESTATE COMMISSION.........................................................................19 9.1 Broker Compensation.................................................................19 9.2 No Other Broker.....................................................................20 10. ASSIGNMENT.....................................................................................20 10.1 Right of Assignment.................................................................20 11. MISCELLANEOUS..................................................................................20 11.1 Material Damage or Condemnation.....................................................20 11.2 Attorneys'and Other Fees............................................................21 11.3 Notices.............................................................................21 11.4 Time of Essence.....................................................................22 11.5 Waiver or Modification..............................................................22 11.6 Successors and Assigns; Survival....................................................22 11.7 Number and Gender...................................................................22 11.8 Governing Law.......................................................................22 11.9 Construction........................................................................23 11.10 Integration of Other Agreements.....................................................23
(iii)
Section Page Number Title Number - --------------------------------------------------------------------------------------------------------------------- 11.11 Duplicate Originals; Counterparts...................................................23 11.12 Non-Waiver of Rights................................................................23 11.13 Days................................................................................23 11.14 Incorporation of Exhibits...........................................................23 11.15 IRS Form 1099-S.....................................................................24 11.16 Further Assurances..................................................................24 11.17 Exclusive Right to Negotiate........................................................24
(iv) EXHIBIT 10.44 AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS (ENCAD CORPORATE HEADQUARTERS) THIS AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS ("Agreement") is made and entered into as of August ,1999, by and between ENCAD, INC., a Delaware corporation ("Seller"), and BIRTCHER PROPERTIES, a California corporation ("Buyer"), with reference to the following facts: A. Seller owns the "Project" (as that term is defined herein). B. Buyer desires to purchase and acquire the Project, on the terms and conditions set forth herein. C. Seller, by this Agreement, agrees with Buyer to sell, transfer, assign and convey the Project to Buyer, in accordance with the terms, provisions and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual promises, covenants, representations, conditions and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller hereby agrees to sell to Buyer, and Buyer hereby agrees to purchase from Seller, the Project, on the following terms and conditions: 1. DEFINED TERMS 1.1 Definitions. For the purposes of this Agreement defined terms, as indicated by initial capital letters, shall have the meanings set forth in this Article 1: 1.1.1 ASSIGNMENT OF INTANGIBLE PROPERTY. "Assignment of Intangible Property" shall mean an assignment of the Intangible Property executed by Seller in favor of Buyer, together with an acknowledgment thereof by Buyer, in a form approved by Buyer prior to the End of the Inspection Period. 1.1.2 BUILDING DOCUMENTS. "Building Documents" shall have the meaning set forth in SECTION 3.1. 1.1.3 BUYER'S CONDITIONS. "Buyer's Conditions" shall have the meaning set forth in SECTION 4.1. 1.1.4 CLOSING. "Closing" shall mean the delivery of the Deed and the other documents required to be delivered hereunder and the payment by Buyer to Seller of the Purchase Price for the Project. 1.1.5 CLOSING DATE. "Closing Date" shall mean the date on which the Closing occurs and shall occur on the date specified in SECTION 6.2 below. 1.1.6 CLOSING OFFICE. "Closing Office" shall mean the offices of First American Title Insurance Company in San Diego, California, or such other place as Buyer and Seller shall designate. 1.1.7 CONTRACT PERIOD. "Contract Period" shall mean the period commencing upon the Effective Date and ending upon the first to occur of the Closing or the termination of this Agreement. 1.1.8 DEED. "Deed" shall mean a grant deed conveying the Land and the Improvements, executed and acknowledged by Seller in favor of Buyer, in form and substance acceptable to Buyer, Buyer's counsel and the Title Insurer. The form and substance of the Deed shall be agreed upon by Buyer and Seller prior to the End of the Inspection Period. 1.1.9 EFFECTIVE DATE. "Effective Date" shall mean the date set forth in this first paragraph of this Agreement. 1.1.10 END OF THE INSPECTION PERIOD. "End of the Inspection Period" shall mean the date thirty (30) days after the later of (i) Seller has advised Buyer in writing that Seller has delivered to Buyer all of the Building Documents to be delivered to Buyer pursuant to SECTION 3.1 and Buyer has acknowledged, in writing, receipt of all such items, and (ii) the date Seller notifies Buyer of the approval of its Board of Directors as provided for in SECTION 4.3.1 below. 1.1.11 END OF THE FINANCING CONTINGENCY PERIOD. "End of Financing Contingency Period" shall mean the date forty-five (45) days after the approval of Seller's Board of Directors, Seller may contact Buyer's proposed Lender regarding the status of a potential loan at any time within fifteen (15) days prior to the End of the Financing Contingency Period. 1.1.12 EXCEPTION DOCUMENTS. "Exception Documents" shall have the meaning set forth in SUBSECTION 1.1.23. 1.1.13 IMPROVEMENTS. "Improvements" shall mean all buildings, parking lots, walks and walkways, fixtures and equipment (including, without limitation, all plumbing, electrical, heating, air conditioning and ventilating lines and systems, elevators, and boilers) and all other improvements located at or on or affixed to the Land to the full extent that such items constitute realty under the laws of the state in which the Project is located. 1.1.14 INTANGIBLE PROPERTY. "Intangible Property" shall mean the permits, certificates of occupancy and all similar items owned by Seller, including without limitation plans, specifications, maps, drawings, and other similar documents and/or items relating to the Project which are in Seller's possession. 1.1.15 LAND. "Land" shall mean all that certain land located at 5959 and 6059 Cornerstone Court West in the City of San Diego, California, known as "ENCAD Corporate Headquarters" and more particularly described in EXHIBIT "A" attached hereto, together with all appurtenances thereto, including without limitation all easements and rights to use adjacent properties, any land lying in the bed of any street, road or avenue, open or proposed, in front of, within or adjoining or adjacent to the Land, which are owned by Seller. The Land shall include any and all oil, gas, water and mineral rights and shares of stock pertaining to water or water rights, whether or not appurtenant thereto, ownership of which affects the Land, and all easements, rights of way, and other rights appurtenant thereto. 1.1.16 LENDER. "Lender" shall mean such bank, savings and loan association, insurance company, or other financial institution or private party if any, which shall provide the funds for Buyer's acquisition of the Project. 1.1.17 NEW LEASE. "New Lease" shall mean the leaseback between Buyer and Seller on the form of lease approved by Buyer and Seller pursuant to the provisions of SECTION 4.1.7 below. 1.1.18 PERMITTED TITLE EXCEPTIONS. "Permitted Title Exceptions" shall have the meaning set forth in SUBSECTION 4.1.1. 1.1.19 PLANS AND SPECIFICATIONS. "Plans and Specifications" shall mean the plans, specifications, and sepias for the Project, including as-built drawings and specifications for the Improvements, any drawings that have been prepared by Seller's architects or other professionals after completion of the Project and reflect the Improvements "as-built", and all architectural, structural, mechanical, electrical, and landscaping plans and specifications, surveys, engineering studies and reports, applicable flood plain maps and reports relating to the Project prepared prior to the Effective Date which Seller has in its possession or can reasonably obtain. 1.1.20 PROJECT. "Project" shall mean the Land, the Improvements and the Intangible Property, collectively. The Project shall include any and all rights appurtenant thereto which are owned by Seller. 1.1.21 PURCHASE PRICE. "Purchase Price" shall mean the aggregate consideration, specified in SECTION 2.1 below, to be paid by Buyer to Seller for the Project. 1.1.22 SURVEY. "Survey" shall mean an American Land Title Association ("ALTA") Survey of the Project and a plat of the results of such instrument survey, made by a surveyor or civil engineer duly licensed in the jurisdiction in which the Project is located, and certified to Buyer, Lender, and the Title Insurer in a manner that will permit the issuance of the Title Policy and in form and substance otherwise satisfactory to Buyer, Lender, and the Title Insurer. The Survey shall certify that it is made for Buyer, Lender, the Title Insurer and their successors and assigns, and shall be dated, signed and certified by the surveyor or engineer. 1.1.23 TITLE COMMITMENT. "Title Commitment" shall mean a binder, preliminary title report or commitment issued by the Title Insurer to Buyer providing for the issuance, at the Closing, to Buyer of the Title Policy. The Title Commitment shall state that Seller is the owner of the fee simple interest in the Land and Improvements and shall disclose, shall have attached to it, and shall mean and include, copies of all matters of record affecting the Land and Improvements and every other document referred to in the Title Commitment creating exceptions to title or encumbrances against the Project (collectively, "Exception Documents"). 1.1.24 TITLE INSURER. "Title Insurer" shall mean First American Title Insurance Company in San Diego, California. 1.1.25 TITLE POLICY. "Title Policy" shall mean the most current form of ALTA (extended coverage) Policy (either (i) a Lender's Policy and an Owner's Policy or (ii) a Joint Protection Policy, as appropriate) of Title Insurance, dated the date and time of Closing and with liability in the amount of the loan, if any, in favor of Lender, insuring Lender as to the priority of its lien, and with liability in the amount of the Purchase Price, insuring Buyer as owner of good, marketable and indefeasible fee title to the Land and Improvements, subject only to the Permitted Title Exceptions and such other exceptions over which Title Insurer is willing to insure that such exceptions will result in no loss to the Project or to Buyer; provided that such endorsements or other assurances from Title Insurer are in a form that is satisfactory to Buyer and Lender, in Buyer's and/or Lender's sole discretion. The Title Policy shall affirmatively insure (by endorsement or otherwise) that the property described therein (that is, the Land) is the same as is depicted on the Survey and that the Improvements are located thereon, and that none of the Permitted Title Exceptions are violated by the existence or current use of the Improvements. Seller shall pay all expenses directly associated with a CLTA policy, and Buyer shall pay all differential expenses associated in any manner with the ALTA policy. 2. PURCHASE PRICE 2.1 PURCHASE PRICE. The Purchase Price for the Project shall be Twelve Million Two Hundred Thousand Dollars ($12,200,000.00). 2.2 PAYMENT OF PURCHASE PRICE. The Purchase Price shall be payable all cash (or by cashier's check or same day federal funds wire transfer) at the Closing. 2.3 EARNEST MONEY DEPOSIT. Buyer agrees to cause an escrow (the "Escrow") to be opened with First American Title Insurance Company in San Diego, California ("Escrow Holder"), and Buyer shall deposit into the Escrow within five (5) days following the Effective Date Two Hundred Forty Thousand Dollars ($240,000.00) (the "Earnest Money Deposit"). The Earnest Money Deposit shall be made by delivering cash or certified funds to Escrow Holder. Any funds delivered to Escrow Holder shall be deposited by Escrow Holder in an insured interest bearing account or another account designated by Buyer. Interest accruing on the Earnest Money Deposit, if any, shall be held for the benefit of Buyer and, if so directed by Buyer, shall apply towards the payment of the Purchase Price. The Escrow shall be opened and maintained for the purpose of holding and disbursing monetary deposits and documents evidencing monetary amounts as directed by Buyer and Seller, and Escrow Holder is hereby directed to disburse funds held by it in accordance with the terms and provisions of this Agreement, or as otherwise directed in a writing signed by both Buyer and Seller. If this Agreement is terminated prior to or at the End of the Inspection Period and Buyer has made the Earnest Money Deposit, Escrow Holder is hereby instructed to promptly return the Earnest Money Deposit, together with any interest earned thereon, to Buyer. Similarly, if this Agreement is terminated after the End of the Inspection Period due to a default by Seller, Escrow Holder is hereby instructed to promptly return the Earnest Money Deposit, together with any interest earned thereon, to Buyer. If this Agreement is terminated after the End of the Inspection Period due to a default by Buyer, Escrow Holder is hereby instructed to promptly deliver the Earnest Money Deposit to Seller. These instructions shall be irrevocable and shall supersede any conflicting provision in Escrow Holder's general conditions or in any escrow instructions executed upon Escrow Holder's request. This Agreement shall constitute escrow instructions to Escrow Holder with respect to the Earnest Money Deposit, but Escrow Holder shall be concerned only with the receipt and deposit of funds and the disbursement of funds as provided in this Agreement, or as otherwise directed in writing by both Buyer and Seller, but shall not be otherwise concerned with the terms and provisions of this Agreement. At the Closing and at Buyer's request, Seller shall deliver to Buyer, in addition to all other deliveries required herein, an executed instruction directing the Escrow Holder to return the Earnest Money Deposit to Buyer, which instruction shall be in a form approved by Buyer and Escrow Holder. 3. INSPECTION OF PROJECT BY BUYER 3.1 BUILDING INSPECTION AND DOCUMENTS. Seller agrees to assist and cooperate with Buyer in obtaining access to the Project and certain documents relating thereto for the purpose of inspection. Seller agrees to provide Buyer and its agents, consultants and employees access to the Project to inspect each and every part thereof subject to the provisions of SECTION 3.4 hereof. To the extent such documents are in Seller's possession or control, Seller shall also deliver to Buyer, within ten (10) days after the Effective Date, the following documents and records relating to the Project, or make the same available to Buyer as herein provided (collectively "Building Documents"), for Buyer to inspect: 3.1.1 TITLE COMMITMENT. Two (2) copies of the Title Commitment issued by the Title Insurer, dated not earlier than the Effective Date. 3.1.2 SURVEY. Three (3) copies of the Survey. A survey completed before the Effective Date shall be sufficient provided that it is acceptable to the Title Insurer and that three (3) copies of a Survey completed and certified by the surveyor after the Effective Date shall be delivered to Buyer at least fifteen (15) days prior to the Closing Date. 3.1.3 OPERATING STATEMENTS. Income and expense statements for the Project for the two (2) most recent full calendar years prior to the Closing (or the period of time the Project has been in existence, if less than three (3) years) and, to the extent available, the current year, all of which shall be certified by the Chief Financial Officer of Seller, as having been prepared from the books and records of the Project in accordance with generally accepted accounting principles (except to the extent prepared on a cash or tax basis). Seller shall deliver to Buyer the above statements prepared in the ordinary course of business and relating to periods prior to the Closing, even if prepared after the Closing, promptly upon preparation thereof. All statements to be provided hereunder shall be certified by Seller as being true and correct and shall be prepared from the actual operations of the Project. Included in such information shall be a copy of any operating budgets for the Project for the current year and the next succeeding calendar year. Any statements provided hereunder shall include, to the extent available and to the extent applicable, itemization of all capital expenditures made during the respective periods. 3.1.4 LICENSES AND PERMITS. Copies of all licenses, all heating, ventilating, air conditioning, boiler, building and other permits, authorizations, approvals, certificates and similar items, and all certificates of occupancy and similar documents required in connection with the Project and/or the maintenance or operation thereof. 3.1.5 PLANS AND SPECIFICATIONS. Copies of all existing Plans and Specifications. 3.1.6 SOIL TESTS AND REPORTS. Soil and geological tests and reports relating to the Project. 3.1.7 INSPECTION REPORTS. Inspection reports relating to or referring to the construction and/or maintenance of the Improvements, if available. 3.1.8 WARRANTIES AND GUARANTIES. Copies of any and all written warranties and/or guaranties pertaining to the landscaping, roofs, plumbing, mechanical, electrical and heating and air conditioning systems, parking lots and equipment that are part of the Project, or Seller's certification that there are no such warranties or guaranties. 3.1.9 BOOKS AND RECORDS. Seller need not deliver, except as otherwise provided herein, but shall make available for Buyer's review and photocopying, all books and records covering the operations of the Project from the date any certificate of occupancy and/or building permit for the Project was originally issued by the appropriate governmental agency having jurisdiction over the Project, including, without limitation, monthly operating statements, cash receipt journals, and any and all invoices, receipts, and other items relating to operation, repair or maintenance of the Project. 3.1.10 AGREEMENTS, REGULATIONS AND ORDERS. Copies of all agreements, regulations and orders affecting the Project and the parking requirements for the operation of the Project, including, but not limited to, all such notices received by Seller during the two (2) year period immediately preceding the date of this Agreement. 3.1.11 TAX BILLS. Copies of the current tax bill(s) or notice(s) affecting the Project, as well as copies of the two (2) immediately preceding years' tax bills and notices of proposed increases or changes in the assessed value of the Project and any protests, complaints or appeals filed with respect thereto during the last two (2) years. 3.1.12 NON-FOREIGN PERSON AFFIDAVIT. An affidavit, executed by Seller and each person or entity comprising Seller, in a form approved by Buyer, certifying that Seller is not a "foreign person" within the meaning of Section 1445(f)(3) of the Internal Revenue Code of 1986, as amended. 3.2 BACK-UP INFORMATION. Seller shall deliver to Buyer or provide Buyer access to, within five (5) business days following the written request of Buyer, such back-up information and documents relating to the operating records of Seller with respect to the Project which Buyer may reasonably request, and which are in the possession of Seller or reasonably available to Seller and which are necessary to allow Buyer to perform its due diligence with respect to the transaction contemplated by this Agreement. 3.3 RETURN OF BUILDING DOCUMENTS. If this Agreement is terminated, then promptly following such termination, Buyer shall return to Seller the Building Documents and any other materials pertaining to the Project that Buyer has received from or through Seller. 3.4 LICENSE TO ENTER. Seller hereby agrees that, subject to prior written notice to Seller and prior scheduling with Seller, and Seller's agreement, not to be unreasonably withheld, Buyer and/or Buyer's agents, representatives, contractors and subcontractors may enter upon the Project prior to the Closing in order to conduct reasonable engineering studies, environmental tests and studies, soil and compaction tests and other tests and studies provided that Buyer shall be responsible for any damage caused thereby to the Property. Buyer shall be responsible for any liability, costs, claims, damage or injury caused by such entry and shall keep the Property free of any and all liens arising therefrom. Buyer shall indemnify and hold Seller harmless against such liability, costs, claims, demands, damage or injury. Buyer shall maintain commercial general liability insurance policies to cover Buyer's activities on the Project pursuant to this Section in such amounts as are reasonably required by Seller. Seller shall be named as an additional insured on such policies. Buyer shall deliver to Seller such evidence of compliance with such insurance requirements prior to entering the Project. The provisions of this Section shall survive the Closing and the termination of this Agreement, as applicable. 4. CONDITIONS TO CLOSING 4.1 BUYER'S CONDITIONS TO CLOSING. Buyer's obligation to acquire the Project, and the Closing, shall, in addition to any other conditions set forth herein, be conditional and contingent upon the satisfaction, or waiver by Buyer (in Buyer's sole and absolute discretion), of each and all of the following conditions (collectively "Buyer's Conditions"): 4.1.1 CONDITION OF TITLE. Buyer shall have approved those covenants, conditions, restrictions, rights of way, easements, reservations, and other matters of record disclosed in (i) the Title Commitment, (ii) the Exception Documents, and (iii) the Survey. Seller shall cause Title Insurer, promptly following the Effective Date of this Agreement, to issue the Title Commitment and to deliver to Buyer copies of all Exception Documents and copies of all documents referenced in any recorded memorandum, all at Seller's sole cost and expense. If Buyer disapproves of any matter disclosed in the Title Commitment, Buyer shall notify Seller of such disapproval within thirty (30) days following receipt of the Title Commitment and all Exception Documents in legible form and the Survey, and Seller shall have ten (10) days from receipt of such disapproval to agree to attempt to remove the disapproved matter; provided however, if Buyer fails within such thirty (30) day period to approve any matter disclosed in the Title Commitment or the Exception Documents, by written notice to Seller and Escrow Holder, then such matter shall be deemed disapproved by Buyer. Seller's agreement to attempt to remove such disapproved items shall not be deemed an agreement by Seller to remove such disapproved items nor shall Seller's failure to remove such disapproved items, for any reason whatsoever, be considered or deemed a default by Seller under, or a breach by Seller of, the terms of this Agreement. If Seller is successful in removing all disapproved matters, the Title Commitment and Exception Documents shall then be deemed approved, and this contingency shall be satisfied. If Seller does not agree to attempt to remove all disapproved matters, or if Seller is not successful in removing all disapproved matters, Buyer shall have five (5) days from the earlier of (i) the date Seller notifies Buyer that Seller will not attempt to remove or cannot remove disapproved matters, or (ii) ten (10) days from the date of Seller's receipt of Buyer's disapproval, if Seller does not agree to remove such disapproved matters, to either terminate this Agreement or agree to accept title to the Project subject to the disapproved matters that Seller cannot, or will not, remove. If Buyer does not notify Seller in writing within such five (5) day period of its willingness to accept title to the Project subject to those matters Seller cannot, or will not, remove, Buyer shall be deemed to have elected to terminate this Agreement. The exceptions to title that Buyer approves, or is deemed to have approved, under this SUBSECTION 4.1.1, and under the terms of SUBSECTION 4.1.2 below, shall be referred to as "Permitted Title Exceptions"; provided, however, that notwithstanding any other provision of this SUBSECTION 4.1.1, or SUBSECTION 4.1.2 below, the Permitted Title Exceptions shall not include, and Seller shall remove at or before the Closing and shall cause the Project to be delivered free and clear of, any lien encumbering the Project that secures the payment of money, such as mechanic's and materialmen's liens, and the liens of deeds of trust and mortgages, unless Buyer otherwise notifies Seller in writing. 4.1.2 SURVEY APPROVAL AND RECERTIFICATION. Buyer shall have reviewed and approved those matters disclosed by the Survey within thirty (30) days after the later to occur of Buyer's (i) receipt of the Survey or (ii) receipt of the Title Commitment and the Exception Documents, in legible form. The Survey shall be sufficient in all respects to allow Title Insurer to issue the Title Policy at the Closing. If Buyer fails, within such thirty (30) day period, to disapprove any matter disclosed in the Survey, by written notice to Seller, then the Survey shall be deemed approved by Buyer. Otherwise, the process for removing and approving the matters disclosed in the Survey shall be the same as applied to the Title Commitment, as set forth in SUBSECTION 4.1.1 above. 4.1.3 INSPECTION APPROVAL. Buyer shall have approved in writing in Buyer's sole and absolute discretion, at or before the End of the Inspection Period, the condition of the Project following Buyer's inspection of the Project. With respect to Buyer's investigation, Buyer may, by means of agents and experts acceptable to Buyer, inspect and receive reports concerning the condition of the Project, including, but not limited to, the condition of the roof, the utilities and the mechanical systems and the structure of the Improvements. Buyer's failure to notify Seller of Buyer's approval of the physical condition of the Project at or prior to the End of the Inspection Period, shall be deemed a disapproval of the Project's physical condition by Buyer. If Buyer notifies Seller at or prior to the End of the Inspection Period of Buyer's disapproval of the physical condition of the Project, Buyer shall include with such notice a punch list of corrective work which Buyer considers necessary to be performed. Within ten (10) days of receipt of such notice, Seller shall notify Buyer of its election to either (i) perform the corrective work designated by Buyer, at Seller's sole cost and expense, and complete such work prior to the Closing, or (ii) not agree to perform such corrective work. In the event Seller fails to give notice of Seller's election, Seller shall be deemed to have elected to perform the corrective work. If Seller elects, or is deemed to have elected, to perform the corrective work, this Buyer's Condition shall be deemed satisfied, provided Seller performs the corrective work to Buyer's reasonable satisfaction prior to the Closing. If Seller elects not to perform the corrective work, the End of the Inspection period shall, for purposes of this SUBSECTION 4.1.3 and SECTION 6.1 below, be extended for an additional fifteen (15) day period, and this Agreement shall terminate automatically at the End of the Inspection Period (as so extended), by reason of the failure of this Buyer's Condition, unless Buyer notifies Seller in writing at or prior to the End of the Inspection (as so extended) that Buyer waives the necessity of the satisfaction of this Buyer's Condition. 4.1.4 DUE DILIGENCE APPROVAL. Buyer shall have approved, in Buyer's sole discretion, at or prior to the End of the Inspection Period, all matters disclosed by the Building Documents and other matters discovered by Buyer in the course of its investigation of the Project. If Buyer fails, at or prior to the End of the Inspection Period, to approve any matters disclosed therein, by written notice to Seller, then all such matters shall be deemed disapproved by Buyer and this Buyer's Condition shall be deemed not satisfied. 4.1.5 INVESTMENT COMMITTEE APPROVAL. Buyer shall have received, on or before the date five (5) days after the Effective Date, the unconditional approval of Buyer's Investment Committee for the acquisition of the Project, pursuant to the terms and conditions of this Agreement and Buyer shall have notified Seller in writing of such approval. If Buyer fails to obtain the unconditional approval of Buyer's Investment Committee, then this Agreement shall be deemed disapproved by Buyer and this Agreement shall terminate. 4.1.6 FINANCING APPROVAL. Buyer shall have received, on or before the End of the Financing Contingency Period, an irrevocable commitment from a Lender providing financing for the acquisition of the Project on such terms and subject to such conditions as may be approved by Buyer in its sole and absolute discretion. 4.1.7 LEASEBACK. Buyer and Seller shall have mutually approved at or prior to the date twenty (20) days after the Effective Date, the form and terms of a lease to be entered into between Buyer and Seller for the Project as of the Closing (the "New Lease"). The New Lease shall be based upon the 1997 AIR Standard Industrial/ Commercial Single-Tenant Net Lease form, subject to the terms and provisions set forth below and such other terms and revisions as may be appropriate. The basic terms of the New Lease shall be as follows: TERM: Seven (7) years commencing upon Closing with an option to extend for five (5) years at fair rental value so long as the Tenant's financial condition is as good or better than Tenant's financial condition as of the Closing. RENT RATES.
PERIOD MONTHS $ PSF/MO. ------ ------ --------- 1 1-12 $1.04 2 13-24 $1.13 3 25-36 $1.21 4 37-48 $1.25 5 49-60 $1.30* 6 61-72 $1.34 7 73-84 $1.38
*At the commencement of period 5, the rent shall be increased to the stipulated amount or the period 3 rent rate plus the increase in the Consumer Price Index from months 25 through 48, whichever is greater. Thereafter, the rental rates shall be increased as stipulated or three percent (3%) over each previous period, whichever is greater. TRIPLE NET: The New Lease shall be triple-net basis with the Tenant assuming payment of all expenses associated with the operation of the Project including both fixed expenses, such as taxes and insurance, and all operating expenses, including maintenance, repair and replacement. SECURITY DEPOSIT: Tenant shall deposit with Landlord an irrevocable Letter of Credit (the "Letter of Credit") in Landlord's favor in an amount equal to the rent due for the first year of the New Lease. For each fiscal year after the fiscal year ending 2001 that Tenant's audited financials reflect a net income exceeding $1,000,000, the Letter of Credit shall be reduced by an amount equal to one-fifth (1/5) of the original amount. Conversely, for each fiscal year that Tenant's audited financials reflect a net loss exceeding $500,000, any previous reductions in the Letter of Credit shall be reinstated by an amount equal to one-fifth (1/5) of the original amount. The total amount of the Letter of Credit shall never exceed the amount of the rent due for the first year of the New Lease. The Letter of Credit may be called and utilized in the event of any default by Tenant under the New Lease subject only to applicable cure periods. PROPERTY CONDITION AND REPAIR: The New Lease shall contain no representations or warranties or liability of Seller in connection with the condition of the Property at or prior to the Closing. Further, all obligations of maintenance, repair, including capital replacement, shall be the sole obligations of the Tenant. ASSIGNMENT OR SUBLETTING: In the event of any approved assignment or subletting, Buyer and Seller shall equally share any net profits (subject to Seller's reasonable expenses associated with the assignment or subletting) received by the Seller in connection with such an assignment or subletting. OCCUPANCY: The abandonment or failure to occupy at least fifty percent (50%) of the Project for a period of more than ninety (90) days shall constitute an event of default under the New Lease. 4.1.8 SELLER'S DELIVERIES. Seller shall have delivered to Buyer, at or before the Closing, all items to be delivered by Seller as described in SECTION 6.3. 4.1.9 SUBORDINATION AGREEMENT. Seller shall have delivered to Buyer at least ten (10) business days prior to the Closing a subordination agreement in a form and substance satisfactory to Buyer, Buyer's Lender and Seller, executed by Seller as Tenant under the New Lease, and dated not more than thirty (30) days prior to the Closing Date. 4.1.10 REPRESENTATIONS AND WARRANTIES. Seller's representations and warranties, as set forth in SECTION 7.1, shall be true and correct in all material respects as of the date of the Closing. 4.1.11 SELLER'S AUTHORIZATION. At or prior to the End of the Inspection Period, Buyer shall have received evidence satisfactory to Buyer and Buyer's counsel that Seller has the power and authority to enter into this Agreement and to execute and deliver all of the other agreements and documents required to be executed and delivered as provided herein, and to sell the Project to Buyer in accordance with the terms and provisions hereof, and that the persons and parties executing this Agreement and such other agreements and documents to be delivered to Buyer on behalf of Seller have been duly authorized to do so. 4.1.12 TITLE POLICY. At the Closing, the Title Insurer shall be irrevocably committed to issue the Title Policy. 4.1.13 NO CHANGE. There shall have been no material adverse change in the economic, financial and/or physical condition of the Project or in its operations during the Contract Period. 4.1.14 SELLER'S COVENANTS. Seller shall have performed each and all of its covenants and agreements hereunder within the times provided therefor. 4.2 FAILURE OF BUYER'S CONDITIONS. Buyer shall have the right (in its sole and absolute discretion) to elect to waive any Buyer's Condition or other condition to the Closing. In the event any Buyer's Condition is not satisfied, deemed satisfied, or waived by Buyer prior to the expiration of the applicable period for satisfaction or waiver (and in the absence of a specified period then at or before the Closing Date), Buyer may terminate this Agreement. In the event Buyer elects to terminate this Agreement as provided herein, all documents and funds delivered by one party to the other party shall be returned to the party making delivery. In such case, Seller shall pay any cancellation charges imposed by the Escrow Holder or Title Insurer. 4.3 SELLER'S CONDITIONS TO CLOSING. Seller's obligation to sell the Project and the Closing shall, in addition to any other conditions set forth herein, be conditioned and contingent upon the satisfaction, or waiver by Seller (in Seller's sole and absolute discretion), of each of the following conditions (collectively "Seller's Conditions"): 4.3.1 BOARD OF DIRECTOR APPROVAL. Seller shall have received on or before the date five (5) days from the Effective Date, the unconditional approval of the Board of Directors of Seller for the sale and leaseback of the Project pursuant to the material terms and conditions of this Agreement, and Seller shall have notified Buyer in writing of such approval. 4.3.2 REPRESENTATIONS AND WARRANTIES. Buyer's representations and warranties, as set forth in SECTION 7.1, shall be true and correct in all material respects as of the date of the Closing. 4.4 FAILURE OF SELLER'S CONDITIONS. Seller shall have the right (in its sole and absolute discretion) to elect to waive any Seller's Condition or any other condition to the Closing in the event any Seller's Condition is not satisfied, deemed satisfied, or waived by Seller prior to the expiration of the applicable period for satisfaction of waiver (and in the absence of a specified period at or before the Closing Date), Seller may terminate this Agreement and the rights of Buyer and Seller hereunder. In the event Seller elects to terminate this Agreement as provided herein, all documents and funds delivered by one party to the other party shall be returned to the party making delivery. In such case, Seller shall pay any cancellation charges imposed by Escrow Holder or Title Insurer. 5. COVENANTS OF SELLER 5.1 SELLER'S COVENANTS. In addition to all other covenants contained herein, Seller makes the following covenants to Buyer: 5.1.1 LEASING ACTIVITIES. During the Contract Period, Seller agrees that it shall not enter into any leases for any portion of the Project without the prior written consent of Buyer, which consent shall not be unreasonably withheld. Buyer's failure to respond to Seller in writing within five (5) business days after its receipt of a written request from Seller seeking Buyer's consent pursuant to this SECTION 5.1 shall be deemed conclusively to constitute Buyer's consent to the proposed transaction. 5.1.2 PAYMENT OF OBLIGATIONS. At all times during the Contract Period, Seller shall timely pay all taxes, assessments and utility charges affecting the Project. 5.1.3 INSURANCE. At all times during the Contract Period, Seller shall maintain in full force and effect and pay all premiums for all fire and extended coverage and liability insurance policies currently covering the Project. 5.1.4 COMPLIANCE WITH LAWS. During the Contract Period, Seller shall not permit to exist, and Seller shall remove, any notices of violations of any federal, state or municipal or other health, building, zoning, safety, environmental protection or other applicable code, law, ordinance, rule or regulation now or hereafter existing and relating or applying to the Project. 5.1.5 ENCUMBRANCES. During the Contract Period, Seller shall not encumber, or permit or suffer to be encumbered with any encumbrance, lien or other claim or right, the Project or any other right, appurtenance or Property, real or personal, to be conveyed pursuant to this Agreement, which encumbrance(s) cannot otherwise be removed as of the date of Closing at no cost to Buyer. 5.1.6 REMOVE LIENS. At or prior to the Closing, Seller agrees to fully pay, satisfy or otherwise remove, at Seller's sole expense, (i) all deeds of trust, mortgages or other monetary liens against the Project, unless otherwise requested by Buyer, and (ii) all mechanic's or materialmen's liens or any similar claim or lien claimed against the Project, or any part thereof, arising from work performed or commenced or materials supplied, prior to the Closing, such that there are and will be no mechanic's or materialmen's liens existing or that may arise by reason of the construction of the Improvements. 5.1.7 CHANGE IN REPRESENTATION AND/OR WARRANTY. At all times during the Contract Period, if Seller learns of any material fact or circumstance that causes or has a reasonable likelihood of causing a representation or warranty of Seller's to be untrue or misleading, Seller shall notify Buyer as soon as is reasonably possible, but in any event, within three (3) days after Seller learns thereof. 5.1.8 MAINTENANCE. During the Contract Period, Seller shall maintain the Project, including all landscaping, in its present condition, ordinary wear and tear excepted, in accordance with all applicable federal, state and local laws, ordinances and requirement; Seller shall not otherwise deviate from its ordinary and customary operation, maintenance or management of the Project. Seller shall, within three (3) days of its occurrence, provide Buyer with written notice of any material change in the condition of the Project which is other than as a result of ordinary wear and tear; the notice shall indicate the extent of the damage, the anticipated cost of repair and the time necessary to make such repairs. 5.1.9 PERMITS AND LICENSES. If Seller does not have any license, permit or certificate that is required for the operation or maintenance of the Project by any authority having jurisdiction over the Project, Seller shall obtain the same prior to the Closing. 6. CLOSING 6.1 AGREEMENT TO CONSTITUTE ESCROW INSTRUCTIONS. This Agreement, together with the General Provisions of Escrow Holder attached hereto as EXHIBIT "B" (the "General Provisions"), collectively shall constitute escrow instructions and a copy hereof shall be deposited with Escrow Holder for this purpose. In the event of any inconsistency between the terms of the General Provisions and this Agreement, the provisions of this Agreement shall prevail to the extent of any such inconsistency. 6.2 CLOSING DATE; CLOSING. Escrow shall open on the date on which a copy of this Agreement, properly executed by the parties hereto, has been deposited with Escrow Holder, which copy the parties hereto agree shall be delivered to Escrow Holder immediately following execution. Escrow Holder shall notify the parties immediately upon receipt of a copy of this Agreement as so executed as to the date of the opening of Escrow. The Closing Date shall occur fifteen (15) days following the End of the Financing Contingency Period; provided, however, that if the Closing Date falls on a Saturday, Sunday or holiday, the Closing shall occur on the next business day thereafter. Buyer shall have the right to extend the Closing for up to fifteen (15) days if necessary to finalize the loan. In such case Buyer agrees to deposit into the Escrow the additional amount of Sixty Thousand Dollars ($60,000) to be held for the benefit of Buyer as part of the Earnest Money Deposit. The Closing shall take place on the Closing Date, at the Closing Office at 10:00 A.M. or at such other place and time as the parties shall mutually agree. 6.3 ITEMS TO BE DELIVERED BY SELLER. At the Closing and as a Buyer's Condition to the occurrence of the Closing, Seller shall deliver or cause to be delivered to Buyer the following (the items listed in SUBSECTIONS 6.3.1 THROUGH 6.3.6 shall be delivered through Escrow Holder unless Seller and Buyer otherwise agree in writing): 6.3.1 The Deed. 6.3.2 The Bill of Sale. 6.3.3 The New Lease. 6.3.4 The Subordination Agreement for the New Lease. 6.3.5 The original Building Documents, including, but not limited to, all books and records requested pursuant to SUBSECTION 3.1.11; provided, however, that copies of the Building Documents shall be acceptable if the originals are not in the possession or control of Seller. 6.3.6 Any other documents, instruments, records, correspondence or agreements called for hereunder that have not previously been delivered to Buyer. 6.4 ITEMS TO BE DELIVERED BY BUYER. At the Closing and as a condition to the occurrence of the Closing, Buyer shall deliver, or cause to be delivered, to Seller the following (the items listed in SUBSECTIONS 6.4.1 THROUGH 6.4.4 shall be delivered through Escrow Holder unless Seller and Buyer otherwise agree in writing): 6.4.1 The Purchase Price. 6.4.2 The Bill of Sale. 6.4.3 The New Lease. 6.4.4 Any other documents, instruments, records, correspondence or agreements called for hereunder that have not previously been delivered to Seller. 6.5 DIRECTIONS TO TITLE INSURER. Buyer and Seller shall instruct the Title Insurer to record the Deed in favor of Buyer and to record all other documents, including deeds of reconveyance, necessary for title to the Land and Improvements to be conveyed to Buyer free and clear of all liens and encumbrances and other matters of record, except those matters specifically permitted under this Agreement. 6.6 PRORATIONS AND OTHER ADJUSTMENTS. The parties shall prorate the following items between Buyer and Seller as of 11:59 P.M. on the day preceding the Closing Date. Seller shall provide to Buyer a tentative proration schedule at least five (5) days prior to the expected Closing Date, together with all supporting documentation necessary for the Buyer to evaluate the appropriateness of the prorations as calculated. The calculations set forth in the proration schedule and the actual prorations shall be made in accordance with the following provisions. 6.6.1 ITEMS OF EXPENSE. 6.6.1.1 Real property taxes and assessments shall be prorated based upon the final tax bill for the year in which the closing occurs. If such final tax bill is not available, the proration shall be computed based on the latest tax bill or notice available, and shall be subject to adjustment within thirty (30) days of the first availability of the final tax bill. Seller shall be solely responsible for the payment of any supplemental real property tax bills received at any time, whether before or after the Closing Date, which bills are applicable or relate to any period prior to the Closing. 6.6.1.2 Personal property taxes shall be prorated. 6.6.1.3 No other items of expense other than those specifically agreed to between the parties shall be prorated. 6.6.2 REMITTANCE BETWEEN PARTIES. Any amounts determined to be owed between Buyer and Seller in accordance with the foregoing provisions shall be determined to be delinquent thirty (30) days after notification to the party required to make remittance. 6.7 POSSESSION. Possession of the Project shall be transferred by Seller to Buyer upon the Closing Date, subject to the rights of Seller under the New Lease. 6.8 SELLER'S CLOSING COSTS. Seller shall pay (i) the documentary transfer tax, stamp tax and/or other recording fees and charges, in the amount required to be paid by law, (ii) the cost of the premium for a CLTA Owner's Title Policy, (iii) one-half (1/2) of the Escrow Holder's fee, (iv) the cost of the Survey, and (v) Seller's attorneys' fees in connection with this Agreement and the transactions contemplated hereby. 6.9 BUYER'S CLOSING COSTS. Buyer shall pay (i) the cost of the additional premium (over and above the premium for a CLTA Owner's Title Policy), (ii) the cost for the Lender's Title Policy, (ii) one-half (1/2) of the Escrow Holder's fee, (iii) Four Thousand Eight Hundred Dollars ($4,800) as reimbursement for the cost incurred by Seller for a Survey dated November 13, 1998, reduced by the cost to update the Survey as required for Closing, and (iv) Buyer's attorneys' fees incurred in connection with this Agreement and the transactions contemplated hereby. 7. WARRANTIES 7.1 REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby makes the following representations and warranties for the benefit of Buyer and Buyer's successors and assigns. Buyer shall be entitled to rely upon the representations and warranties of Seller, notwithstanding Buyer's inspection and investigation of the Project. Buyer and Seller have entered into this Agreement on the condition that Seller make the following representations and warranties, which were and are a material inducement to Buyer entering into this Agreement and Buyer would not have entered into this Agreement except in reliance upon the representations and warranties of Seller made herein. Seller represents and warrants only to Seller's best knowledge that the following representations and warranties, as well as the facts and other matters contained therein, are true as of the date of this Agreement and shall be true as of the Closing Date and shall survive the Close of Escrow. 7.1.1 ACCESS; ADJACENT DEVELOPMENT. The Project has full and free access to and from public streets and roads, and there are no facts or conditions that could result in the termination of the present access from or to the Project to or from any such existing highways and roads, or in the termination or expiration of any conditional use permits, sign permits or other governmental permits or approvals necessary for the use and operation of the Property for the purposes for which the Project is presently being used and operated. 7.1.2 LEASES. Except with respect to the New Lease, there are no Leases or other agreements that grant, and there is no person who has or has asserted, any right of use or possession to the Project or any part thereof. 7.1.3 AUTHORITY. Seller is a corporation, properly organized under the laws of the State of Delaware, and properly authorized to own real property in the State of California. Seller is the owner of the Project and has the right, power, legal capacity and power to enter into this Agreement and to convey the Project to Buyer pursuant to the terms and provisions hereof and perform Seller's other obligations hereunder. The parties and persons executing this Agreement on behalf of Seller have been duly authorized to execute this Agreement. The execution of this Agreement by Seller, the performance by Seller of Seller's obligations hereunder, and the sale, transfer, conveyance and/or assignments contemplated hereby, do not require the consent of any third party. 7.1.4 CONFORMANCE WITH LAWS. The Project, including the Improvements as constructed and as operated by Seller, conforms to, and is operated and maintained in accordance with all applicable city, county, state, federal and other applicable laws, statutes, ordinances, rules and regulations. 7.1.5 DISCLOSURE AND COMPLIANCE. There is no suit, action or arbitration, bond issuance or proposal therefor, proposal for public improvement assessments, pay-back agreement, paving agreement, road expansion or improvement agreement, utility moratorium, use moratorium, improvement moratorium, or legal, administrative, or other proceeding or governmental investigation or requirement, formal or informal, existing or pending or threatened that affects the Project or which adversely affects Seller's ability to perform hereunder, or other charge or expense upon or relating to the Project, which is not disclosed in the Title Commitment or which has not been disclosed to Buyer in writing prior to the Effective Date. 7.1.6 DISCLOSURE OF ADVERSE CHANGE. Seller shall inform Buyer in writing of any material adverse change in the condition, financial or otherwise, of the Project, or the operation thereof, which occurs at any time during the Contract Period. 7.1.7 NO ADVERSE SOIL CONDITIONS. There are no soil or geological conditions affecting the Project that could materially and adversely affect the Project, or the ownership and operation thereof by Buyer. The condition of the soil at the Project is such that it will support all of the Improvements thereon for the foreseeable life of the Improvements without the need for unusual or new sub-surface excavations, fill, footings, caissons or other installations. The Improvements, as built, were constructed in a manner compatible with soil conditions at the time of construction and all necessary excavations, fill, footings, caissons or other installations were provided. 7.1.8 NO BANKRUPTCY PROCEEDINGS. Seller has not (i) made a general assignment for the benefit of creditors, (ii) filed any voluntary petition in bankruptcy or suffered the filing of an involuntary petition by Seller's creditors, (iii) suffered the appointment of a receiver to take possession of all or substantially all of the Seller's assets, (iv) suffered the attachment or other judicial seizure of all, or substantially all, of Seller's assets, (v) admitted in writing its inability to pay its debts as they become due or (vi) made an offer of settlement, extension or composition to its creditors generally. 7.1.9 NO DEFAULT. Seller is not in default under the terms of any Lease or any other agreement pertaining to the Project, nor has any event occurred that shall constitute a default by Seller under such documents and instruments following the passage of time, nor has Seller received any notice of any default under any Lease or other agreement pertaining to the Project. 7.1.10 NO HAZARDOUS WASTES. Seller has received no written notice from any third parties, prior owners of the Project, or any federal, state or local governmental agency, indicating that any hazardous substance remedial or clean-up work will be required. There are not any on-site spills, releases or discharges of Hazardous Substances which have occurred on the Project during Seller's ownership of the Project, nor at any time prior to Seller's ownership of the Project, nor on any property immediately adjoining the Project, or of any spills of Hazardous Substances that have occurred or are presently occurring off the Project as a result of any activities on the Project, there are no underground storage tanks, wells, underground sumps, clarifiers, oil/water separators, buried waste containers and/or any other underground structures on or under the Project. Nothing in the foregoing shall alter any obligations of Seller under applicable federal, state or local law. For purposes of this Agreement, the term "Hazardous Substances" shall include all substances which are classified as hazardous substances or hazardous wastes under any of the following laws, rules and regulations: (i) the Toxic Substances Control Act, 15 U.S.C., Section 2601 et seq., (ii) the Clean Water Act, 33 U.S.C., Section 1251 et seq., (iii) the Resource and Conservation and Recovery Act, 42 U.S.C., Section 6901 et seq., (iv) the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C., Section 9601, et seq., (v) the Hazardous Materials Transportation Act, 49 U.S.C., Section 1801 et seq., (vi) the California Hazardous Waste Control Act, Health and Safety Code, Section 25100 et seq., (vii) the California Hazardous Substance Account Act, Health and Safety Code, Section 25249.5 et seq., (viii) the California Waste Management Act, Health and Safety Code, Section 25170.1 et seq., (ix) Health and Safety Code, Section 2550, Hazardous Materials Release Response Plans and Inventory, (x) the California Porter-Cologne Water Quality Control Act, Water Code, Section 13000 et seq., or (xi) other federal or state laws, rules or regulations, all as amended. 7.1.11 NO INFESTATION. The Project is free from infestation by rodents, termites or other insects or animals. 7.1.12 NO LITIGATION. There is no pending litigation or threatened litigation, or asserted or unasserted claims, relating to the Project. 7.1.13 NO NOTICES. Seller has not received, and has no knowledge of, any notification from any city, county, state or federal authority having jurisdiction over the Project or of any utility providing service requiring any work to be done to, or affecting the use of, the Project or any portion thereof. Seller has received no notice from any insurance carrier, nor is Seller aware, of defects or inadequacies in the Project that if not corrected would result in termination of insurance coverage or increase in insurance costs. 7.1.14 NO UNDISCLOSED ASSESSMENTS. There are no taxes, assessments (special, general or otherwise) or bonds of any nature affecting the Property, or any portion thereof, except as disclosed in the Title Commitment. Seller has no understanding or agreement with any taxing authority respecting the imposition or deferment of any taxes or assessments respecting the Project. 7.1.15 NO UNTRUE STATEMENTS. Seller has made no untrue statement or representation in connection with this Agreement, and all items from Seller transferred or delivered and/or given to Buyer are genuine, true, correct and complete copies of what they purport to be. Additionally, (i) said items have not been amended or modified, other than as also transferred or delivered and/or given to Buyer, and (ii) no item that should have been transferred, delivered and/or given to Buyer has not been so transferred, delivered and/or given. Seller has not failed to state or disclose any material fact in connection with the transactions contemplated by this Agreement. Seller knows of no facts and Seller has not misrepresented any facts that would prevent Buyer from operating the Project after the Closing in the manner in which the Project is currently being operated and used. 7.1.16 NO VIOLATION OF OTHER AGREEMENTS. Neither this Agreement nor anything provided to be done hereunder (including, but not limited to, the transfer of the Project to Buyer) violates or shall violate any contract, document, understanding, agreement or instrument to which Seller is a party or by which Seller may be bound, or any contract, document, understanding, agreement or instrument affecting the Project. 7.1.17 OPERATING STATEMENTS. All operating statements delivered to Buyer by Seller are accurate, true and correct, have been accurately compiled from the books and records of the Project and accurately set forth the results of the operation of the Project for the periods covered. The financial records kept by Seller are complete, accurate, true and correct in all respects and reflect all transactions affecting or relating to the Project, and are kept and maintained at the office of Seller at the Project. 7.1.18 OPERATION DURING CONTRACT PERIOD. The Project shall be operated and maintained in its current condition, normal wear and tear excepted, until the Closing Date. 7.1.19 PARKING. There are ( ) parking spaces at the Project. The parking spaces at the Project comply with all applicable laws, rules and regulations. No person other than Seller under the New Lease shall have the right to park on the Project. 7.1.20 IMPROVEMENTS. All Improvements at the Project are in good condition and repair. 7.1.21 PROJECT CONDITION. The Project, and all components thereof, including, but not limited to, parking lots, electrical systems, roofs, air conditioning systems, heating systems and elevators are and, at the Closing, shall be in good condition and working order, and will perform the work or function for which intended. The Improvements, and all component parts thereof, were constructed in substantial conformance with the Plans and Specifications, as well as documents approved by the appropriate city, county, state, and other officials, and are free of material construction, design and structural defects. 7.1.22 STORM WATER. All storm water flowing from the Project drains either into a public system or onto a permitted location and through easements, if any, for the benefit of the Project. 7.1.23 TITLE TO REAL PROPERTY. At the Closing fee simple title to the Land and Improvements shall be conveyed to Buyer in a good and marketable condition, free and clear of all liens, encumbrances, agreements, encroachments, leases, tenancies, mechanics' liens, materialmen's liens, and other interests affecting all or any portion of the Project or any interest therein other than (i) current non-delinquent real Property taxes (but not assessments), (ii) New Lease, and (iii) the Permitted Title Exceptions. 7.1.24 UTILITIES AVAILABLE. All utilities necessary for the operation of the Project in accordance with its intended use are available to the Land. 7.1.25 ZONING AND OTHER GOVERNMENTAL INFORMATION. There is no pending or threatened request, application or proceeding to alter or restrict the zoning or other use restrictions applicable to the Project; there is no plan, study or effort by any governmental authority or agency or any private party or entity that in any way affects or would affect the authorization of the current use and operation of the Project. There is no pending or threatened action or governmental proceeding in eminent domain, zoning change, rent control or otherwise that would directly or indirectly affect the Project, nor any fact that might give rise to such a proceeding; all governmental and regulatory licenses, franchises, certificates and permits respecting the Project that are necessary for the operation of the Project by Seller in accordance with its intended use, if any, are possessed by Seller and will be transferred to Buyer, if legally transferable, at the Closing. 7.2 REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents and warrants to Seller, for the benefit of Seller and Seller's successors and assigns, that the following statements are true as of the date of this Agreement, and shall be true as of the Closing Date. 7.2.1 REQUIRED APPROVALS. Except for the approval of the Board of Directors of the general partner of Buyer as required by SECTION 4.1.5, all required approvals or consents have been obtained in connection with the execution of this Agreement by Buyer and with the performance by Buyer of Buyer's obligations hereunder. Subject to obtaining the approval described above, Buyer has full right and authority to enter into and fully perform its obligations under this Agreement. 7.2.2 NO CONFLICTS. Neither this Agreement nor anything provided to be done hereunder violates or shall violate any contract, document, understanding, Agreement or instrument to which Buyer is a party or by which Buyer may be bound. 7.2.3 ADVERSE CHANGE. Buyer shall inform Seller of any material adverse change in the foregoing representations and warranties of Buyer occurring at any time after the execution hereof and prior to the Closing Date. 7.2.4 SECURITIES COMPLIANCE. Buyer agrees to use reasonable efforts to inform Buyer's employees with knowledge of the terms of this transaction that they are prohibited from trading in the securities of Seller until the subject matter of the transaction is publicly announced, if deemed necessary by Seller (and the market has had an opportunity to absorb that announcement). Buyer also agrees to use reasonable efforts not to make any public statement regarding this transaction without the prior approval of Seller (unless required to do so in good faith opinion of Buyer's counsel). 8. TERMINATION OF AGREEMENT 8.1 TERMINATION. In the event of (i) a default by Seller, (ii) the failure of any of Buyer's Conditions or other conditions to the Closing to be satisfied or waived, (iii) any incorrect representation(s) or warranty(ies) by Seller (which shall be deemed a default by Seller), or (iv) a termination of this Agreement pursuant to the operation of Section 11.1, then and in any of such events, this Agreement may be cancelled and terminated by Buyer and all funds and documents previously delivered shall be returned to the party delivering same. In the event the Closing fails to occur by reason of Buyer's default, then Seller shall be entitled solely to liquidated damages as provided in Section 8.2. In the event of a default by Seller, including, but not limited to, any incorrect representation(s) or warranty(ies), whether or not such default results in termination, Buyer shall have such remedies against Seller as may be available to Buyer either at law or in equity, including the right to specifically enforce this Agreement. 8.2 LIQUIDATED DAMAGES. SELLER WAIVES THE RIGHT TO SPECIFICALLY ENFORCE THIS AGREEMENT. IN THE EVENT THE CLOSING FAILS TO OCCUR BY REASON OF BUYER'S DEFAULT AFTER THE END OF THE INSPECTION PERIOD, SELLER AND BUYER AGREE THAT, BASED ON THE CIRCUMSTANCES NOW EXISTING, KNOWN OR UNKNOWN, SELLER AND BUYER EACH RECOGNIZE AND AGREE THAT IT WOULD BE EXCESSIVELY COSTLY AND IMPRACTICABLE TO ESTABLISH SELLER'S DAMAGES BY REASON OF BUYER'S DEFAULT AND IT WOULD BE REASONABLE TO AWARD SELLER LIQUIDATED DAMAGES IN THE AMOUNT OF THE EARNEST MONEY DEPOSIT. BOTH PARTIES AGREE THAT SUCH AMOUNT STATED AS LIQUIDATED DAMAGES IS A REASONABLE ESTIMATE OF SELLER'S DAMAGES IN THE EVENT OF BUYER'S DEFAULT AND SUCH AMOUNT SHALL BE IN LIEU OF ANY OTHER MONETARY RELIEF TO WHICH SELLER MAY OTHERWISE BE ENTITLED BY VIRTUE OF THIS AGREEMENT OR BY OPERATION OF LAW. ACCORDINGLY, SELLER SHALL BE ENTITLED TO RETAIN SUCH AMOUNT AS LIQUIDATED DAMAGES FOR BUYER'S BREACH OR FAILURE TO COMPLETE THE PURCHASE OF THE PROPERTY AS PROVIDED HEREIN PURSUANT TO CALIFORNIA CIVIL CODE SECTIONS 1671 AND 1677. IN SUCH EVENT, ESCROW HOLDER IS HEREBY IRREVOCABLY INSTRUCTED BY BUYER AND SELLER TO DISBURSE IMMEDIATELY TO SELLER, UPON DEMAND OF SELLER ALONE, THE EARNEST MONEY DEPOSIT AND ANY INTEREST EARNED THEREON. SELLER HEREBY AGREES THAT LIQUIDATED DAMAGES SET FORTH HEREIN SHALL BE THE SOLE REMEDY OF SELLER IN THE EVENT OF A DEFAULT BY BUYER AND SELLER HEREBY WAIVES ANY RIGHT TO SPECIFIC PERFORMANCE BY BUYER. PRIOR TO THE END OF THE INSPECTION PERIOD, SELLER AND BUYER AGREE IT WOULD BE REASONABLE NOT TO AWARD SELLER ANY DAMAGES BY REASON OF BUYER'S DEFAULT. ---------------- ----------------- Buyer's Initials Seller's Initials 9. REAL ESTATE COMMISSION 9.1 BROKER COMPENSATION. Seller hereby represents and warrants to Buyer that the only real estate broker involved in this transaction, including any negotiations relating to this Agreement and any other agreements and documents contemplated hereby is John Burnham Real Estate Services, Inc. (the "Seller's Broker"). Seller agrees that any compensation due Seller's Broker as a result of this Agreement or the Closing is and shall be the sole and exclusive responsibility of Seller, and Buyer shall have no liability or responsibility therefor. Seller shall indemnify Buyer against and hold Buyer free and harmless from any and all loss, damage, liability or expense (including costs and reasonable attorneys' fees) that Buyer may incur or sustain by reason of, or in connection with, any misrepresentation or breach of warranty with respect to the foregoing. 9.2 NO OTHER BROKER. Seller and Buyer represent and warrant to each other that they have employed no broker and/or finder other than Seller's Broker. Seller and Buyer each agree that, to the extent a brokerage and/or finder's fee shall have been earned or claimed in connection with this Agreement, other than the fee payable to Seller's Broker as provided above, the payment of such fees and the defense of any action in connection therewith shall be the sole and exclusive obligation of the party who requested the services of the broker and/or finder. In the event that any claim, demand or cause of action for brokerage and/or finder's fees is asserted against a party to this Agreement who did not request such services, the party through whom the broker or finder is making the claim shall indemnify, defend (with an attorney of indemnitee's choice) and hold harmless the other party from and against any and all such claims, demands and causes of action. 10. ASSIGNMENT 10.1 RIGHT OF ASSIGNMENT. Upon written approval of Seller, which approval shall not be unreasonably withheld or delayed, Buyer shall have the right to assign its interest under this Agreement at any time prior to the date of the Closing. In the event Buyer assigns its interest under this Agreement, Seller agrees that Buyer shall, upon the making of such assignment, be released and relieved of all of the Buyer's obligations and liabilities hereunder, provided the Buyer's obligations and liabilities are assumed by such assignee. In the event of an assignment of Buyer's rights and an assumption of Buyer's obligations hereunder, Seller shall execute a consent to such assignment and assumption. The consent document shall release and relieve Buyer of all its obligations hereunder, shall provide that Seller shall look solely to Buyer's assignee with respect to such obligations and liabilities. Notwithstanding the foregoing, Seller's consent shall not be required for an assignment to an affiliate of Buyer, to any entity in which Buyer, directly or indirectly, has a beneficial or equitable interest, or to an accommodator for the purpose of completing a 1031 tax deferred exchange so long as such entity is not a direct competitor of Seller. 11. MISCELLANEOUS 11.1 MATERIAL DAMAGE OR CONDEMNATION. If the Project is materially damaged or if the Project or any part thereof is materially taken by condemnation or there is any condemnation or threatened condemnation of any direct or indirect access to the Project prior to the Closing Date, then Buyer shall have the right to reject the Project and, on written demand of Buyer, this Agreement shall be terminated forthwith and neither Seller nor Buyer shall thereafter have any obligation to each other, except as set forth in SECTION 8.1 above. In the alternative, Buyer may elect to complete the transaction on the terms set forth in this Agreement and, in such event, Buyer shall receive a full assignment of all insurance proceeds (and shall use such proceeds to make necessary repairs to the Project) or condemnation proceeds, as the case may be, allocable to the restoration of the damaged Project or given as consideration for the taking. By "materially damaged," Seller and Buyer mean (i) any uninsured damage or (ii) the cost to repair such damage or destruction to the Project exceeds the sum of Fifty Thousand Dollars ($50,000.00). By "materially taken," Seller and Buyer mean a condemnation or taking by eminent domain occurring on the Project that results in the elimination of more than five percent (5%) of the Project, the elimination of more than five percent (5%) of the total gross square footage of the land comprising the Land or the elimination of more than five percent (5%) of the total net rentable square footage in the Improvements at the Project. The phrase "taking by eminent domain" includes any notices of taking or commencement of proceedings under eminent domain power, but excludes any claim for inverse condemnation. 11.2 ATTORNEYS' AND OTHER FEES. Should either party institute any action or proceeding to enforce or interpret this Agreement or any provision hereof, for damages by reason of any alleged breach of this Agreement or of any provision hereof, or for a declaration of rights hereunder, the prevailing party in any such action or proceeding shall be entitled to receive from the other party all costs and expenses, including reasonable attorneys' and other fees, incurred by the prevailing party in connection with such action or proceeding. The term "attorneys' and other fees" shall mean and include attorneys' fees, accountants' fees, and any and all other similar fees incurred in connection with the action or proceeding and preparations therefor. The term "action or proceeding" shall mean and include legal actions, proceedings, suits, arbitrations, appeals and other similar proceedings. 11.3 NOTICES. Any notice, demand, request, covenant, approval or other communication to be given by one party to the other shall be given by personal service, express mail, Federal Express, DHL or any other similar form of nationally recognized airborne/overnight delivery service, or mailing in the United States mail (certified mail, return receipt requested), addressed to the parties at their respective addresses as follows: If to Buyer: Birtcher Properties 27611 La Paz Road Laguna Niguel, California 92677 Attn: Mr. Arthur B. Birtcher Telephone: (949) 643-7700 Facsimile: (949) 643-7455 With a copy to: Voss, Cook & Thel LLP Suite 700 840 Newport Center Drive Newport Beach, California 92660-6310 Attention: David A. Lurker, Esq. Telephone: (949) 720-0300 Facsimile: (949) 720-1508 If to Seller: Encad, Inc. 6059 Cornerstone Court West San Diego, California 92121 Attention: Chief Executive Officer Telephone: (619) 452-0882 Facsimile: (619) 452-0891 With a copy to: Encad, Inc. 5959 Cornerstone Court West San Diego, California 92121 Attention: General Counsel Telephone: (619) 677-6169 Facsimile: (619) 452-7229 Any such notice shall be deemed to have been given (i) upon delivery, if personally delivered or delivered by any nationally recognized form of airborne/overnight delivery service, or (ii) upon receipt or upon the expiration of three (3) business days, whichever is earlier, if mailed. Either party may change the address at which it desires to receive notice upon giving written notice of such request to the other party. Buyer and Seller, and their respective counsel, hereby agree that notices may be given hereunder by the parties' respective counsel, and that if any communication is to be given hereunder by Buyer's or Seller's counsel, such counsel may communicate directly with all principals, as required to comply with the foregoing provisions. 11.4 TIME OF ESSENCE. Time is of the essence of this Agreement and each and every term and provision hereof. 11.5 WAIVER OR MODIFICATION. A modification of any provision herein contained, or any other amendment to this Agreement, shall be effective only if the modification or amendment is in writing and signed by both Seller and Buyer. No waiver by any party hereto of any breach or default shall be considered to be a waiver of any other breach or default. The waiver of any condition shall not constitute a waiver of any breach or default with respect to any covenant, representation or warranty. 11.6 SUCCESSORS AND ASSIGNS; SURVIVAL. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, successors and assigns. All covenants, representations and warranties contained herein shall survive the Closing. The term "Buyer" as used herein shall mean and include Buyer's successors and assigns. 11.7 NUMBER AND GENDER. As used in this Agreement, the neuter includes the masculine and feminine, and the singular includes the plural. 11.8 GOVERNING LAW. This Agreement shall be governed by, interpreted under, and construed and enforced in accordance with, the laws of the State of California applicable to agreements made and to be performed wholly within the State of California. 11.9 CONSTRUCTION. Headings at the beginning of each Article, Section, and subsection are solely for the convenience of the parties and are not a part of this Agreement. All exhibits attached hereto are hereby incorporated herein by this reference. Unless otherwise indicated, all references herein to Articles, Sections, subsections, paragraphs, subparagraphs or provisions are to those in this Agreement. Any reference to an Article herein includes all Sections thereof and any reference to a Section herein includes all subsections thereof. This Agreement shall not be construed as if it had been prepared by only Buyer or Seller, but rather as if both Buyer and Seller had prepared the same. In the event any portion of this Agreement shall be declared by any court of competent jurisdiction to be invalid, illegal or unenforceable, such portion shall be deemed severed from this Agreement, and the remaining parts hereof shall remain in full force and effect, as fully as though such invalid, illegal or unenforceable portion had never been part of this Agreement. 11.10 INTEGRATION OF OTHER AGREEMENTS. This Agreement supersedes all previous contracts, letters of intent, correspondence and documentation relating to the sale of the Project. Any oral representations or modifications concerning this Agreement shall be of no force or effect. 11.11 DUPLICATE ORIGINALS; COUNTERPARTS. This Agreement may be executed in any number of duplicate originals, all of which shall be of equal legal force and effect. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which shall constitute one and the same instrument. 11.12 NON-WAIVER OF RIGHTS. No failure or delay of either party in the exercise of any right given to such party hereunder shall constitute a waiver thereof unless the time specified herein for exercise of such right has expired, nor shall any single or partial exercise of any right preclude other or further exercise thereof or of any other right. 11.13 DAYS. The term "days," as used herein, shall mean actual days occurring, including Saturdays, Sundays and holidays. The term "business days" shall mean days other than Saturdays, Sundays and holidays. If any item must be accomplished or delivered hereunder on a day that is not a business day, it shall be deemed to have been timely accomplished or delivered if accomplished or delivered on the next following business day. 11.14 INCORPORATION OF EXHIBITS. All schedules and exhibits attached hereto and referred to herein are incorporated in this Agreement as though fully set forth herein. These schedules and exhibits are: Exhibit "A" Description of Land Exhibit "B" Escrow Holder's General Provisions 11.15 IRS FORM 1099-S. For purposes of complying with Section 6045 of the Internal Revenue Code of 1986 ("Code"), as amended, Escrow Holder shall be deemed the "person responsible for closing the transaction," and shall be responsible for obtaining the information necessary to file with the Internal Revenue Service Form 1099-S, "Statement for Recipients of Proceeds From Real Estate, Broker and Barter Exchange Transactions." 11.16 FURTHER ASSURANCES. Buyer and Seller each agree to execute any and all other documents and to take any further actions reasonably necessary to consummate the transaction contemplated hereby. 11.17 EXCLUSIVE RIGHT TO NEGOTIATE. Seller agrees not to solicit or negotiate any other offer from any other party for the sale of the Property or enter into any agreement for the sale of the Property, unless and until specifically notified in writing that Buyer has no further interest in purchasing the Property. IN WITNESS WHEREOF, Buyer and Seller have executed this Agreement as of the date first above written. "Buyer" "Seller" BIRTCHER PROPERTIES, ENCAD, INC., a California corporation a Delaware corporation By: /s/ Robert M. Anderson By: /s/ T.W. Schmidt ------------------------------------- -------------------------- Robert M. Anderson, President Its: Vice President & CFO -------------------------- By: /s/ Thomas L. Green -------------------------- Its: V.P./General Counsel -------------------------- ESCROW HOLDER'S RECEIPT The undersigned, as Escrow Holder, hereby acknowledges receipt of the foregoing Escrow Instructions, accepts said escrow account, and agrees to carry out said Escrow Instructions and hold and dispose of the funds and documents deposited in said account in accordance with such instructions. Dated: August , 1999 FIRST AMERICAN TITLE INSURANCE COMPANY ---------- By: ----------------------------------- Printed Name: ------------------------- Its: ---------------------------------- Escrow No.: ------------------------------ Escrow Officer: ------------------------------ Telephone No.: ( ) - ------ -------- ------------ Fax No.: ( ) - ------ -------- ------------ Title Order No.: ------------------------------ Title Officer: ------------------------------ Telephone No.: ( ) - ------ -------- ------------ Fax No.: ( ) - ------ -------- ------------ EXHIBIT "A" DESCRIPTION OF LAND PARCELS 1 AND 2 OF PARCEL MAP NO. 13800, IN THE CITY OF SAN DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, MAY 22, 1985, AS FILE/PAGE NO. 85-180247 OF OFFICIAL RECORDS. A-1 EXHIBIT "B" [ESCROW HOLDER'S GENERAL PROVISIONS] B-1 FIRST AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS ENCAD CORPORATE HEADQUARTERS This FIRST AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS, ENCAD CORPORATE HEADQUARTERS (the "First Amendment") is made effective as of this 30th day of September, 1999, by and between ENCAD, INC., a Delaware corporation ("Seller"), and BIRTCHER PROPERTIES, a California corporation ("Buyer"). R E C I T A L S A. Seller and Buyer are parties to that certain Agreement of Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated as of August 5, 1999 (the "Purchase Agreement"), providing for the purchase and sale of that certain land and improvements more particularly described in the Purchase Agreement. B. Seller and Buyer desire to amend and modify the Purchase Agreement in certain particulars, and the purpose of this First Amendment is to set forth the terms and provisions agreed upon between Seller and Buyer with respect to the amendment and modification of the Purchase Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer hereby agree to amend and modify the Purchase Agreement, as follows: 1. END OF THE INSPECTION PERIOD. Section 1.1.10 of the Purchase Agreement is hereby modified and amended to delete the provisions thereof and replace them with the date of October 18, 1999, which shall be deemed to be the "End of the Inspection Period" for the purposes of the Purchase Agreement. 2. END OF THE FINANCING CONTINGENCY PERIOD. Section 1.1.11 of the Purchase Agreement is hereby modified and amended to delete the provisions thereof and replace them with the date of October 18, 1999, which shall be deemed to be the "End of the Financing Contingency Period" for the purposes of the Purchase Agreement. 3. NEW LEASE APPROVAL DATE. The provisions of Section 4.1.7 of the Purchase Agreement are hereby amended and modified to provide that the New Lease shall be mutually approved by Buyer and Seller on or prior to October 18, 1999. 4. CLOSING. Section 6.2 of the Purchase Agreement is hereby modified and amended to change the "Closing Date" from the date "fifteen (15) days following the End of the Financing Contingency Period" to November 1, 1999. 5. NOTICES. The provisions of Section 11.2 of the Purchase Agreement are hereby amended to permit notice by facsimile and any notices given by facsimile shall be deemed to have been given upon receipt. If such notice by facsimile is given to Encad, such notice shall be given to Todd W. Schmidt, CFO, at facsimile number (858) 452-6292, and to Encad's General Counsel at facsimile number (858) 452-7229. 6. PROPERTY DEFICIENCIES. Seller acknowledges that, as a part of Buyer's due diligence, Buyer has identified numerous potential violations of applicable governmental requirements, including, without limitation, violations relating to parking and outdoor storage under the terms of the Planned Industrial Development Permit No. 83-0378 as amended by Planned Industrial Development Permit No. 85-0830, as well as the fact that significant tenant improvements were completed without building permits or inspection by applicable governmental authorities. Seller agrees to use its best efforts to obtain inspections of the Property by the applicable governmental authorities as soon as possible and to engage its architect to identify the scope and nature of any violations, including determining the extent of remedial work required, if any, and the estimated cost to complete all work necessary to correct the deficiencies. Seller further agrees that at the Closing, Escrow Holder shall holdback in Escrow a portion of the Purchase Price in an amount equal to one hundred fifty percent (150%) of the amount necessary to remedy all such deficiencies, including the cost of any new work or improvements required. Seller shall cause its architect to provide an estimate of such costs in sufficient detail for Buyer and Buyer's lender to evaluate on or before October 18, 1999. Such costs shall include all governmental fees, consultants fees, contractors fees, and all other third party costs necessary to complete such work. Buyer shall have the right, on or before October 18, 1999, to approve the scope and nature of the remedial work, as well as the amounts estimated to complete the work. If Buyer fails, within such period, to approve such matters, by written notice to Seller, then such matters shall be deemed disapproved by Buyer. In such case, the failure shall be deemed a failure of a Buyer's Condition governed by the provisions of Section 4.2 of the Agreement. The terms of the holdback shall permit the disbursement of portions of the holdback amount on a monthly basis to reimburse Seller for costs actually incurred to complete the remedial work. The establishment of the holdback shall constitute a Buyer's Condition to the Closing. The provisions of this Section shall survive the Closing. 7. MISCELLANEOUS. 1 7.1 CONFLICT OR INCONSISTENCY. In the event of any conflict or inconsistency between the terms and provisions of this First Amendment and the terms and provisions of the Purchase Agreement, the terms and provisions of this First Amendment shall control and govern the rights, duties and obligations of the parties. 7.2 DEFINED TERMS. The defined terms used in this First Amendment, as indicated by the first letter of a word being capitalized, shall have the same meaning and definition in this First Amendment as such terms have in the Purchase Agreement, unless such terms have been redefined in this First Amendment. 7.3 EFFECT OF AMENDMENT. Except as modified and amended by this First Amendment, the Purchase Agreement shall remain in full force and effect. 7.4 COUNTERPARTS. This First Amendment may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one and the same instrument. 7.5 TELEFAXED COPIES OF FIRST AMENDMENT. The parties hereto hereby agree that either party may rely on telefaxed execution copies of this First Amendment for all purposes. [continued on next page] IN WITNESS WHEREOF, Buyer and Seller have executed this First Amendment as of the date first written above. "Buyer" "Seller" BIRTCHER PROPERTIES, ENCAD, INC., a California corporation a Delaware corporation By: /s/ Robert M. Anderson By: /s/ David A. Purcell ----------------------- ---------------------- Its: President Its: President --------- --------- By: /s/ Thomas L. Green --------------------- Its: V.P./General Counsel -------------------- Birtcher/Birtcher Properties/Encad Acq/Docs/First Amendmt to APS8 2 SECOND AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS ENCAD CORPORATE HEADQUARTERS This SECOND AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS, ENCAD CORPORATE HEADQUARTERS (the "Second Amendment") is made effective as of this 18th day of October, 1999, by and between ENCAD, INC., a Delaware corporation ("Seller"), and BIRTCHER PROPERTIES, a California corporation ("Buyer"). R E C I T A L S A. Seller and Buyer are parties to that certain Agreement of Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated as of August 5, 1999 (the "Purchase Agreement"), as amended by that certain First Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated effective as of September 30, 1999 (the "First Amendment"), providing for the purchase and sale of that certain land and improvements more particularly described in the Purchase Agreement. As used herein, the term "Purchase Agreement" shall mean the Purchase Agreement as amended by the First Amendment. B. Seller and Buyer desire to amend and modify the Purchase Agreement in certain particulars, and the purpose of this Second Amendment is to set forth the terms and provisions agreed upon between Seller and Buyer with respect to the amendment and modification of the Purchase Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer hereby agree to amend and modify the Purchase Agreement, as follows: 1. END OF THE INSPECTION PERIOD. Section 1.1.10 of the Purchase Agreement is hereby modified and amended to delete the provisions thereof and replace them with the date of October 26, 1999, which shall be deemed to be the "End of the Inspection Period" for the purposes of the Purchase Agreement. 2. END OF THE FINANCING CONTINGENCY PERIOD. Section 1.1.11 of the Purchase Agreement is hereby modified and amended to delete the provisions thereof and replace them with the date of November 2, 1999, which shall be deemed to be the "End of the Financing Contingency Period" for the purposes of the Purchase Agreement. 3. NEW LEASE APPROVAL DATE. The provisions of Section 4.1.7 of the Purchase Agreement are hereby amended and modified to provide that the New Lease shall be mutually approved by Buyer and Seller on or prior to October 26, 1999. 4. CLOSING. Section 6.2 of the Purchase Agreement is hereby modified and amended to change the "Closing Date" to November 17, 1999. 5. PROPERTY DEFICIENCIES. Section 6 of the First Amendment is hereby modified and amended to require as an additional covenant of Seller that Seller cause its architect to provide an estimate of such costs in sufficient detail for Buyer and Buyer's lender to evaluate on or before October 26, 1999. Further, Section 6 of the First Amendment is hereby modified and amended to provide that Buyer shall have the right, on or before October 26, 1999, to approve the scope and nature of the remedial work, as well as the amounts estimated to complete such work. 6. MISCELLANEOUS. 6.1 CONFLICT OR INCONSISTENCY. In the event of any conflict or inconsistency between the terms and provisions of this Second Amendment and the terms and provisions of the Purchase Agreement, the terms and provisions of this Second Amendment shall control and govern the rights, duties and obligations of the parties. 6.2 DEFINED TERMS. The defined terms used in this Second Amendment, as indicated by the first letter of a word being capitalized, shall have the same meaning and definition in this Second Amendment as such terms have in the Purchase Agreement, unless such terms have been redefined in this Second Amendment. 1 6.3 EFFECT OF AMENDMENT. Except as modified and amended by this Second Amendment, the Purchase Agreement shall remain in full force and effect. 6.4 COUNTERPARTS. This Second Amendment may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one and the same instrument. 6.5 TELEFAXED COPIES OF SECOND AMENDMENT. The parties hereto hereby agree that either party may rely on telefaxed execution copies of this Second Amendment for all purposes. IN WITNESS WHEREOF, Buyer and Seller have executed this Second Amendment as of the date first written above. "Buyer" "Seller" BIRTCHER PROPERTIES, ENCAD, INC., a California corporation a Delaware corporation By: /s/ Robert M. Anderson By: /s/ T.W. Schmidt ----------------------- ------------------ Its: President Its: Vice President & C.F.O. --------- ----------------------- By: /s/ Thomas L. Green -------------------- Its: V.P./General Counsel -------------------- Birtcher/Birtcher Properties/Encad Acq/Docs/Second Amendmt to APS 2 THIRD AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS ENCAD CORPORATE HEADQUARTERS This THIRD AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS, ENCAD CORPORATE HEADQUARTERS (the "Third Amendment") is made effective as of this 26th day of October, 1999, by and between ENCAD, INC., a Delaware corporation ("Seller"), and BIRTCHER PROPERTIES, a California corporation ("Buyer"). R E C I T A L S A. Seller and Buyer are parties to that certain Agreement of Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated as of August 5, 1999 (the "Purchase Agreement"), as amended by that certain First Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated effective as of September 30, 1999 (the "First Amendment"), and that certain Second Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated October 18, 1999, providing for the purchase and sale of that certain land and improvements more particularly described in the Purchase Agreement. As used herein, the term "Purchase Agreement" shall mean the Purchase Agreement as amended by the First Amendment and the Second Amendment. B. Seller and Buyer desire to amend and modify the Purchase Agreement in certain particulars, and the purpose of this Third Amendment is to set forth the terms and provisions agreed upon between Seller and Buyer with respect to the amendment and modification of the Purchase Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer hereby agree to amend and modify the Purchase Agreement, as follows: 1. END OF THE INSPECTION PERIOD. Section 1.1.10 of the Purchase Agreement is hereby modified and amended to delete the provisions thereof and replace them with the date of November 2, 1999, which shall be deemed to be the "End of the Inspection Period" for the purposes of the Purchase Agreement. 2. END OF THE FINANCING CONTINGENCY PERIOD. Section 1.1.11 of the Purchase Agreement is hereby modified and amended to delete the provisions thereof and replace them with the date of November 9, 1999, which shall be deemed to be the "End of the Financing Contingency Period" for the purposes of the Purchase Agreement. 3. NEW LEASE APPROVAL DATE. The provisions of Section 4.1.7 of the Purchase Agreement are hereby amended and modified to provide that the New Lease shall be mutually approved by Buyer and Seller on or prior to November 2, 1999. 4. CLOSING. Section 6.2 of the Purchase Agreement is hereby modified and amended to change the "Closing Date" to November 24, 1999. 5. PROPERTY DEFICIENCIES. Section 6 of the Second Amendment is hereby modified and amended to require as an additional covenant of Seller that Seller cause its architect to provide an estimate of such costs in sufficient detail for Buyer and Buyer's lender to evaluate on or before October 28, 1999. Further, Section 6 of the Second Amendment is hereby modified and amended to provide that Buyer shall have the right, on or before October 28, 1999, to approve the scope and nature of the remedial work, as well as the amounts estimated to complete such work. 6. MISCELLANEOUS. 6.1 CONFLICT OR INCONSISTENCY. In the event of any conflict or inconsistency between the terms and provisions of this Third Amendment and the terms and provisions of the Purchase Agreement, the terms and provisions of this Third Amendment shall control and govern the rights, duties and obligations of the parties. 6.2 DEFINED TERMS. The defined terms used in this Third Amendment, as indicated by the first letter of a word being capitalized, shall have the same meaning and definition in this Third Amendment as such terms have in the Purchase Agreement, unless such terms have been redefined in this Third Amendment. 6.3 EFFECT OF AMENDMENT. Except as modified and amended by this Third Amendment, the Purchase Agreement shall remain in full force and effect. 6.4 COUNTERPARTS. This Third Amendment may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one and the same instrument. 6.5 TELEFAXED COPIES OF THIRD AMENDMENT. The parties hereto hereby agree that either party may rely on telefaxed execution copies of this Third Amendment for all purposes. 1 IN WITNESS WHEREOF, Buyer and Seller have executed this Third Amendment as of the date first written above. "Buyer" "Seller" BIRTCHER PROPERTIES, ENCAD, INC., a California corporation a Delaware corporation By: /s/ Robert M. Anderson By: /s/ T.W. Schmidt ----------------------- ------------------ Its: President Its: Vice President & C.F.O. --------- ----------------------- By: /s/ Thomas L. Green -------------------- Its: V.P./General Counsel -------------------- Birtcher/Birtcher Properties/Encad Acq/Docs/Third Amendmt to APS 2 FOURTH AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS ENCAD CORPORATE HEADQUARTERS This FOURTH AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS, ENCAD CORPORATE HEADQUARTERS (the "Fourth Amendment") is made effective as of this 9th day of November, 1999, by and between ENCAD, INC., a Delaware corporation ("Seller"), and BIRTCHER PROPERTIES, a California corporation ("Buyer"). R E C I T A L S A. Seller and Buyer are parties to that certain Agreement of Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated as of August 5, 1999 (the "Purchase Agreement"), as amended by that certain First Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated effective as of September 30, 1999 (the "First Amendment"), and that certain Second Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated October 18, 1999, and that certain Third Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated October 26, 1999, providing for the purchase and sale of that certain land and improvements more particularly described in the Purchase Agreement. As used herein, the term "Purchase Agreement" shall mean the Purchase Agreement as amended by the First Amendment, the Second Amendment, and the Third Amendment. B. Seller and Buyer desire to amend and modify the Purchase Agreement in certain particulars, and the purpose of this Fourth Amendment is to set forth the terms and provisions agreed upon between Seller and Buyer with respect to the amendment and modification of the Purchase Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer hereby agree to amend and modify the Purchase Agreement, as follows: 1. END OF THE FINANCING CONTINGENCY PERIOD. Section 1.1.11 of the Purchase Agreement is hereby modified and amended to delete the provisions thereof and replace them with the date of November 16, 1999, which shall be deemed to be the "End of the Financing Contingency Period" for the purposes of the Purchase Agreement. 2. NEW LEASE APPROVAL DATE. The provisions of Section 4.1.7 of the Purchase Agreement are hereby amended and modified to provide that the New Lease shall be mutually approved by Buyer and Seller on or prior to November 16, 1999. 3. MISCELLANEOUS. 3.1 CONFLICT OR INCONSISTENCY. In the event of any conflict or inconsistency between the terms and provisions of this Fourth Amendment and the terms and provisions of the Purchase Agreement, the terms and provisions of this Fourth Amendment shall control and govern the rights, duties and obligations of the parties. 3.2 DEFINED TERMS. The defined terms used in this Fourth Amendment, as indicated by the first letter of a word being capitalized, shall have the same meaning and definition in this Fourth Amendment as such terms have in the Purchase Agreement, unless such terms have been redefined in this Fourth Amendment. 3.3 EFFECT OF AMENDMENT. Except as modified and amended by this Fourth Amendment, the Purchase Agreement shall remain in full force and effect. 3.4 COUNTERPARTS. This Fourth Amendment may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one and the same instrument. 3.5 TELEFAXED COPIES OF FOURTH AMENDMENT. The parties hereto hereby agree that either party may rely on telefaxed execution copies of this Fourth Amendment for all purposes. 1 IN WITNESS WHEREOF, Buyer and Seller have executed this Fourth Amendment as of the date first written above. "Buyer" "Seller" BIRTCHER PROPERTIES, ENCAD, INC., a California corporation a Delaware corporation By: /s/ Robert M. Anderson By: /s/ T.W. Schmidt ----------------------- ------------------ Its: President Its: Vice President & C.F.O. --------- ----------------------- By: /s/ Thomas L. Green -------------------- Its: V.P./General Counsel -------------------- Birtcher/Birtcher Properties/Encad Acq/Docs/Fourth Amendmt to APS 2 FIFTH AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS ENCAD CORPORATE HEADQUARTERS This FIFTH AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS, ENCAD CORPORATE HEADQUARTERS (the "Fifth Amendment") is made effective as of this 16th day of November, 1999, by and between ENCAD, INC., a Delaware corporation ("Seller"), and BIRTCHER PROPERTIES, a California corporation ("Buyer"). R E C I T A L S A. Seller and Buyer are parties to that certain Agreement of Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated as of August 5, 1999 (the "Purchase Agreement"), as amended by that certain First Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated effective as of September 30, 1999 (the "First Amendment"), and that certain Second Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated October 18, 1999, that certain Third Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated October 26, 1999, and that certain Fourth Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated November 9, 1999, providing for the purchase and sale of that certain land and improvements more particularly described in the Purchase Agreement. As used herein, the term "Purchase Agreement" shall mean the Purchase Agreement as amended by the First Amendment, the Second Amendment, and the Third Amendment. B. Seller and Buyer desire to amend and modify the Purchase Agreement in certain particulars, and the purpose of this Fifth Amendment is to set forth the terms and provisions agreed upon between Seller and Buyer with respect to the amendment and modification of the Purchase Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer hereby agree to amend and modify the Purchase Agreement, as follows: 1. END OF THE FINANCING CONTINGENCY PERIOD. Section 1.1.11 of the Purchase Agreement is hereby modified and amended to delete the date set forth therein and replace it with the date of November 19, 1999, which shall be deemed to be the "End of the Financing Contingency Period" for the purposes of the Purchase Agreement. 2. NEW LEASE APPROVAL DATE. The provisions of Section 4.1.7 of the Purchase Agreement are hereby amended and modified to provide that the New Lease shall be mutually approved by Buyer and Seller on or prior to November 19, 1999. 3. MISCELLANEOUS. 3.1 CONFLICT OR INCONSISTENCY. In the event of any conflict or inconsistency between the terms and provisions of this Fifth Amendment and the terms and provisions of the Purchase Agreement, the terms and provisions of this Fifth Amendment shall control and govern the rights, duties and obligations of the parties. 3.2 DEFINED TERMS. The defined terms used in this Fifth Amendment, as indicated by the first letter of a word being capitalized, shall have the same meaning and definition in this Fifth Amendment as such terms have in the Purchase Agreement, unless such terms have been redefined in this Fifth Amendment. 3.3 EFFECT OF AMENDMENT. Except as modified and amended by this Fifth Amendment, the Purchase Agreement shall remain in full force and effect. 3.4 COUNTERPARTS. This Fifth Amendment may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one and the same instrument. 3.5 TELEFAXED COPIES OF FIFTH AMENDMENT. The parties hereto hereby agree that either party may rely on telefaxed execution copies of this Fifth Amendment for all purposes. 1 IN WITNESS WHEREOF, Buyer and Seller have executed this Fifth Amendment as of the date first written above. "Buyer" "Seller" BIRTCHER PROPERTIES, ENCAD, INC., a California corporation a Delaware corporation By: /s/ Greg MacDiarmid By: /s/ T.W. Schmidt -------------------- ------------------ Its: Chief Financial Officer Its: Vice President & C.F.O. ----------------------- ----------------------- By: /s/ Thomas L. Green -------------------- Its: V.P./General Counsel -------------------- Birtcher/Birtcher Properties/Encad Acq/Docs/Fifth Amendmt to APS 2 SIXTH AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS ENCAD CORPORATE HEADQUARTERS This SIXTH AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS, ENCAD CORPORATE HEADQUARTERS (the "Sixth Amendment") is made effective as of this 19th day of November, 1999, by and between ENCAD, INC., a Delaware corporation ("Seller"), and BIRTCHER PROPERTIES, a California corporation ("Buyer"). R E C I T A L S A. Seller and Buyer are parties to that certain Agreement of Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated as of August 5, 1999 (the "Purchase Agreement"), as amended by that certain First Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated effective as of September 30, 1999 (the "First Amendment"), and that certain Second Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated October 18, 1999, that certain Third Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated October 26, 1999, that certain Fourth Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated November 9, 1999, and that certain Fifth Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated November 16, 1999, providing for the purchase and sale of that certain land and improvements more particularly described in the Purchase Agreement. As used herein, the term "Purchase Agreement" shall mean the Purchase Agreement as amended by the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, and the Fifth Amendment. B. Seller and Buyer desire to amend and modify the Purchase Agreement in certain particulars, and the purpose of this Sixth Amendment is to set forth the terms and provisions agreed upon between Seller and Buyer with respect to the amendment and modification of the Purchase Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer hereby agree to amend and modify the Purchase Agreement, as follows: 1. END OF THE FINANCING CONTINGENCY PERIOD. Section 1.1.11 of the Purchase Agreement is hereby modified and amended to delete the date set forth therein and replace it with the date of November 23, 1999, which shall be deemed to be the "End of the Financing Contingency Period" for the purposes of the Purchase Agreement. 2. NEW LEASE APPROVAL DATE. The provisions of Section 4.1.7 of the Purchase Agreement are hereby amended and modified to provide that the New Lease shall be mutually approved by Buyer and Seller on or prior to November 23, 1999. 3. MISCELLANEOUS. 3.1 CONFLICT OR INCONSISTENCY. In the event of any conflict or inconsistency between the terms and provisions of this Sixth Amendment and the terms and provisions of the Purchase Agreement, the terms and provisions of this Sixth Amendment shall control and govern the rights, duties and obligations of the parties. 3.2 DEFINED TERMS. The defined terms used in this Sixth Amendment, as indicated by the first letter of a word being capitalized, shall have the same meaning and definition in this Sixth Amendment as such terms have in the Purchase Agreement, unless such terms have been redefined in this Sixth Amendment. 3.3 EFFECT OF AMENDMENT. Except as modified and amended by this Sixth Amendment, the Purchase Agreement shall remain in full force and effect. 3.4 COUNTERPARTS. This Sixth Amendment may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one and the same instrument. 3.5 TELEFAXED COPIES OF SIXTH AMENDMENT. The parties hereto hereby agree that either party may rely on telefaxed execution copies of this Sixth Amendment for all purposes. 1 IN WITNESS WHEREOF, Buyer and Seller have executed this Sixth Amendment as of the date first written above. "Buyer" "Seller" BIRTCHER PROPERTIES, ENCAD, INC., a California corporation a Delaware corporation By: /s/ Greg McDiarmid By: /s/ T.W. Schmidt ------------------- ------------------ Its: Chief Financial Officer Its: Vice President & C.F.O. ----------------------- ----------------------- By: /s/ Thomas L. Green -------------------- Its: V.P./General Counsel -------------------- Birtcher/Birtcher Properties/Encad Acq/Docs/Sixth Amendmt to APS 2 SEVENTH AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS ENCAD CORPORATE HEADQUARTERS This SEVENTH AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS, ENCAD CORPORATE HEADQUARTERS (the "Seventh Amendment") is made effective as of this 23rd day of November, 1999, by and between ENCAD, INC., a Delaware corporation ("Seller"), BIRTCHER PROPERTIES, a California corporation ("Buyer") and BIRTCHER CORNERSTONE, L.P. a Delaware limited partnership. R E C I T A L S A. Seller and Buyer are parties to that certain Agreement of Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated as of August 5, 1999 (the "Purchase Agreement"), as amended by that certain First Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated effective as of September 30, 1999 (the "First Amendment"), and that certain Second Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated October 18, 1999, that certain Third Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated October 26, 1999, that certain Fourth Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated November 9, 1999, that certain Fifth Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad Corporate Headquarters, dated November 16, 1999 that certain Sixth Amendment to Agreement for Purchase and Sale of Real Property and Escrow Instructions, Encad corporate headquarters, dated November 19, 1999, providing for the purchase and sale of that certain land and improvements more particularly described in the Purchase Agreement. As used herein, the term "Purchase Agreement" shall mean the Purchase Agreement as amended by the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, and the Sixth Amendment. B. Seller and Buyer desire to amend and modify the Purchase Agreement in certain particulars, and the purpose of this Seventh Amendment is to set forth the terms and provisions agreed upon between Seller and Buyer with respect to the amendment and modification of the Purchase Agreement. Buyer, by this Seventh Amendment also desires to assign all of its rights, duties and obligations under the Purchase Agreement to Birtcher Cornerstone, L.P., and have that entity assume the duties and obligations of Buyer thereunder. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller, Buyer and Birtcher Cornerstone, L.P., a Delaware limited partnership, hereby agree to amend and modify the Purchase Agreement, as follows: 1. APPROVAL OF FINANCING CONTINGENCY. Buyer hereby confirms that the Buyer has satisfied, and hereby waives, the Buyer's Condition set forth in Section 4.1.6 of the Purchase Agreement providing for the approval of financing for the acquisition. 2. NEW LEASE APPROVAL. Buyer and Seller hereby approve the form of the New Lease negotiated between the parties and forwarded to Seller by letter dated January 19, 2000, which form of lease shall be executed and delivered at the Closing. 3. CLOSING. Section 6.2 of the Purchase Agreement is hereby modified and amended to change the "Closing Date" to on January 26, 2000. 4. PROPERTY CONDITION. Pursuant to the terms of Section 4.1.3 "Inspection Approval," Buyer delivered to Seller a punch list of corrective work which Buyer considered necessary to be performed, which punch list was dated November 2, 1999, and a copy of which is attached hereto and incorporated herein by this reference (hereinafter the "Punch List"). In reviewing the Punch List, Seller retained the services of architect Don Reeves of Turpit and Potter Architects (the "Architect") to review the items listed in the Punch List. Based upon the review by Buyer, Seller and the Architect of the Punch List, the Seller has agreed to the complete following items after the Closing, and Seller agrees that the obligation to complete these items shall survive the Closing: (a) MINOR REPAIR ITEMS. Seller hereby agrees to perform all of the minor repair items set forth on the Punch List within thirty (30) days of the Closing. (b) MAJOR REPAIR ITEMS. Seller agrees to repair, slurry and re-stripe the parking on the Property. Seller shall perform the required work within one hundred twenty (120) days of the Closing. In the event the City, at any time during the term of the New Lease, determines that the parking is not in compliance with City requirements as interpreted by the City, the Seller shall promptly make all modifications requested by the City. (c) ADA COMPLIANCE. If the City, at any time during the term of the New Lease, determines that the Property does not comply with the requirements of the Americans with Disabilities Act 1 ("ADA"), Seller agrees to promptly comply with such requirements as interpreted by the City and to make all modifications requested by the City. (d) CODE COMPLIANCE. Buyer shall obtain electrical permits, complete the work, and seek inspections and approvals for all of the electrical work items identified in the Turpit and Potter Review of Building Alterations for Encad, Inc., 21 October 1999, Revised, 3 November 1999. Seller shall use its best efforts to obtain the electrical permits for such work within sixty (60) days of the Closing and shall use its best efforts to complete such work and seek the inspections of the work within one hundred twenty (120) days of the Closing. Further, Seller shall use its best efforts to obtain certificates of occupancy for the Property, or the equivalency thereof, after the electrical work is completed. In the event the City, at any time during the term of the New Lease, determines that the Property does not comply with all codes, regulations and requirements as interpreted by the City, the Seller shall promptly make all modifications requested by the City. 5. REMEDIAL WORK. Pursuant to the provisions of paragraph 6 of the First Amendment, Buyer and Seller hereby agree that the holdback in Escrow of the Purchase Price shall be in the amount of Thirty-six Thousand Dollars ($36,000.00). Such amount shall be subject to monthly disbursement to reimburse Seller for costs actually incurred to complete the remedial work identified in paragraphs 4(c) and (d), above. All disbursements shall require evidence of payment for such work performed on the Property as identified in paragraphs 4(a) through (d) above, release of all lien claims, and evidence of the approval of the work by applicable governmental authorities, if such approval is required and can be obtained. Seller shall be entitled to a release of any balance of the holdback once Seller has completed the work required by paragraphs 4(a) through (d), above, and obtained a certificates of occupancy, or its equivalent, from the City, or provided Buyer with reasonable evidence that such approvals cannot be obtained from the City. 6. ASSIGNMENT. Buyer hereby assigns all of its rights, duties and obligations under the Purchase Agreement to Birtcher Cornerstone, L.P., a Delaware limited partnership, and Birtcher Cornerstone, L.P., a Delaware limited partnership, hereby agrees to assume all of Buyer's duties and obligations under the Purchase Agreement. All references in the Purchase Agreement to "Buyer" shall hereinafter refer to Birtcher Cornerstone, L.P., a Delaware limited partnership. 7. MISCELLANEOUS. 7.1 CONFLICT OR INCONSISTENCY. In the event of any conflict or inconsistency between the terms and provisions of this Seventh Amendment and the terms and provisions of the Purchase Agreement, the terms and provisions of this Seventh Amendment shall control and govern the rights, duties and obligations of the parties. 7.2 DEFINED TERMS. The defined terms used in this Seventh Amendment, as indicated by the first letter of a word being capitalized, shall have the same meaning and definition in this Seventh Amendment as such terms have in the Purchase Agreement, unless such terms have been redefined in this Seventh Amendment. 7.3 EFFECT OF AMENDMENT. Except as modified and amended by this Seventh Amendment, the Purchase Agreement shall remain in full force and effect. 7.4 COUNTERPARTS. This Seventh Amendment may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one and the same instrument. 7.5 TELEFAXED COPIES OF SEVENTH AMENDMENT. The parties hereto hereby agree that either party may rely on telefaxed execution copies of this Seventh Amendment for all purposes. 2 IN WITNESS WHEREOF, Buyer and Seller have executed this Seventh Amendment as of the date first written above. "Buyer" "Seller" BIRTCHER PROPERTIES, ENCAD, INC., a California corporation, a Delaware corporation By: /s/ Robert M. Anderson By: /s/ T.W. Schmidt ------------------------ ------------------ Its: President Its: V.P. and C.F.O. --------- --------------- BIRTCHER CORNERSTONE, L.P., By: /s/ Thomas L. Green a Delaware limited partnership, --------------------- Its: V.P. ---- By: Birtcher Cornerstone G.P., L.L.C., a Delaware limited liability company, General Partner of Birtcher Cornerstone, L.P. By: /s/ Robert M. Anderson ----------------------- Its: ----------------------- Birtcher/Birtcher Properties/Encad Acq/Docs/Seventh Amendmt to APS6 3 PUNCH LIST OF CORRECTIVE WORK ENCAD CORPORATE HEADQUARTERS MINOR REPAIR ITEMS - All corrective work to be completed prior to Closing. - - 5959 Building - Connect condensate line directly to the underground storm drain at the computer room cooling tower; - - 5959 Building - Replace stained ceiling tiles surrounding the skylight opening; - - 6059 Building - Repair fence section at top-of-slope adjacent to eastern parking area; and - - 6059 Building - Trim tree from building line at west elevation. MAJOR REPAIR ITEM - To be completed in conjunction with correction of Compliance Issues referenced in Paragraph 2.5, Lessee as Prior Owner/Occupant, of the Lease. - - Repair, slurry, and re-stripe parking/parking areas. - - ADA Compliance: - Install correct signage; provide path of travel to lobby entrances; provide parking space pavement marking including van-accessible space; - Install compliant lever faucets in restrooms; - Install insulation over drain and hot water piping in restrooms; - Provide handrail extensions at all stairways; - Provide visible signal at elevator doors; and - Install visible fire alarm systems (covered in Turpit & Potter report). CODE COMPLIANCE ITEMS - To be completed per Paragraph 2.5 of the Lease. - - Based on Turpit & Potter report (Review of Building Alterations for ENCAD, Inc. dated 21 October 1999, revised 1 November 1999), deposit of $36,000 into Escrow pursuant to the Third Amendment to Purchase and Sale Agreement; - - Completion of compliance items. 4 EX-10.45 8 EXHIBIT 10.45 EXHIBIT 10.45 LEASE AGREEMENT DATED OCTOBER 15, 1999 BETWEEN THE COMPANY AND BIRTCHER CORNERSTONE, L.P., A DELAWARE LIMITED PARTNERSHIP AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET 1. BASIC PROVISIONS ("BASIC PROVISIONS"). 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, October 15, 1999, is made by and between Birtcher Cornerstone, L.P., a Delaware Limited partnership ("Lessor") and ENCAD, INC., a Delaware corporation ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2 Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 6059 and 5959 Cornerstone Court West, San Diego (APNs 341-370-18 & 341-370-19), located in the County of San Diego, State of California, and generally described as (describe briefly the nature of the property and, if applicable, the "Project", if the property is located within a Project) two (2) two-story high-tech R&D/office buildings containing approximately 97,945 square feet as follows: 6059 Cornerstone Court West - approx. 50,600 square feet; and 5959 Cornerstone Court West - approx. 47,345 square feet ("Premises"). (See also Paragraph 2) 1.3 Term: Seven (7) years and zero (0) months ("Original Term") commencing per Paragraph 59 ("Commencement Date") and ending per Paragraph 59 ("Expiration Date"). (See also Paragraph 3) 1.4 Early Possession: N/A ("Early Possession Date"). (See also Paragraphs 3.2 and 3.3) 1.5 Base Rent: $101,862.80 per month ("Base Rent") subject to the increase and as increased in accordance with Paragraph 51, payable on the Commencement Date and thereafter on the first (1st) day of each month commencing on the Commencement Date. (See also Paragraph 4) /X/ If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Base Rent Paid Upon Execution: $0 as Base Rent for the period. 1.7 Security Deposit: See Paragraph 53. 1.8 Agreed Use: Design, research, warehousing and manufacturing of high technology products and/or general office uses, but subject to Applicable Requirements. (See also Paragraph 6) 1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated herein. (See also Paragraph 8) 1.10 [Intentionally Omitted] 1.11 [Intentionally Omitted] 1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda consisting of Paragraphs 50 through 60 and Exhibits "A", "B" and "C", all of which constitute a part of this Lease. 2. PREMISES. (See also Paragraph 50) 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable and the rental based thereon is not subject to revision whether or not the actual size is more or less 2.2 Condition. Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs ("Start Date"), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee within thirty (30) days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the "Building") shall be free of material defects. If a non-compliance with said warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If, after the Start Date, Lessee does not give Lessor written notice of any non-compliance with this warranty within: (i) one year as to the surface of the roof and the structural portions of the roof, foundations and bearing walls, (ii) six (6) months as to the HVAC systems, (iii) thirty (30) days as to the remaining systems and other elements of the Building, correction of such non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 Compliance. Lessor warrants that the improvements on the Premises comply with all applicable laws, covenants or restrictions of record, building codes, regulations and ordinances ("Applicable Requirements") in effect on the Start Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the zoning is appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises doe not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Start Date, which is addressed in Paragraph 6.2(e) below) so as to require during the term of this Lease the construction of an addition to or an alteration of the Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("Capital Expenditure"), Lessor and Lessee shall allocate the cost of such work as follows: (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(c); provided, however, that if such Capital Expenditure is required during the last two years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and bring an action against Lessor to recover the same, together with Interest. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 2.4 Acknowledgements. Lessee acknowledges that: (a) it has been advised by Lessor to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee's intended use; (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefore as the same relate to its occupancy of the Premises; and (c) neither Lessor, Lessor's agents, nor any Broker has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. 2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work. In this regard, Lessee acknowledges and agrees that (i) Lessee is fully responsible and liable for obtaining any and all building permits required for improvements in, to, on and/or about the Premises as the same exist as of the Commencement Date and shall obtain and deliver them to Landlord within sixty (60) days thereafter, (ii) Lessee shall bring the Premises into compliance with Applicable Requirements and obtain final Certificates of Occupancy therefore within one-hundred twenty (120) days of the Commencement Date, and (iii) Lessee shall indemnify, defend and hold Lessor free and harmless of, from and against any and all claims, demands, losses, liabilities, damages, fees, penalties, costs and/or expenses, including without limitation reasonable attorneys fees, arising out of, resulting from or incurred in connection with the Premises not having required licenses, permits or Certificates of Occupancy as of the Commencement Date or the Premises not being in compliance with Applicable Requirements as of the Commencement Date. 3. TERM. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including, but not limited to, the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.3 Delay in Possession. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefore, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until it receives possession of the Premises. If possession is not delivered within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing within ten (10) days after the end of such sixty (60) day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said ten (10) day period, Lessee's right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Lessee by the Start Date and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession of the Premises is not delivered within four (4) months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing. 3.4 Lessee Compliance. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. RENT. (See also Paragraphs 51 and 52) 4.1 Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("Rent"). 4.2 Payment. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in Paragraph 13.6(b) of this Lease), on or before the day on which it is due. Rent for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. 5. [INTENTIONALLY OMITTED] 6. USE. 6.1 Use. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in use. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State of California or the United States Government, as well as any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefore. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (c) Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (d) Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. NO TERMINATION, CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY LESSOR AND LESSEE SHALL RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE TIME OF SUCH AGREEMENT. (e) Lessor Indemnification. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which existed as a result of Hazardous Substances on the Premises or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (f) Investigations and Remediations. As a result of, among other things, Lessee's previous ownership, occupancy and/or use of the Premises, Lessee shall have and retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date. Additionally, if such remediation measure is required as a result of Lessee's use (including Alterations", as defined in Paragraph 7.3(a) below) of the Premises (whether before, on or after the Start Date), Lessee shall also be responsible for the same. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out investigative, monitoring and remedial responsibilities. (g) Lessor Termination Open. If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefore (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.23(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of remediation of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3 Lessee's Compliance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. 6.4 Inspection; Compliance. Lessor and Lessor's "Lender" (as defined in Paragraph 30 below) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the commercially reasonable cost of such inspections, so long as such inspection is reasonably related to the violation or contamination. 7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 Lessee's Obligations. (See also Paragraphs 52 and 54) (a) In General. Subject to the provisions of Paragraph 2.2 (Condition), as modified by Paragraph 2.5, Paragraph 2.3 (Compliance), as modified by Paragraph 2.5, Paragraph 6.3 (Lessee's Compliance with Applicable Requirements), Paragraph 7.2 (Lessor's Obligations), Paragraph 9 (Damage or Destruction), and Paragraph 14 (Condemnation), as well as Paragraphs 52 and 54, Lessee shall, at Lessee's sole expense, keep the Premises, Utility Installations, and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such reapirs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, heating, ventilating, air-conditioning, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the Building. (b) Service Contracts. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drains, (vi) driveways and parking lots, (vii) clarifiers, (viii) basic utility feed to the perimeter of the Building, and (ix) any other equipment, if it is required by Lessor and commercially reasonable to impose such requirement. (c) Replacement. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if an item described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such item, then such item shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is the number of months of the useful life of such replacement as such useful life is specified pursuant to Federal income tax regulations or guidelines for depreciation thereof (including, that is, plus, interest on the unamortized balance at the lesser of ten percent (10%) per annum or the maximum legal rate, with Lessee reserving the right to prepay its obligation at any time. 7.2 Lessor's Obligations. Subject to the provisions of Paragraph 2.2 (Condition), as modified by Paragraph 2.5, Paragraph 2.3 (Compliance), as modified by Paragraph 2.5, Paragraph 7.1(c), Paragraph 9 (Damage or Destruction) and Paragraph 14 (Condemnation) and except as is otherwise specifically provided in this Lease, it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair or the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. 7.3 Utility Installations; Trade Fixtures; Alterations. (a) Definitions; Consent Required. The term "Utility Installations" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent, which consent shall not be unreasonably withheld. Lessee may, however, make non structural Alterations and/or non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed $50,000 in the aggregate or $10,000 in any one year; provided, however, that in no event shall Lessor's consent be required to recarpet or paint the interior of the building(s) at the Premises. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount equal to the greater of one month's Base Rent, or $10,000, Lessor many condition its consent upon Lessee providing a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation. (c) Indemnification. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non- responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to one and on-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's reasonable attorneys' fees and costs. 7.4 Ownership; Removal; Surrender; and Restoration. (a) Ownership. All Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. (b) Removal. All Lessee Owned Alterations or Utility Installations shall be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. (c) Surrender/Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. 8. INSURANCE; INDEMNITY. 8.1 Payment for Insurance. Lessee shall pay (or reimburse Lessor, as appropriate) for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy period commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of any invoice. 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability Policy of Insurance protecting Lessee and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an " Additional Insured-Managers or Lessors of Premises Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement" for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an 'insured contract' for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance - Building, Improvements and Rental Value. (a) Building and Improvements. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lenders, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alternations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (including the perils of flood and/or earthquake if desired by Lessor or required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has deductible clause, the deductible amount shall not exceed $5,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss. (b) Rental Value. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one (1) year. Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of Rent from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) Adjacent Premises. If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. 8.4 Lessee's Property/Business Interruption Insurance. (a) Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $5,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5 Insurance Policies. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least A-X, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 Indemnity. Except for Lessor's negligence or greater fault (to the extent, but only to the extent, such negligence or greater fault is not covered by insurance Lessee maintains or would not have been covered by such insurance if Lessee had maintained all insurance required to be obtained and maintained by Lessee hereunder), Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. Lessee's indemnity and other obligations, liabilities and duties under this paragraph shall survive the expiration or termination of this Lease. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom (i) resulting from Lessee's breach of or default or failure to perform under this Lease or (ii) which is covered by insurance Lessee maintains or which would have been covered by such insurance if Lessee had maintained all insurance required to be obtained and maintained by Lessee hereunder. 9. DAMAGE OR DESTRUCTION. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (c) "Insured Loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within thirty (30) days following receipt of written notice of such shortage and request therefore. If Lessor receives said funds or adequate assurance thereof within said thirty (30) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or have this Lease terminate sixty (60) days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may 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) terminate this Lease by giving written notice to Lessee within thirty (30) days after receipt by Lessor or knowledge of the occurrence of such damage. Such termination shall be effective sixty (60) days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within ten (10) days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days after making such commitment. In the event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6. 9.5 [Intentionally omitted] 9.6 Abatement of Rent; Lessee's Remedies. (a) Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein. 9.7 Termination - Advance Payments. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an adjustment, on a per diem basis, shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor. 9.8 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 Definition of "Real Property Taxes." As used herein, the term "Real Property Taxes" shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises, Lessor's right to other income therefrom, and/or Lessor's business of leasing the Premises, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Premises. 10.2 . (a) Payment of Taxes. Lessee shall pay the Real Property Taxes applicable to the Premises during the term of this Lease. Subject to Paragraph 10.2(b), all such payments shall be made at least ten (10) days prior to any delinquency date. In the event that Lessee does not receive the original or a copy of the bill for the Real Property Taxes directly from the taxing authority, Lessor shall promptly furnish Lessee with the same. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment. If Lessee shall fail to pay any required Real Property Taxes, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefore upon demand. (b) Advance Payment. In the event (i) Lessee incurs a late charge on any Rent payment other than Real Property Taxes twice or more in any twelve (12) month period or (ii) Lessee incurs or there is otherwise charged a late charge, fee or delinquency with respect to Real Property Taxes, Lessor may, at Lessor's option, estimate the current Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sums as are necessary to pay such obligations. All monies paid to Lessor under this Paragraph may be intermingled with other monies of Lessor and shall not bear interest. 10.3 Joint Assessment. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. 10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alteration, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall reimburse Lessor, if previously paid by Lessor, or pay directly to the taxing authority the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement. 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered. 12. ASSIGNMENT AND SUBLETTING. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "assign or assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, however, but subject to the terms and provisions of Paragraph 12.2 (except Paragraph 12.2(e) thereof), it is expressly understood and agreed that Lessee may assign, or transfer by operation of law, its entire interest in this Lease and all of its rights hereunder (including, without limitation, the Extension Option set forth in Paragraph 56 of this Lease) to a "successor corporation" of Lessee or to a "parent," "subsidiary" or "affiliate" of Lessee, as such terms are hereinafter defined, without Lessor's prior written consent, provided that this Lease is in full force and effect. A "successor corporation" as used in this Paragraph shall mean (i) a corporation to which or with which Lessee is merged or consolidated in accordance with applicable statutory provisions for the merger or consolidation of corporations or (ii) a corporation to which all or substantially all of Lessee's assets are transferred, provided that, in either case, by operation of law or by agreements with Lessor in a commercially reasonable form, the terms, covenants and conditions of this Lease to be performed by Lessee are assumed by the corporation to which this Lease is assigned or transferred. A "parent" shall be deemed an entity owning Lessee, either directly or indirectly; a "subsidiary" shall be deemed an entity owned by Lessee, either directly or indirectly; and an "affiliate" shall be deemed an entity having substantially the same ownership as Lessee. (b) Subject to the provisos set forth (i) in the second sentence of Paragraph 12.1(a) and (ii) after the colon in the first sentence of Paragraph 12.1(c), including without limitation that portion of said proviso set forth after the semicolon in such first sentence, a change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of fifty percent (50%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than twenty-five percent (25%) of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent, subject, however, to the following: Lessor acknowledges that Lessee has advised Lessor that Lessee is a "publicly traded stock company" and, therefore, Lessor shall not have the right to withhold its consent to an assignment resulting solely from the transfer of the publicly traded stock of Lessor in the normal course of business; and this shall be so notwithstanding the fact that such a transfer may occur in connection with a merger. "Net Worth of Lessee" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles. (d) An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice, increase the monthly Base Rent to one hundred ten percent (110%) of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to one hundred ten percent (110%) of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent. (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 Terms and Conditions Applicable to Assignment. (See also Paragraph 55) (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease; (ii) release Lessee of any obligations hereunder; or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (b) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $1,000 as consideration for Lessor's considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions (as well as those set forth in Paragraph 55) shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. (b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 Default; Breach. A "Default" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this lease. A "Breach" is defined as the occurrence of one or more of the following Defaualts, and the failure of Lessee to cure such Default within any applicable grace period: (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "debtor" as defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days; (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guarantee: (i) the death of a Guarantor; (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty; (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing; (iv) a Guarantor's refusal to honor the guaranty; or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any of its affirmative duties or obligations, within ten (10) days after written notice or such longer period as is reasonably required, if ten (10) days is insufficient but Lessee commences performance within such period and, thereafter, diligently prosecutes such performance to completion (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor, including a commercially reasonable management fee, shall be due and payable by Lessee upon receipt of invoice therefor; the parties acknowledge and agree that, so long as the management fee charged in, for or during any one (1) month period, does not exceed the lesser of (i) ten percent (10%) of such costs and expenses exclusive of such management fee or (ii) one and one-half percent (1.5%) of the then current monthly Base Rent, such management fee shall be deemed commercially reasonable (see also Paragraph 52). If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of Rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to five percent (5%) of each such overdue amount. The Parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the thirty-first (31st) day after it was due as to non-scheduled payments. The interest ("Interest") charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus four percent (4%), but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. Additionally, except as otherwise specifically provided herein, Interest shall also be due with respect to any monetary payment due Lessee hereunder not received by Lessee hereunder within thirty (30) days following the date on which it was due; in such case, Interest will accrue from the thirty-first (31st) day after said due date. 13.6 Breach by Lessor. (a) Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. (b) Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within thirty (30) days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to one month's Base Rent, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "Condemnation"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of any building portion of the Premises, or more than twenty-five percent (25%) of the land area portion of the Premises not occupied by any building, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. 15. [INTENTIONALLY OMITTED] 16. ESTOPPEL CERTIFICATES. (See also Paragraph 60) (a) Lessee shall within ten (10) days after written notice from Lessor execute, acknowledge and deliver to Lessor a statement in writing in form similar to the then most current "Estoppel Certificate" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by Lessor. (b) If Lessee shall fail to execute or deliver the Estoppel Certificate within such ten day period, Lessor may execute an Estoppel Certificate stating and/or Lessee shall be deemed to have certified that: (i) the Lease is in full force and effect without modification except as may be represented by Lessor, (ii) there are no uncured defaults in Lessor's performance, and (iii) Lessor's Estoppel Certificate and/or Lessee's certification, and Lessee shall be estopped from denying the truth of the facts contained in said Certificate or such certification. This Paragraph 16(b) shall not limit Lessor's other rights and remedies as provided by this Lease or otherwise. (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including, but not limited to, Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. DEFINITION OF LESSOR. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined Paragraph 6 above. 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. DAYS. Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days. 20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction. 21. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 22. NO PRIOR OR OTHER AGREEMENTS. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. 23. NOTICES. 23.1 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier) or may be sent by overnight, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of monies or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Lessee shall, upon request of Lessor, execute, acknowledge and deliver to Lessor a short form memorandum of this Lease for recording purposes. Lessor shall be responsible for payment of any recording fees applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to one hundred twenty-five percent (125%) of the Base Rent applicable during the month immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "Lessor's Lender") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor; or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "Non-Disturbance Agreement") from the Lender for the benefit of Lessee which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within sixty (60) days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at Lessee's option, directly contact Lessor's lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein and such other agreements as Lender shall reasonably request. 31. ATTORNEYS' FEES. If any Party brings an action or proceeding involving the Premises to enforce the terms hereof or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereof, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall include, without limitation, a Party who substantially obtains or defeats the relief sought, as the case may be, whether by judgment or the abandonment by the other Party of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonable incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach; provided, however, Lessee shall be entitled to contest such fees, costs and expenses to the extent there is not a Default. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times (with reasonable prior notice to Lessee) for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary; provided, however, that Lessor shall limit its access to the Premises, for the purposes of showing the same to prospective lessees, to the last nine (9) months of the term of this Lease and other commercially reasonable times (i.e., when Lessee is in default and/or Lessor is showing the Premises as a part of its effort to mitigate damages caused by Lessee). All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "For Sale" signs and Lessor may during the last six (6) months of the term hereof place on the Premises any ordinary "For Lease" signs. Lessee may at any time place on or about the Premises any ordinary "For Sublease" sign. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction. 34. SIGNS. Except for (i) existing signs at sign locations which both (a) pre-date the Start Date and (b) comply with all Applicable Requirements and (ii) ordinary "For Sublease" signs, Lessee shall not place any sign upon the Premises without Lessor's prior written consent. All signs must comply with all Applicable Requirements. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within ten (10) days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including, but not limited to, architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including, but not limited to, consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within ten (10) business days following such request. 37. [INTENTIONALLY OMITTED] 38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof. 39. OPTIONS. 39.1 Definition. "Option" shall mean: the right to extend the term of this Lease as set forth in Paragraph 56. 39.2 Options Personal to Original Lessee. Each Option granted to Lessee in this Lease is, except as provided in the second sentence of Paragraph 12.1(a), personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting. 39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option: (i) during the period commending with the giving of any notice of Default (so long as, in fact, there is or was such a Default) and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given three (3) or more notices of separate Default (so long as, in fact, such Defaults occurred), whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of thirty (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default (so long as, in fact, such Defaults occurred) during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATION. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay plus interest from the thirty-first (31st) day after payment "under protest," in accordance with Paragraph 13.5. 44. AUTHORITY. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each Party shall, within thirty (30) days after request, deliver to the other Party satisfactory evidence of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 48. MULTIPLE PARTIES. If not more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease / / is /X/ is not attached to this Lease. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVISE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: Executed at: On: On: By LESSOR By LESSEE: BIRTCHER CORNERSTONE, L.P., ENCAD, INC., a Delaware limited partnership a Delaware limited partnership By: Birtcher Cornerstone GP L.L.C., By: /s/ Thomas L. Green a Delaware limited liability company, ------------------- General Partner Name Printed: Thomas L. Green Title: V.P. By: Birtcher ENCAD L.L.C., By: /s/ T.W. Schmidt a Delaware limited liability company, ------------------ its sole Member Name Printed: T.W. Schmidt Title: V.P. & C.F.O. Address: 6059 Cornerstone Court, West, San Diego By: /s/ Robert M. Anderson CA 92121-3734; Attn: General Co ----------------------- Telephone: (858) 452-0882 Name Printed: Robert M. Anderson, Facsimile: 858-452-0991 Title: Member Federal ID No.:95-3672088 Address: 27611 La Paz Road Laguna Niguel, CA 92677 Telephone: (949) 643-7700 Facsimile: (949) 643-7755 Federal ID No.: 52-2200583
ADDENDUM Addendum to that certain Lease dated October 15, 1999, by and between BIRTCHER CORNERSTONE, L.P., a Delaware limited partnership, as Lessor, and ENCAD, INC., a Delaware corporation, as Lessee, for that certain property commonly known as 6059 and 5959 Cornerstone Court, West in the City of San Diego, County of San Diego, State of California (i.e., the Premises). This Addendum is incorporated into the Lease. If there is a conflict between the Lease (exclusive of this Addendum) and this Addendum, this Addendum shall control. Defined terms in this Addendum are indicated by initial capital letters. Except as otherwise provided in this Addendum, defined terms herein shall have the same meaning as such terms have in the body of the Lease (i.e., Paragraphs 1-49, inclusive, of the Lease). 50. ADDITIONAL TERMS RELATING TO THE PREMISES: 50.1 VEHICLE PARKING. Lessee shall, in accordance with the terms of this Lease, in general, and this Paragraph 50, in particular, as well as all Applicable Requirements, be entitled to use those portions of the Common Areas designated for parking. In the event Lessee (including any permitted sublessee or assignee) occupies less than one-hundred percent (100%) of the Premises and the Premises is or may become a multi-tenant facility, Lessor may regulate the loading and unloading of vehicles by adopting Rules and Regulations as provided in Paragraph 50.4; provided, however, that, so long as Lessee (including any permitted sublessee or assignee) occupies one-hundred percent (100%) of at least one (1) of the two (2) buildings at the Premises, such Rules and Regulations shall not apply to that portion of the Common Areas which are located exclusively on the parcel with respect to which Lessee continues its one-hundred percent (100%) occupancy. Lessee shall not service or store any vehicles in the Common Areas. 50.2 COMMON AREAS - DEFINITION. The term "Common Areas" is defined as all areas and facilities outside the Building and within the exterior boundary line of the Premises and that are provided from time to time for the general use of Lessor and Lessee and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, walkways, driveways and landscaped areas. Except as is otherwise specifically provided in this Lease, there shall be no cost to Lessee for Lessee's parking usage during the term of this Lease. 50.3 COMMON AREAS - LESSEE'S RIGHTS. So long as Lessee leases 100% of the Premises, Lessor grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the exclusive right to use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any commercially reasonable rules and regulations or restrictions governing the use of the Project. Lessee's rights hereunder shall be reduced, prorata (based upon square footage leased), to the extent other tenants lease any portion of the Premises. 50.4 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other person(s) as Lessor may appoint shall have the right, from time to time, to establish, modify, amend and enforce commercially reasonable rules and regulations ("Rules and Regulations") for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other tenants of the Premises, if and when there are any such other tenants, and their invitees. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said Rules and Regulations by other tenants. However, Lessor shall use good faith reasonable efforts to apply and enforce the Rules and Regulations the same as to all tenants. 50.5 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's sole discretion, from time to time: a) If the Premises is or may become a multi-tenant facility, to make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; c) If the Premises is or may become a multi-tenant facility, to add additional buildings and improvements to the Common Areas; provided, however, that so long as Lessee (including any permitted sublessee or assignee) occupies one-hundred percent (100%) of at least one (1) of the two (2) buildings at the Premises, such additional buildings and improvements to the Common Areas shall only be added with respect to that portion of such Common Areas which are located exclusively upon the parcel where such one-hundred percent (100%) occupancy does not exist; d) To use the Common Areas while engaged in making improvements, repairs or alterations to the Premises, or any portion thereof; e) To make any legally required changes in, to or with respect to the Common Areas and Premises; f) To do and perform such other acts and make such other reasonably desired changes in, to or with respect to the Common Areas and Premises as Lessor may, in the exercise of sound business judgment, deem to be appropriate; provided, however, that, so long as Lessee (including any permitted sublessee or assignee) occupies one-hundred percent (100%) of at least one (1) of the two (2) buildings at the Premises, such changes may not materially interfere with Lessee's business conducted (i) in the building which continues to be one-hundred percent (100%) occupied or (ii) in the Common Areas which are located exclusively on the parcel where such one-hundred percent (100%) occupancy exists. 51. BASE RENT ADJUSTMENT: The Base Rent described in Basic Provisions (i.e., Paragraph 1.5) and Paragraph 4 of the Lease shall be the amounts shown below for the periods shown below:
Period Months Rent ------ ------ ---- 1 1-12 $101,862.80/month 2 13-24 $110,677.85/month 3 25-36 $118,513.45/month 4 37-48 $122,431.25/month 5 49-60 $127,328.50*/month 6 61-72 $131,246.30/month 7 73-84 $135,164.10/month
*Notwithstanding the foregoing, at the commencement of Month 49, the Base Rent shall be increased to (i) the stipulated amount (as set forth in the appropriate line of the appropriate column above) or (ii) the Base Rent for Month 36, plus the increase in the Consumer Price Index from Months 25 through 48, whichever is greater. Thereafter, the rental rates shall be increased (i) as stipulated or (ii) by three percent (3%) each period, whichever is greater. The term "Consumer Price Index" shall mean the Consumer Price Index for All Urban Consumers U.S. City Average, All Items (Base Years 1982-1984=100), published by the United States Department of Labor, Bureau of Labor Statistics for the months indicated hereinabove. Lessor shall calculate the amount of any increase in Base Rent after the United States Department of Labor publishes the statistics on which the amount of the increase may be based. Lessor shall give written notice of the amount of the increase. Lessee shall pay this amount, together with the monthly Base Rent next becoming due under this Lease, and shall thereafter pay the monthly Base Rent under this Lease at the increased rate, which shall constitute the Base Rent until any subsequent increase. Lessor's failure to make the required calculations promptly shall not be considered a waiver of Lessor's right to adjust the monthly Base Rent due, nor shall it affect Lessee's obligation to pay the increased Base Rent. If the Consumer Price Index is changed so that the Base Year(s) differ(s) from that in effect on the Commencement Date, the Consumer Price Index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the Consumer Price Index is discontinued or revised during the term of this Lease, the government index of computation with which it is replaced shall be used to obtain substantially the same result as if the Consumer Price Index has not been discontinued. 52. OPERATING EXPENSES: Except as is otherwise specifically provided in this Lease, it is intended by the parties that, in accordance with Paragraph 7.2 of this Lease, Lessor shall have no obligation, in any manner whatsoever, to repair or maintain the Premises and, therefore, there shall be no Operating Expenses to be reimbursed pursuant to this Paragraph 52. However, (i) in the event that Lessee shall fail to perform any of its affirmative duties or obligations under Paragraph 7.1 or any other provision of this Lease relating to the maintenance and/or repair of the Premises or keeping the same in good order, condition and repair, within ten (10) days after written notice (or such longer period as is reasonably required, if ten (10) days is insufficient, so long as Lessee commences performance within such ten (10) day period and, thereafter, diligently prosecute such performance to completion), three (3) or more times within any twelve (12) month period during the term of this Lease, or (ii), subject to the terms and provisions of Paragraph 52.5, in the event that Lessee (including any permitted sublessee or assignee) occupies less than one-hundred percent (100%) of the Premises, then Lessor may, at its option, elect, at any time thereafter in a written notice directed to Lessee, to perform such duties or obligations (or such portion(s) of them as Lessor shall elect) on Lessee's behalf until further notice (as provided in Paragraph 52.2) or the expiration or termination of this Lease, whichever shall occur first, and in such event the cost and expense of any such performance by Lessor shall, if Lessor so elects, be reimbursed as follows rather than pursuant to Paragraph 13.2 of the Lease or otherwise: Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, one hundred percent (100%) of all Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: 52.1 "OPERATING EXPENSES" are defined, for purposes of this Lease, as all costs incurred by Lessor relating to the ownership and/or operation of the Premises which costs and expenses would not have been incurred had Lessee performed and/or continued to perform its obligations under this Lease with respect to the operations, maintenance and repair of the Premises and the payment of and/or for insurance, taxes and utilities, including, but not limited to, those set forth Paragraphs 7.1, 8, 10 and 54. Operating Expenses shall also include a property management fee consistent with Paragraph 13.2. 52.2 The inclusion of the improvements, facilities and services set forth in Paragraph 52.1 shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services; in fact, in any event, Lessor's right to perform or provide any of such improvements, facilities and/or services shall be elective (e.g., after Lessee's three (3) time failure of performance in any twelve (12) month period as described hereinabove), from time to time, and, therefore, Lessor may also elect, on not less than thirty (30) days prior written notice to Lessee (but not more often than twice (i.e., two (2) times) in any twelve (12) month period), that, until further notice of at least ten (10) days, any such obligation, liability or duty shall again be the responsibility of Lessee. 52.3 The Operating Expenses shall be payable by Lessee within 10 days after a reasonably detailed statement of actual expenses is presented to Lessee. At Lessor's (or, if Lessee is then current in paying for and or reimbursing the same, Lessee's) option, however, an amount may (and, if Lessee is entitled to and does so elect, shall) be estimated by Lessor from time to time of the annual Operating Expenses and the same shall be payable monthly, as Lessor shall designate, during each 12 month period of the Lease term (as extended), on the same day as the Base Rent is due hereunder. Lessor shall deliver to Lessee, within 60 days after the expiration of each calendar year, a reasonably detailed statement showing the actual Operating Expenses incurred during the preceding year. If Lessee's payments under this Paragraph 52.3 during the preceding year exceed the total amount of such Operating Expenses as indicated on such statement, Lessor shall be credited the amount of such over-payment against the Operating Expenses next becoming due. If Lessee's payments under this Paragraph 52.3 during the preceding year were less than the total amount of such Operating Expenses as indicated on such statement, Lessee shall pay to Lessor the amount of the deficiency within 10 days after delivery by Lessor to Lessee of the statement. 52.4 LESSEE'S RIGHT TO AUDIT. Lessee may, upon at least five days advance written notice to Lessor and during business hours, at an office reasonably designated by Lessor, examine Lessor's records relating to the Operating Expenses; provided, however, that Lessee shall only be entitled to such an examination once in each calendar year, and the examination shall not be conducted by anyone who is engaged on a contingent fee basis to represent Lessee or who is a competitor of Lessor. Property managers and commercial building owners shall be deemed competitors of Lessor. The person conducting the examination on behalf of Lessee shall enter into a confidentiality agreement in form and substance reasonably satisfactory to Lessor. In the event the examination discovers an overcharge in excess of four and one half percent (4.5%) of the Operating Expenses paid by Lessee during the year covered by the examination, Lessor shall reimburse Lessee for the actual reasonable cost incurred by Lessee due to the examination plus the overcharge, within thirty (30) days of receipt of demand therefor. In the event the examination fails to discover an overcharge in excess of four and one-half percent (4.5%) of the Operating Expenses covered by the examination, Lessee shall not reimburse Lessor for the any costs incurred by Lessor due to the examination or for any overcharge. 52.5 ONE BUILDING. Notwithstanding anything contained herein to the contrary, in the event that Lessor is proceeding under provision (ii) rather than provision (i) of Paragraph 52 above, then, so long as Lessee (including any permitted sublessee or assignee) occupies one-hundred percent (100%) of at least one (1) of the two (2) buildings at the Premises, then Lessor's option to elect to perform Lessee's duties and obligations shall be limited to those obligations and duties which relate exclusively to or which can be performed exclusively on the other parcel (i.e., the parcel on which the building which Lessee occupies less than one-hundred percent (100%) of the building is located). 53. SECURITY DEPOSIT: 53.1 DELIVERY OF LETTER OF CREDIT. In lieu of depositing a Security Deposit under Paragraph 5 with Lessor, Lessee shall, on execution of this Lease, deliver to Lessor and cause to be in effect during the Lease term (as extended) and thereafter for a period of at least thirty (30) days (except as otherwise provided in this Paragraph 53) an unconditional, irrevocable standby letter of credit ("LOC") in the amount equal to the aggregate Base Rent payable during the first twelve (12) months of the Lease term (the "LOC Amount"), subject, however, to the following: For each fiscal year following the calendar year 2001 that Lessee's audited financial statements reflect a net income exceeding $1,000,000, the LOC Amount may be reduced by 20% of the original LOC Amount. Conversely, for each fiscal year that Lessee's audited financial statements reflect a net loss exceeding $500,000, the LOC shall be increased by 20% of the original LOC Amount; provided, however, that the total amount of the LOC need never exceed the original LOC Amount. Each LOC shall (a) reflect the form and content of Exhibit "C" attached hereto and incorporated herein by this reference and otherwise be in form and content reasonably acceptable to Lessor's Lender(s) or mortgagee(s), (b) be issued by an LOC Bank selected by Lessee and reasonably acceptable to Lessor, and (c) be confirmed by a bank selected by Lessor that has a local office in Orange County, California. An "LOC Bank" is a bank that accepts deposits, maintains accounts, has a local San Diego, California office that will negotiate a letter of credit, and the deposits of which are insured by the Federal Deposit Insurance Corporation. Lessee shall pay all costs, expenses, points, or fees, including without limitation reasonable attorneys' fees, (i) incurred by Lessee in obtaining and/or confirming, and/or (ii) incurred by Lessor in transferring, confirming, drawing on and/or enforcing, any LOC. 53.1.1 REPLACEMENT OF LETTER OF CREDIT. Lessee may, from time to time, and shall, at least thirty (30) days prior to any LOC expiration date which occurs prior to thirty (30) days after the expiration of the Lease term (as extended), replace any existing LOC with a new LOC which new LOC (a) becomes effective on or before the day after the expiration of the LOC that it replaces, (b) is in the required LOC Amount, (c) is issued by an LOC Bank reasonably acceptable to Lessor, and (d) otherwise complies with the requirements of this Paragraph 53. 53.1.2 LESSOR'S RIGHT TO DRAW ON LETTER OF CREDIT. 53.1.2.1 Lessor shall hold the LOC as security for the performance of Lessee's obligations under this Lease. If, after notice (as stated in this Lease) and failure to cure within the applicable period, if any, stated in this Lease, Lessee is in Default or Breach of any provision of this Lease, Lessor may, without prejudice to any other remedy it has, draw on that portion of the LOC necessary to (a) pay any Rent or other sum in default, (b) pay or reimburse Lessor for any amount that Lessor may spend or become obligated to spend in exercising Lessor's rights under this Lease, or (c) compensate Lessor for any expense, loss, or damage that Lessor may suffer or incur because Lessee Defaults on or Breaches any provision of this Lease. 53.1.2.2 Other than an LOC which can only expire at least thirty (30) days after the end of the Lease term (as extended) and notwithstanding anything contained in this Lease to the contrary, if Lessee fails to renew or replace any LOC at least thirty (30) days before its expiration, Lessor may immediately, without notice and without prejudice to any other remedy it has, draw on all of the LOC. Further, notwithstanding anything contained in this Lease to the contrary, Lessor may immediately, without notice and without prejudice to any other remedy it has, draw on all of the LOC in the event that Lessor does not receive possession of the Premises upon the expiration of the Lease term (as extended) or any earlier termination of this Lease. 53.1.2.3 Within ten (10) days of Lessee's receipt of notice from Lessor indicating that Lessor has drawn on an LOC in accordance with Subparagraph 53.1.2.1 above, Lessee shall provide to Lessor an amendment to the then current LOC (i) confirming that, notwithstanding any previous draws upon the same, the LOC Amount has been increased and replenished to the then required LOC Amount without any reduction as a result of any previous draw(s) thereon and (ii) otherwise in form and substance reasonably satisfactory to Lessor. 53.1.3 LOC SECURITY DEPOSIT. Any amount of the LOC that is drawn on by Lessor but not applied by Lessor pursuant to Subparagraph 53.1.2.2, as well as additions thereto pursuant to Paragraph 53.1.4, shall be held by Lessor as a security deposit ("LOC SECURITY DEPOSIT"), which may be applied by Lessor for the purposes described in provisions (a), (b), or (c) of Subparagraph 53.1.2.1. 53.1.4 CASH SECURITY DEPOSIT. Except as provided in Subparagraph 53.1.2.3 above, once an LOC (or any portion of it) has been drawn on and converted from the LOC to cash, thereafter it (or such portion of it) shall always be and remain a cash security deposit and a part of the LOC Security Deposit referred to in Paragraph 53.1.3. Lessee shall be required to replenish (and/or fund), in cash, any portion of the LOC Security Deposit used or applied in accordance with provisions (a), (b) or (c) of Subparagraph 53.1.2.1 (including without limitation all or any part of the LOC Amount initially drawn on the LOC and applied in accordance with said provisions (a), (b) or (c) of Subparagraph 53.1.2.1 which is not timely replenished in accordance with Subparagraph 5.3.1.2.3) immediately and, in any event, within ten (10) days of Lessee's receipt of Lessor's demand therefor. 53.1.5 EXCESS FUNDS. So long as Lessee is in compliance with all provisions of this Lease, if at any time the total amount available for draw under the LOC plus the amount of the LOC Security Deposit is greater than the LOC Amount as required in this Paragraph 53.1, then Lessor shall, immediately and, in any event, within ten (10) days of Lessor's receipt of Lessee's demand therefore, reduce the LOC Security Deposit and pay to Lessee a portion of or all, but not more than all, of the LOC Security Deposit such that after such payment the amount remaining for draw under the LOC plus the remaining LOC Security Deposit, if any, is equal to the required LOC Amount or such greater amount as remains available for draw under the LOC because Lessee has failed to reduce the LOC Amount as permitted by this Paragraph 53.1. 53.1.6 COMMINGLING OF FUNDS. Lessor shall not be required to keep the LOC Security Deposit separate from its general funds, and Lessee shall not be entitled to receive interest on the LOC Security Deposit. 53.1.7 RETURN OF FUNDS. Unless otherwise required by law, if Lessee complies with all the provisions of this Lease, the unused and unapplied portion of the LOC Security Deposit, if any, shall be returned to Lessee within thirty (30) days after the expiration of the Lease term (as extended) or sooner termination of this Lease and the surrender of possession of the Premises to Lessor in the condition required by this Lease. 53.2 LESSOR'S TRANSFER OF LOC ON TRANSFER OF REAL PROPERTY. If Lessor transfers or mortgages its interest in the Premises, Lessor may transfer or assign the LOC and/or the LOC Security Deposit to Lessor's mortgagee or Lender or other transferee and thereupon be relieved of further responsibility and liability with respect to the LOC or the LOC Security Deposit, as long as the transferee agrees in writing to hold the LOC and/or LOC Security Deposit, as appropriate, under the provisions of this Paragraph 53. Additionally in this regard, Lessee acknowledges and agrees that the initial LOC, as well as any replacements to the same, shall, for so long as Lessor's mortgagee or Lender shall require, name such mortgagee(s) or Lender(s) as the beneficiary in lieu of Lessor. If Lessor fails to transfer or assign the LOC, Lessee shall not be required to replace the LOC until expiration of the LOC. If Lessor draws on the LOC after a transfer or an assignment, the mortgagee or the transferee shall pay to Lessee, within thirty (30) days from the date of the draw, the amount of the LOC. In accordance with Paragraph 53.1 above, any expense of transferring an LOC hereunder shall be borne solely by Lessee. 54. ADDITIONAL MAINTENANCE AND REPAIR PROVISIONS: 54.1 LESSEE'S OBLIGATIONS - IN GENERAL. Lessee acknowledges and understands that, pursuant to agreements with Lessor's lenders, financial partners or otherwise, Lessor is to be responsible for managing all aspects of the operations at the Premises, including without limitation leasing, management, maintenance (which maintenance, except as otherwise provided in this Lease, in general, and Paragraph 55, in particular, shall be limited to review, oversight and/or supervision Lessee's maintenance obligations and duties), accounting and tenant improvement work, in a professional and cost effective manner. Lessee further acknowledges and understands that, in connection with the foregoing, Lessor shall be required to prepare monthly reports of property operations for the Premises in sufficient detail for Lessor's lenders, financial partners and/or others to monitor the performance of the Premises. Therefore, monthly and at such other times as Lessor shall reasonably request, within thirty (30) days of Lessee's receipt of such request, Lessee shall, at no cost to Lessor, provide any and all information reasonably requested or needed in order to allow Lessor to perform its obligations and duties as well as comply with the requirements as described in this Paragraph 54.1. 54.2 MAJOR CONTRACTS. Lessee acknowledges and agrees that, as a result of Lessor's agreements with its financial partners, lenders and/or otherwise, Lessor must have the right to approve Major Contracts. "Major Contracts" are defined as contracts that have material effect on the value of the Premises. Examples of Major Contracts include any contract to perform significant renovation or tenant improvement work as well as certain of the contracts to be obtained by Lessee pursuant to the terms of Paragraph 7.1(b). Therefore, prior to entering into any such contract, Lessee shall provide a copy of the same to Lessor for Lessor's prior written approval, which approval shall not be unreasonably withheld or delayed. 54.3 FURTHER ASSURANCES. In addition to the acts and deeds recited in this Paragraph 54 and contemplated to be performed, executed and/or delivered by Lessee to Lessor in connection therewith, Lessee agrees to perform, execute and/or deliver, from time to time, in any event within thirty (30) days of Lessor's written request therefor (and monthly thereafter, if Lessor and for so long as shall request but not beyond the expiration or termination of this Lease), any further deliveries and assurances and take such further actions as may be reasonably necessary to consummate the transactions contemplated by and/or satisfy the requirements of this Paragraph 54. 55. ASSIGNMENT AND SUBLETTING: 55.1 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. Upon any request by Lessee to transfer all or any part of the Premises, Lessor shall have the right to either (a) permit the transfer on the conditions set forth in Paragraph 12 and any other commercially reasonable conditions Lessor may impose, or (b), if reasonable, deny Lessee's request, in which event this Lease shall continue in full force and effect and unmodified. 55.2 CONDITIONS OF LESSOR'S CONSENT. As a condition to Lessor's prior written consent as provided in Paragraphs 12 and 55.1, (a) Lessee shall, in addition to the fee set forth in Paragraph 12.2(e) of this Lease, pay, within ten (10) days of receipt of demand, Lessor's reasonable legal fees and costs incurred due to the transfer, (b) the transferee(s) shall agree in writing to comply with and be bound by all of the terms, covenants, conditions, provisions and agreements of this Lease, and (c) Lessee shall deliver to Lessor, promptly after execution, an executed copy of each transfer instrument and an agreement of said compliance by each transferee. As an additional condition of granting consent to a transfer, Lessee shall pay to Lessor 50% of all profits from the transfer. Profits are to be determined by deducting (from the total consideration paid directly or indirectly to or for the benefit of Lessee or its designee for the transferred interest) the reasonable costs of the transfer incurred by Lessee and subtracting the remaining rent obligation of Lessee at such time under this Lease. For purposes of determining all profits from the transfer, substance shall control over form such that Lessor may ignore any attempt by Lessee to inflate the purchase price of any other assets transferred in an attempt to conceal the profit on the transfer of the Lessee's interest in this Lease or otherwise. Sums payable hereunder shall be paid to Lessor as Rent as and when paid by the transferee to Lessee. Reasonable costs of a transfer shall include the actual, reasonable out-of-pocket costs and expenses, incurred solely by Lessee, in connection with the following: (i) tenant improvements to that portion of the Premises to be transferred to the transferee, to the extent such tenant improvements are for the transferee; (ii) rental abatement during the term of the sublease or assignment; (iii) brokerage commissions; (iv) plans, permits and processing costs relating to the transferee's tenant improvements in the Premises paid for by Lessee; (v) the outside counsel legal fees incurred by Lessee in documenting the transfer transaction; (vi) fees paid to Lessor or Lessor's agents in connection with the review and/or approval (or disapproval) of the sublease or assignment transaction; and (vii) and such other costs as are customarily incurred in such a transaction. Notwithstanding the foregoing, the parties acknowledge and agree that this Paragraph 55.2 shall not apply to an assignment or transfer with respect to which Lessor's prior written consent is not required as described in the second sentence of Paragraph 12.1(a). 56. OPTION TO EXTEND TERM: Subject to Paragraph 39, Lessor grants to Lessee one (1) option to extend the term of this Lease ("Extension Option") for a period of five (5) years ("Option Term"), subject to the conditions described in this Paragraph 56. Lessee shall have no other right to extend the term beyond the Option Term. 56.1 CONDITIONS OF OPTION. The Extension Option is subject to the following conditions: (a) The Extension Option may be exercised only by written notice delivered by Lessee to Lessor as provided in this Paragraph 56 and only if and to the extent permitted by Paragraph 39 (see, for example, the limitations in Paragraph 39.4(a)). (b) Except as provided in the second sentence of Paragraph 12.1(a), the rights contained in this Paragraph 56 shall be personal to the originally named Lessee, and may (except as is otherwise specifically provided in the second sentence of Paragraph 12.1(a)) be exercised only by such originally named Lessee (and not any other assignee, sublessee, or other transferee of Lessee's interest in this Lease, except as is provided in the second sentence of Paragraph 12.1(a)) and only if such originally named Lessee (or an assignee or transferee identified in the second sentence of Paragraph 12.1(a)) occupies the entire Premises as of the date it exercises the Extension Option in accordance with the terms of this Paragraph 56. (c) Subject to the terms and provisions of Paragraph 39, if Lessee properly exercises the Extension Option, the term of this Lease, as it applies to the entire Premises then leased by Lessee, shall be extended for the Option Term. 56.2 OPTION RENT. The Rent payable by Lessee during the Option Term ("Option Rent") shall be equal to the Fair Market Rental Value of the Premises as of the commencement date of the Option Term. 56.2.1 FAIR MARKET RENTAL VALUE. For purposes of this Paragraph 56, "Fair Market Rental Value" of the Premises shall be the rental rate, determined in accordance with this Paragraph 56.2, for Comparable Space as of the commencement of the Option Term. For this purpose, "Comparable Space" shall be space that is: (a) Not subleased; (b) Not leased to an entity related to the Landlord; (c) Not subject to another tenant's expansion rights; (d) Comparable in size, location, and quality to the Premises; (e) Leased for a term comparable to the Option Term; and (f) Located in Comparable Buildings. For this purpose, "Comparable Buildings" shall be R&D and other similar buildings, that are comparable in age, location, quality of construction and amenities, located in the Sorrento Mesa area of the City of San Diego. 56.2.2 RENTAL RATE OF COMPARABLE SPACE. In determining the rental rate of Comparable Space, the parties shall include all escalations and take into consideration the following concessions: (a) Rental abatement concessions, if any, being granted to tenants in connection with the Comparable Space; (b) Tenant improvements or allowances provided or to be provided for the Comparable Space, taking into account the value of the existing improvements in the Premises, based on the age, quality, and layout of the improvements; and (c) All other monetary and non-monetary concessions, if any, generally being granted to tenants in connection with the Comparable Space. 56.2.3. ADJUSTMENT FOR TENANT IMPROVEMENT ALLOWANCE. If in determining the Fair Market Rental Value the parties determine that the economic terms of leases of Comparable Space include a tenant improvement allowance and/or other concessions, Lessor may, at Lessor's sole option, elect to do the following: (a) Grant some or all of the value of the tenant improvement allowance and/or other concessions as an allowance for the refurbishment of the Premises and/or other concessions; and/or (b) Reduce the base rent component of the Fair Market Rental Value to be an effective rental rate that takes into consideration the total dollar value of that portion of the tenant improvement allowance and/or other concessions that Lessor has elected not to grant to Lessee (in which case that portion of the tenant improvement allowance and/or other concessions evidenced in the effective rental rate shall not be granted to Lessee). 56.3 EXERCISE OF OPTION. The Extension Option must be exercised by Lessee, if at all, only at the time and in the manner provided in this Section 56.3. 56.3.1 INTEREST NOTICE. If Lessee wishes to exercise the Extension Option, Lessee shall deliver written notice ("Interest Notice") to Lessor no less than nine (9) months before the expiration of the Original Term. 56.3.2 OPTION RENT NOTICE. After receipt of Tenant's Interest Notice, Lessor shall deliver notice ("Option Rent Notice") to Lessee no less than eight (8) months before the expiration of the Original Term, stating the Option Rent, based on Lessor's determination of the Fair Market Rental Value of the Premises as of the commencement date of (as well as thereafter throughout) the Option Term. 56.3.3 EXERCISE NOTICE. If Lessee wishes to exercise the Extension Option, Lessee must, on or before the earlier of (a) the date occurring seven (7) months before the expiration of the Original Term or (b) the date occurring fifteen (15) days after Lessee's receipt of the Option Rent Notice, exercise the Extension Option by delivering written notice ("Exercise Notice") to Lessor. 56.3.4 OBJECTION TO OPTION RENT. If Lessee wishes to contest the Option Rent stated in an Option Rent Notice, Lessee must provide, with the Exercise Notice, written notice to Lessor that Lessee objects to the stated Option Rent. If Lessee provides such written objection, the parties shall follow the procedure described in Paragraph 56.5, and the Option Rent shall be determined as set forth in that paragraph. 56.3.5 FAILURE TO DELIVER TIMELY NOTICE. If Lessee fails to deliver a timely Interest Notice or Exercise Notice, Lessee shall be considered to have elected not to exercise the Extension Option. 56.4 AMENDMENT TO LEASE. Subject to Paragraph 56.5.2 below, if Lessee timely exercises the Extension Option, Lessor and Lessee shall, within fifteen (15) days after the Option Rent is determined under this Paragraph 56, including without limitation Paragraph 56.5, execute an amendment to this Lease extending the term of this Lease, for the First Option Term on the terms and conditions set forth in this Paragraph 56. 56.5 RESOLVING DISAGREEMENT OVER FAIR MARKET RENTAL VALUE. If Lessee timely and effectively objects to Lessor's determination of Fair Market Rental Value under Paragraph 56.3.4, the disagreement shall be resolved under this Paragraph 56.5. 56.5.1 NEGOTIATED AGREEMENT. Lessor and Lessee shall diligently attempt in good faith to agree on the Fair Market Rental Value on or before the tenth (10th) business day after Lessee's objection to the Fair Market Rental Value ("Outside Agreement Date"). 56.5.2 PARTIES' SEPARATE DETERMINATIONS OR RESCISSION. If Lessor and Lessee fail to reach agreement on or before the Outside Agreement Date, Lessor and Lessee shall each make a separate determination of the Fair Market Rental Value and notify the other party of this determination (which, if necessary, shall be the determination used in Paragraph 56.5.2.1) within five (5) business days after the Outside Agreement Date or Lessee may, instead, elect to rescind its exercise of the Option by notifying Lessor of its election to rescind within said five (5) business day period. 56.5.2.1 TWO DETERMINATIONS. If each party makes a timely determination of the Fair Market Rental Value, those determinations shall be submitted to arbitration in accordance with Paragraph 56.5.3. 56.5.2.2 ONE DETERMINATION. If Lessor or Lessee fails to make a determination of the Fair Market Rental Value within the five (5) business day period, that failure shall be conclusively considered to be that party's approval of the Fair Market Rental Value submitted within the five (5) business day period by the other party. 56.5.2.3 RESCISSION. If Lessee timely rescinds its exercise of the Extension Option, the Extension Option shall then lapse, expire and, therefore, be of no further force or effect. 56.5.3 ARBITRATION. If both parties make timely individual determinations of the Fair Market Rental Value under Paragraph 56.5.2, the Fair Market Rental Value shall be determined by arbitration under this Paragraph 56.5.3. 56.5.3.1. SCOPE OF ARBITRATION. The determination of the arbitrator(s) shall be limited to the sole issue of the amount of the Fair Market Rental Value, taking into account the requirements of Paragraph 56.2. 56.5.3.2 QUALIFICATIONS OF ARBITRATOR(S). Each arbitrator must be a licensed MAI Certified real estate appraiser who has been active in the appraisal of commercial properties in the San Diego area over the five-year (5-year) period ending on the date of his or her appointment as arbitrator. 56.5.3.3 PARTIES' APPOINTMENT OF ARBITRATORS. Within fifteen (15) days after the Outside Agreement Date, Lessor and Lessee shall each appoint one arbitrator and notify the other party of the arbitrator's name and business address. 56.5.3.4 APPOINTMENT OF THIRD ARBITRATOR. If each party timely appoints an arbitrator, the two (2) arbitrators shall, within ten (10) days after the appointment of the second arbitrator, agree on and appoint a third arbitrator (who shall be qualified under the same criteria set forth above for qualification of the initial two (2) arbitrators) and provide notice to Lessor and Lessee of the arbitrator's name and business address. 56.5.3.5 ARBITRATORS' DECISION. Within thirty (30) days after the Outside Agreement Date, the three (3) arbitrators shall decide on the amount of the Fair Market Rental Value and, if the majority of the three (3) arbitrators cannot timely agree, then, within thirty (30) days after the appointment of the third arbitrator, the third arbitrator alone shall determine the Fair Market Rental Value and the three (3) arbitrators or the third arbitrator, as appropriate, shall notify Lessor and Lessee of their or his or her decision. The decision of the majority of the three (3) arbitrators timely made shall be binding on Lessor and Lessee; otherwise, the decision of the third arbitrator above shall be binding on the parties. 56.5.3.6 IF ONLY ONE ARBITRATOR IS APPOINTED. If either Lessor or Lessee fails to appoint an arbitrator within fifteen (15) days after the Outside Agreement Date (and Lessee has not elected to rescind its exercise of the Extension Option), the arbitrator timely appointed by one of them shall reach a decision as to the amount of the Fair Market Rental Value and notify Lessor and Lessee of that decision within thirty (30) days after the arbitrator's appointment and, therefore, the same shall be the Fair Market Rental Value. The arbitrator's decision shall be binding on Lessor and Lessee. 56.5.3.7 IF ONLY TWO ARBITRATORS ARE APPOINTED. If each party appoints an arbitrator in a timely manner, but the two (2) arbitrators fail to agree on and appoint a third arbitrator within the required period, the arbitrators shall be dismissed without delay and the issue of Fair Market Rental Value shall be submitted to binding arbitration under the commercial arbitration rules of American Arbitration Association; provided, however, that in the event of any inconsistency between such arbitration rules and the terms and conditions of this Paragraph 56, the terms and conditions of this Paragraph 56 shall govern. 56.5.3.8 IF NO ARBITRATOR IS APPOINTED. If Lessor and Lessee each fail to appoint an arbitrator in a timely manner (and Lessee does not elect to rescind its exercise of the Extension Option), the matter to be decided shall be submitted without delay to binding arbitration under the commercial arbitration rules of American Arbitration Association, subject to the provisions of this Paragraph 56.5 other than those provisions requiring the selection of one or the other of Lessor's or Lessee's determination of the Fair Market Rental Value as closest to the Fair Market Rental Value and, therefore, using the same as the Fair Market Rental Value. 56.5.3.9 COST OF ARBITRATION. The cost of the arbitration shall be paid and borne as follows: Except as otherwise provided herein, each party shall bear its own costs and expenses, including without limitation any fees to be paid to the arbitrator selected by the party; the fee of the third arbitrator, if any, shall be split equally between the parties; and all costs and expenses of and fees charged by the American Arbitrator Association, if any, shall be split equally between the parties. 57. SUBDIVISION: The Premises, as shown on Exhibit "A," are part of a "Subdivision." The Subdivision totals approximately 36.2 net acres, as shown on Exhibit "B" (See lots 1-11); the Premises are lots 6 and 7. The Subdivision is governed by, among other instruments, covenants, conditions and restrictions ("CC&R's"). The owner of each lot is responsible for its pro rata share of expenses applicable to the Subdivision. Lessor (if Lessor is responsible under the CC&R's) or the developer of the Subdivision (if the developer is responsible) or such other third party who is responsible under the CC&R's or other operative documents (collectively, "Responsible Party") is to maintain the common areas of the Subdivision in good order, condition and repair. Lessee shall pay, as additional Rent, within ten (10) days of Lessee's receipt of Lessor's written demand, all costs and expenses incurred by Lessor or for which Lessor is legally responsible in connection with the operation, maintenance and/or repair of the common areas of the Subdivision. Additionally, in the event that Lessor shall so elect, in a written notice directed to Lessee, Lessee shall, commencing not sooner than ten (10) days after the Lessee's receipt of such notice, perform and be responsible for any and all obligations, liabilities and duties of Lessor under the CC&Rs and other operative documents, from time to time, to the extent directed to do so by and until further notice from Lessor or the sooner expiration or termination of this Lease. 58. NOTICE OF SALE: In the event that Lessor shall elect to market the Premises for sale, Lessor shall endeavor to notify Lessee of the same not less than thirty (30) days prior to publicly beginning such marketing efforts. However, in the event that Lessor shall, for any reason, fail to give the notice contemplated by this Paragraph 58, Lessee shall have no right or remedy therefor, Lessor shall not be default under this Lease and, therefore, Lessor shall have no additional obligation, liability or duty. In the event Lessor does notify Lessee pursuant to this Paragraph 58, Lessee shall keep any and all marketing information, including without limitation any proposed purchase price or other financial data, provided by Lessor confidential. 59. TERM: The Original Term is defined in the Basic Provisions (see Paragraph 1.3). Paragraph 1.3 refers to this Paragraph for the purposes of establishing the Commencement Date and the Expiration Date. The parties acknowledge and agree that the Commencement Date shall be the day that title to the Premises is transferred of record by Lessee to Lessor and that the Expiration Date shall be the day before the seventh anniversary of the Commencement Date. Upon Lessor's or Lessee's request, Lessee and Lessor shall execute an amendment to this Lease or other appropriate instrument confirming and setting forth the Commencement Date and the Expiration Date. 60. LANDLORD'S STATEMENT. Lessor shall, within ten (10) days after receipt of written request from Lessee, execute a statement certifying (i) that, to Lessor's knowledge without any duty of inquiry or investigation, the Lease, as modified, if modified, is in full force and effect, and (ii) the date to which Base Rent has been paid in advance. EXHIBIT "A" THE PREMISES [ATTACHED] MAP EXHIBIT "B" THE PROJECT [ATTACHED] MAP EXHIBIT "C" FORM OF LETTER OF CREDIT [ATTACHED] Draft for discussion purposes only TRADE SERVICES DIVISION, NORTHERN CALIFORNIA 525 Market Street, 25th Floor San Francisco, California 94105 IRREVOCABLE LETTER OF CREDIT BENEFICIARY: ________________________ Letter of Credit No. NZS__________ ________________________ Date:_____________, 1999 Ladies and Gentlemen: At the request and for the account of _________________________________________, we hereby establish our irrevocable Letter of Credit in your favor in the amount of _______________________ United States Dollars (US $____.00). This Letter of Credit may be drawn at our above office by presentation to us at sight of your signed and dated statement worded as follows (with instructions therein brackets complied with): "The undersigned, an authorized representative of [insert name of lessor] (the "Lessor"), hereby certifies that the amount of the draft drawn on Wells Fargo Bank, N.A. is the amount due us under that certain Lease Agreement signed by and between ______________________ (the "Lessee") and the Lessor." Partial and multiple drawings are permitted under this Letter of Credit. Each draft must be marked "DRAWN UNDER WELLS FARGO BANK, N.A. LETTER OF CREDIT NO. NZS ___________. This Letter of Credit expires at our above office on July 20, 1999 but shall be automatically extended, without written amendment, to July 20 in each succeeding calendar year unless we have sent written notice to you at your address above by registered mail or express courier that we elect not to renew this Letter of Credit beyond the date specified in such notice, which expiration date will be July 20, 1999 or any subsequent July 20, and be at least thirty (30) calendar days after the date we send you such notice. Upon our sending you such notice of non-renewal of the expiration date of this letter of credit, you may also draw under this Letter of Credit by presentation to us at our above address, on or before the expiration date specified in such notice, of your draft drawn on us at sight accompanied by your signed and dated statement worded as follows: THIS IS AN INTEGRAL PART OF THIS LETTER OF CREDIT NO. NZS ________ "The undersigned, an authorized representative of [insert name of lessor] (the "Lessor"), hereby certifies that (a) we have received notice from Wells Fargo Bank, N.A. that Letter of Credit Number NZS_______ will not be renewed and (B) ______________ (the "Lessee"), has failed to secure and deliver to the Lessor a replacement Letter of Credit in form and substance satisfactory to the Lessor." This Letter of Credit is transferable. Transfer may be effected only through ourselves and only upon payment of our usual transfer fee and upon presentation to us at our above-specified office of a duly executed instrument of transfer in form and substance acceptable to us together with the original of this Letter of Credit. Transfer of this Letter of Credit may not change the place of expiration of this Letter of Credit from our above-specified office. If any instructions accompanying a drawing under this Letter of Credit request that payment is to be made by transfer to an account with us or at another bank, we and/or such other bank may rely on an account number specified in such instructions. Except as expressly stated herein, the obligation under this Letter of Credit is the obligation of the bank and is not subject to any condition or qualification and is not contingent on the ability of the bank to perfect a lien, security interest or obtain any other reimbursement. This Letter of Credit is subject to the Uniform Customs and Practice For Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 ("UCP") and the laws of the State of California, and, in the case of any conflict between such laws and the UCP, the laws of the State of California will control. We hereby engage with you that each draft drawn and presented to us in compliance with the terms and provisions of this Letter of Credit will be duly honored by payment to you of the amount requested. Very truly yours, WELLS FARGO BANK, N.A. By: -------------------------------- (Authorized Signature) EX-10.46 9 EXHIBIT 10.46 EXHIBIT 10.46 OFFER OF EMPLOYMENT LETTER FROM THE COMPANY TO MICHAEL LIESS September 8, 1998 Mr. Michael Liess 12050 South Riviera Tustin, CA 92782 Dear Mike, We are very pleased to offer you the position of Vice President, Sales and Field Marketing of our Digital Imaging Solutions SBU, reporting to Michael Steep, Sr. VP/GM pending successful completion of a background check. We are pleased to offer you the following: - A base salary of ** bi-weekly (** annually.) - A start date of Monday, October 5, 1998. - Stock options in the amount of ** shares. The price per share of these options will be determined by the fair market value on the date of grant under the terms of ENCAD's Stock Option Plan. A meeting to explain your stock option plan will be held shortly after you begin work. Key employees who participate in the stock option plan will be expected to give their full professional effort to the Company. Outside consulting is discouraged except when done through ENCAD. - A car allowance of ** (gross) per month. - 3 weeks vacation per year. - Participation in ENCAD's Executive bonus program. This program provides for a range of bonus from ** to ** of your base annual salary with a 100% target of 30%. Bonus payouts are based on your achievement of your assigned worldwide revenue plan, your individual performance against pre-established objectives, and company profitability. Your bonus for 1998 will be pro-rated based on your start date, with a guarantee of ** for 1998 based on achievement of personal objectives. Details of the plan will be provided to you upon hire. - A recoverable draw of ** per annum (** bi-weekly), against your annual bonus, is authorized. ** CONFIDENTIAL TREATMENT REQUESTED - Participation in ENCAD's semi-annual Employee Profit Sharing Plan. Please note that ENCAD's profit sharing payout in previous years has been around ** of base salary. - Relocation Assistance: To assist you with your move to San Diego, ENCAD will reimburse you for the following relocation expenses, in accordance with company practices: - Movement of household goods - Relocation allowance in the amount of ** to cover any miscellaneous expenses. This allowance is designed to give you greater flexibility in managing your relocation expenses and focusing ENCAD's financial assistance in the areas of your special needs. - Home purchase assistance - reimbursement of customary, non-negotiable, non recurring and legally required closing costs when purchasing a home in San Diego. - Home sale assistance - reimbursement of customary, non-negotiable, non recurring legally required closing costs associated with the sale of your home. In addition, ENCAD will reimburse the actual incurred real estate commission, not to exceed 6%. - Tax gross-up on eligible relocation expenses. Upon acceptance, and when ready to relocate to San Diego, the above package must be coordinated through ENCAD's relocation service, PRC (Professional Relocation & Consulting Services). Your contact is Lucy Donaldson who can be reached at **. Ms. Donaldson will explain ENCAD's relocation expense guidelines and coordinate the various aspects of your relocation. Relocation must be completed and reimbursed no later than end of year 1999. Please note that if you voluntarily terminate or are terminated for cause within 12 months of your relocation, you will be required to reimburse ENCAD all relocation expenses that were paid by the company. Your signed acceptance of our offer indicates compliance with this provision of ENCAD's policy. - Eligibility to participate in ENCAD's benefit plans. Coverage includes medical, dental, life and disability insurance. Associated costs are attached. Additionally, ENCAD offers an on-site fitness center, health club membership, an attractive Employee Stock Purchase Plan, tuition reimbursement program, and 401(k) plan. - A sign-on bonus in the amount of ** (net) paid in your first paycheck. (Please note, if you voluntarily terminate or are terminated for cause within one year of employment, you will be required to reimburse this bonus to ENCAD.) - Severance package of 12 months base pay and earned bonus in the event that your employment is terminated with ENCAD within the first year of employment for any reason other than poor performance or "for cause." ** CONFIDENTIAL TREATMENT REQUESTED - Bridge loan in the amount of ** (interest free). It is agreed that this loan will be deducted from your 1999 performance bonus. If any balance still remains, it is agreed that you will repay ENCAD at that time (loan agreement will be executed upon your hire.) Due to the enactment of the Immigration Reform and Control Act of 1986, this offer is contingent on your ability to produce acceptable documentation verifying your eligibility to work in the United States. Please review the enclosed INS I-9 form; it specifies which documents are acceptable. You will be required to complete this form and present the necessary documents on the day you begin work at ENCAD. If you wish to accept our offer of employment, please sign and date this offer and return it to me. Your signature below will indicate your understanding that no other promises or representations have been made and that you will be considered an at-will employee; either party may end the relationship at any time. This offer is not a contract of employment, and the terms of employment are subject to change. Mike, this letter describes the "tangible" components of our offer; just as important are the "intangible" we can offer you in terms of becoming a member of our executive team. I sincerely believe that we can provide you the personal challenges, professional support, and job satisfaction you are seeking! We look forward to having you join us at ENCAD and a productive and mutually rewarding working relationship. If you have any questions, please call me at **. Sincerely, /s/ Sheryl Roland - --------------------------- Sheryl Roland Director of Human Resources Cc: Mike Steep Approved and accepted: /s/ Michael Liess 9/14/98 - --------------------------------- ------------------ Michael Liess Date ** CONFIDENTIAL TREATMENT REQUESTED EX-10.47 10 EXHIBIT 10.47 EXHIBIT 10.47 OFFER OF EMPLOYMENT LETTER FROM THE COMPANY TO CHARLES SHARP September 24, 1999 Charles Sharp 3 Thomas Rice Drive Westboro, MA 01581 Dear Chuck: All of us here at ENCAD are pleased to offer you the position of Vice President, Supplies Operations, reporting to Michael Steep, Executive Vice President and Chief Operating Officer. This is an exempt position which pays ** bi-weekly (** annually). Other parameters of the offer are as follows: - - Participation in the 1999 Sales Incentive Plan: Annual Target $50,000. This amount will be prorated based on your start date. - - A non-recoverable draw against your 1999/2000 Sales Incentive Plan for a period of six months in the amount of ** per month. After the expiration of this six month period, you will receive a recoverable draw against the remainder of your 2000 Sales Incentive Plan in the amount of ** per month. - - ENCAD will grant you Stock Options in the amount of ** shares. The price per share of these options will be determined by the fair market value on the date of grant under the terms of ENCAD's Stock Option Plan. The Stock Option Plan has been approved by the Board of Directors and shareholders. A meeting to explain your stock option will be held shortly after you begin work. Key employees who participate in the stock option plan will be expected to give their full professional effort to the Company. Any outside consulting is discouraged except when done through ENCAD. - - One-time sign on bonus in the gross amount of **. The sign on bonus paid by the company to you will be refunded by you if you elect to terminate your employment with ENCAD, or if you are terminated for cause or poor performance before you have been employed with the company for a period of one year. Refunds shall be calculated on a prorated basis. - - Severance package of 6 months base pay only during your first year of employment in the event that your employment should terminate other than voluntarily or for cause. Termination of your employment based on the "at-will" status will not abrogate payment of severance benefits to you. - - You will receive a monthly car allowance of **. This will be included on your W-2 and is taxable. Miles driven for ENCAD business will be reimbursed at the rate of $.15 per mile. ** CONFIDENTIAL TREATMENT REQUESTED Charles Sharp Page 2 of 3 - - Relocation Assistance: To assist you with your move to San Diego, ENCAD will assist you with the following relocation expenses, in accordance with the company relocation policies: - House hunting trip for up to 3 days, including spouse/partner. This includes coach airfare, lodging, car rental, meals at $30 per person per day with receipts. - Shipment of household goods and personal effects, including two autos and storage costs for up to 30 days. o Temporary Housing for up to 3 months in the new location not to exceed **. - Travel for employee and family to final destination. - Home Purchase Assistance - Reimbursement of home purchase non-recurring closing costs and 1% loan origination fee. - Home Sale Assistance - Reimbursement of commissions and non-recurring closing costs. All home sale activity must be coordinated through PRC Relocation to avoid taxable reimbursements. - Relocation allowance of ** (gross) to assist with incidental expenses incurred during the relocation. - One time tax gross-up for home purchase, house hunting trip and temporary living expenses. - - This offer of employment expires at 5:00pm PST on Friday, September 24, 1999. The relocation benefit has tax implications and you should consult with your tax accountant about these. Upon acceptance, and when ready to relocate to San Diego, the ABOVE PACKAGE MUST BE COORDINATED THROUGH ENCAD'S RELOCATION SERVICE, PRC (Professional Relocation & Consulting Services). Your contact is Lucy Donaldson who can be reached at **. Ms. Donaldson will explain ENCAD's relocation expense guidelines and coordinate the various aspects of your relocation. Please note that if you voluntarily terminate or are terminated for cause (as supported by appropriate California or Federal laws, rules, statutes or case precedence) or poor performance within 12 months of your relocation, you will be required to reimburse ENCAD all relocation expenses that were paid by the company. Your signed acceptance of this offer indicates your agreement with this provision. ENCAD currently extends a medical, dental, life, disability and additional health benefits to all employees as well as three weeks of annual VIP time (Vacation, Illness and Personal time) in accordance with the specific provisions of the policy. ENCAD also offers an attractive Employee Stock Purchase Plan (ESPP), and a 401(k) Savings/Investment Plan. You are eligible to enroll in the ESPP and 401(k) plans the first calendar quarter following your hire date. You will receive details of these plans during your Orientation Program. Due to the enactment of the Immigration Reform and Control Act of 1986, this offer is contingent on your ability to produce acceptable documentation verifying your eligibility to work in the United States. You will be required to present the necessary documents on the day you begin work at ENCAD. ** CONFIDENTIAL TREATMENT REQUESTED Charles Sharp Page 3 of 3 As confirmation of acceptance, please sign and return the enclosed copy of this letter in the enclosed envelope. Your orientation program will be conducted shortly after you begin work, and we will be in contact with you prior to this day. Chuck, this letter describes the "tangible" components of our offer, just as important are the "intangibles" we can offer you in terms of becoming a member of our team. I sincerely believe that we can provide you with the personal challenges, professional support and job satisfaction you are seeking. Your signature below will also indicate your understanding that no other promises or representations have been made and that you will be considered an "at-will" employee; either party may end the relationship at any time. This offer is not a contract of employment, and the general terms of employment not addressed herein are subject to change. I will be happy to discuss any questions you might have. We look forward to a mutually rewarding relationship and are pleased that you will be joining us. Sincerely, /s/ Sheryl Roland - ------------------------------- Sheryl Roland Vice President, Human Resources Accepted: /s/ Charles L. Sharp - ------------------------------------- Start Date 10/11/99 Charles Sharp ----------------- RELOCATION AGREEMENT (Must be signed in order to receive relocation benefits.) In order to conduct business at ENCAD you have been asked to relocate to San Diego. ENCAD will directly pay or reimburse you for certain relocation expenses in accordance with the provisions of your offer of employment. If you receive reimbursements or payments from ENCAD related to this relocation, you are expected to remain an employee of ENCAD for at least twelve months following your date of hire. If you are terminated from employment with ENCAD for cause or choose to voluntarily leave ENCAD within that twelve-month period, you must repay the amounts paid to you under this Agreement. In order to insure such repayment, your signature below will authorize ENCAD, at its option, to withhold from final payment of any amounts due you (other than those covered by applicable laws) the full amount of payments made on your behalf under this Relocation Agreement. If the amounts due you do not cover this repayment, you must make arrangements that are acceptable to ENCAD before your final scheduled workday, and such excess repayment will not be excused. I understand and agree with the terms listed above. /s/ Charles L. Sharp - --------------------------------------- Date 9/24/99 Charles Sharp ---------------- EX-10.48 11 EXHIBIT 10.48 EXHIBIT 10.48 OFFER OF EMPLOYMENT LETTER FROM THE COMPANY TO GURI STARK September 4, 1998 Mr. Guri Stark 50 Aaron Drive Novato, CA 94949 Dear Guri, We are very pleased to offer you the position of Vice President, Vice President, Marketing of our Digital Imaging Solutions SBU, reporting to Michael Steep, Sr. VP/GM pending successful completion of a background check. ENCAD's goal is to provide its executive team with a competitive compensation program that rewards the team on performance and contribution to the growth and success of our organization. The Board of Directors has set forth an executive compensation philosophy that provides: - Base salary compensation at the 50th - 60th percentile of salaries at high tech companies of comparable size. - An annual incentive plan that is leverage so performance substantially above targeted financial levels will result in total annual cash compensation above competitive levels. In the spirit of our executive compensation philosophy, we are pleased to offer you the following: - A base salary of ** bi-weekly **. - A start date of October 5, 1998. - Stock options in the amount of ** shares. The price per share of these options will be determined by the fair market value on the date of grant under the terms of ENCAD's Stock Option Plan. A meeting to explain your stock option plan will be held shortly after you begin work. Key employees who participate in the stock option plan will be expected to give their full professional effort to the Company. Outside consulting is discouraged except when done through ENCAD. - A car allowance of ** (gross) per month. - 3 weeks vacation per year. - Participation in ENCAD's Executive bonus program. This program provides for a range of bonus from ** to ** of your base annual salary with a 100% target of 30%. Bonus payouts are based on the Company's operating profit before taxes and your individual performance against pre-established objectives. Your bonus for 1998 will be pro-rated based on your start date, with a guarantee of ** provided ** CONFIDENTIAL TREATMENT REQUESTED successful completion of your 1998 personal objectives. Details of the plan will be provided to you upon hire. - Participation in ENCAD's semi-annual Employee Profit Sharing Plan. Historically, ENCAD's profit sharing plan has paid out at approximately ** of base pay. - Relocation Assistance: To assist you with your move to San Diego, ENCAD will reimburse you for the following relocation expenses, in accordance with company practices: - Movement of household goods. - Househunting trip for your family. - Relocation allowance in the amount of ** (gross) to offset any miscellaneous T&E expense incurred during the temporary transition period prior to relocation of your family and home. This allowance is designed to give you greater flexibility in managing your relocation expenses and focusing ENCAD's financial assistance in the areas of your special needs. - Home purchase assistance - reimbursement of customary, non-negotiable, non recurring and legally required closing costs when purchasing a home in San Diego. - Home sale assistance - reimbursement of customary, non-negotiable, non recurring legally required closing costs associated with the sale of your home. In addition, ENCAD will reimburse the actual incurred real estate commission, not to exceed 6%. - Tax gross-up on eligible relocation expenses. - Temporary living (air/hotel) reimbursement for a period not to exceed 6 months. Upon acceptance, and when ready to relocate to San Diego, the above package must be coordinated through ENCAD's relocation service, PRC (Professional Relocation & Consulting Services). Your contact is Lucy Donaldson who can be reached at **. Ms. Donaldson will explain ENCAD's relocation expense guidelines and coordinate the various aspects of your relocation. RELOCATION MUST BE COMPLETED AND REIMBURSED NO LATER THAN END OF YEAR 1999. Please note that if you voluntarily terminate or are terminated for cause within 12 months of your relocation, you will be required to reimburse ENCAD all relocation expenses that were paid by the company. Your signed acceptance of our offer indicates compliance with this provision of ENCAD's policy. - - Eligibility to participate in ENCAD's benefit plans. Coverage includes medical, dental, life and disability insurance. Associated costs are attached. Additionally, ENCAD offers an on-site fitness center, health club membership, an attractive Employee Stock Purchase Plan, tuition reimbursement program, and 401(k) plan. - - A sign-on bonus in the amount of ** (net) paid in your first paycheck. (Please note, if you leave ENCAD within one year of employment, you will be required to reimburse this bonus to ENCAD.) - - Severance package of 6 months base pay in the event that your employment is terminated with ENCAD within the first year of employment for any reason other than poor performance or "for cause." ** CONFINDENTIAL TREATMENT REQUESTED Due to the enactment of the Immigration Reform and Control Act of 1986, this offer is contingent on your ability to produce acceptable documentation verifying your eligibility to work in the United States. Please review the enclosed INS I-9 form; it specifies which documents are acceptable. You will be required to complete this form and present the necessary documents on the day you begin work at ENCAD. If you wish to accept our offer of employment, please sign and date this offer and return it to me. Your signature below will indicate your understanding that no other promises or representations have been made and that you will be considered an at-will employee; either party may end the relationship at any time. This offer is not a contract of employment, and the terms of employment are subject to change. Guri, this letter describes the "tangible" components of our offer; just as important are the "intangible" we can offer you in terms of becoming a member of our executive team. I sincerely believe that we can provide you the personal challenges, professional support, and job satisfaction you are seeking! We look forward to having you join us at ENCAD and a productive and mutually rewarding working relationship. If you have any questions, please call me at **. Sincerely, /s/ Sheryl Roland - --------------------------- Sheryl Roland Director of Human Resources Cc: Mike Steep Approved and accepted: /s/ Guri Stark - --------------------------------- Date 9/8/98 Guri Stark ------------------ ** CONFIDENTIAL TREATMENT REQUESTED EX-21.1 12 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES ENCAD INTERNATIONAL INCORPORATED (FOREIGN SALES CORPORATION IN U.S. VIRGIN ISLANDS) ENCAD EUROPE, S.A. (SALES OFFICE) ENCAD, Ltd. (SALES OFFICE) ENCAD GmbH (SALES OFFICE) EX-23.1 13 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 333-24695, No. 333-44923, No. 333-45327, No. 333-59779, and No. 333-85143 of Encad, Inc. on Form S-8 of our report dated February 18, 2000, appearing in this Annual Report on Form 10-K of Encad, Inc. for the year ended December 31, 1999. DELOITTE & TOUCHE LLP San Diego, California March 30, 2000 EX-27.1 14 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ENCAD, INC. DECEMBER 31, 1999 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 3,953 0 30,546 0 11,992 51,794 28,709 (14,445) 68,479 15,972 0 0 0 12 51,232 68,479 117,712 117,712 66,171 66,171 47,357 0 203 3,981 917 3,064 0 0 0 3,064 0.26 0.26
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