**Exhibit 10.40**

 

**SINGLE-TENANT NET LEASE AGREEMENT(15175 Innovation Drive, San Diego)**

 

ThisSingle-Tenant Net Lease Agreement (this “Lease”) is entered into as ofSeptember 16, 2002, between Carmel Mountain #8 Associates, L.P., a Californialimited partnership, and Carmel Mountain Environmental, LLC, a Californialimited liability company, as tenants-in-common (collectively, “Landlord”), andQuantum Magnetics, Inc., a California corporation (“Tenant”), who agree asfollows:

 

1.  Agreement to Let.  Landlord leases to Tenant, and Tenant leasesfrom Landlord, on the terms, provisions, and conditions contained in thisLease, the premises described in the attached*Exhibit A* commonly known as 15175 Innovation Drive, San Diego,California (the “Premises”), on which is located an existing vacant building ofapproximately 58,438 square-feet as of the date of this Lease (the “Building”)and parking lot, subject to the access and parking rights of others under theexisting reciprocal easement agreement recorded against the Premises.

 

2.  Principal Lease Provisions andDefinitions.  The following are the“Principal Lease Provisions” of this Lease. Other portions of this Lease explain and define the Principal LeaseProvisions in more detail and should be read in conjunction with this Article.

 

2.1.    “Basic Monthly Rent” means, on a fully netbasis, the product of $1.33 multiplied by the number of Rentable Square Feet ofthe Building.  Basic Monthly Rentautomatically is increased on the first day of the calendar month which is twoyears after the Rent Commencement Date, and every two years after such date ofrent increase (an “Adjustment Date”), to an amount equal to 107% of the BasicMonthly Rent payable on account of the calendar month immediately preceding theAdjustment Date.

 

2.2.    “Brokers” means:  The Staubach Company – West, Inc., as Tenant’s representative andFranklin Croft, Inc., as Landlord’s representative.

 

2.3.    “Rentable Square Feet”  means the total number of rentable squarefeet of the Building (excluding the Expansion Improvements) as determined bythe Architect in accordance with the current standards of the AmericanIndustrial Real Estate Association (AIREA) for measuring rentable square feetof single-tenant industrial buildings. Once established, the Rentable Square Feet will not be modified forpurposes of this Lease.

 

2.4.    “Expansion Improvements” means a portion ofTenant’s Work consisting of a structure on the parking lot of the Premises ofup to 5,000 Rentable Square Feet, to the extent permitted by applicable lawsand CC&R’s, and more particularly described on the attached *Exhibits B* and *C*.  The RentableSquare Feet (and the Basic Monthly Rent) will not increase based on theExpansion Improvements.  Before theExpiration Date or earlier termination of this Lease, Tenant shall cause theExpansion Improvements to be demolished and removed, and shall return theparking lot of the Premises to the condition existing as if the date of thisLease, all in accordance with Article 12 below.

 

2.5.    “Expiration Date”:  December 31, 2012, subject to Tenant’s one-time right to extendthe Expiration Date in accordance with the attached *Addendum No. 1*.

 

2.6.    Notice Addresses:

 

ForTenant:  After the Rent CommencementDate, at the Premises; before the Rent Commencement Date, to Quantum Magnetics,Inc.,  ATTN:  Lowell Burnett, 7740 Kenamar Court, San Diego, CA 92121;Facsimile:  (858) 566-9388

 

ForLandlord:  c/o Franklin CroftManagement, Inc., ATTN:  President, 7855Fay Avenue, Suite 300, La Jolla, California, 92037-4265; Facsimile:  (858) 454-2216.

 

2.7.    “Permitted Use” means Tenant’s use of thePremises for general office, research, development, warehouse, and distributionpurposes in accordance with applicable laws and regulations and all covenants,conditions and restrictions governing the Premises, and in compliance with allinsurance contemplated by this Lease. The foregoing includes Tenant’s use of explosive materials in qualitiesand quantities that do not interfere with Landlord’s ability to receive theinsurance coverage contemplated by this Lease (whether procured by Tenant or byLandlord subject to reimbursement under this Lease).

 

2.8     “Rent Commencement Date” means January 1,2003.

 

2.9.    “Security Deposit” means $120,000.00.

 

2.10.  Tenant’s Work:  At its sole cost (subject to reimbursement from the TIAllowance), Tenant shall improve the Premises with the tenant improvementsreasonably necessary for Tenant to conduct its business on the Premises(“Tenant’s Work”).  Tenant’s Work mustsubstantially conform to the plans described in the attached *Exhibit C* and must be constructed inaccordance with plans and specifications prepared by Herkes Design Associates(“Architect”), an architect selected by Tenant, or another architect mutuallyacceptable to Landlord and Tenant. Tenant’s Work may include walls, HVAC systems, flooring, wiring andplumbing, utility connection and “tap-in” charges.  Tenant’s Work must be made in compliance with Article 12 belowand Tenant is solely responsible for construction of Tenant’s Work, includingtiming and quality.  Tenant mustcomplete Tenant’s Work before September 1, 2003.  Landlord may not unreasonably withhold or delay its approval toTenant’s proposed plans or modifications to plans for Tenant’s Work; Landlord’sfailure to disapprove of Tenant’s proposed plans or modifications to plans forTenant’s Work within ten business days after Landlord’s receipt of Tenant’srequest is deemed Landlord’s approval. Landlord will have no liability for any delays or defects in Tenant’sWork.

 

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2.11.  “TI Allowance” means $1,000,000.00.  Landlord shall reimburse Tenant up to the TIAllowance for the cost of Tenant’s Work in accordance with the attached *Addendum No. 1*.  No more than 30% of the TI Allowance may be allocated towardssoft costs (such as, without limitation, architectural, space planning, permitfees, material testing, or contractor fees/profit) and no portion of the TIAllowance may be allocable towards fees paid to Tenant or any of its owners,employees or affiliates.  Tenant is notentitled to any rent credit or discount based on any unused portion of the TIAllowance.

 

3.  Term.   The term of this Lease (the “Term”) commences on the date ofthis Lease and expires on the Expiration Date, subject to earlier terminationin accordance with this Lease.

 

4.  Possession.   Tenant is entitled to immediate possession of the Premises.  Tenant has thoroughly inspected the Premisesand accepts the Premises in its as-is condition; provided, however, Landlordshall, at its sole cost (without any right of reimbursement under Article 7below) cause the following work to be completed before Tenant completesTenant’s Work:  (a) replace one of theHVAC units and ensure that all of the other HVAC units are in good workingorder as of such date; (b) install a site back-flow preventer, and, if needed,a domestic back-flow preventer inside the Building, in accordance withapplicable code requirements; and provided further, Landlord warrants that asof the date of this Lease, there are no leaks in the roof of the Building.  Any claims on account of any roof leaks mustbe made by Tenant before Tenant first begins construction or installation workat the Premises.

 

5.  Use of Premises.

 

5.1.  Permitted Use of Premises.  Tenant may use the Premises for thePermitted Use and for no other use.  Anychange in the Permitted Use requires Landlord’s prior written consent, whichconsent may be granted or withheld in Landlord’s reasonable discretion.

 

5.2.  Compliance with Laws.  Tenant shall comply with all laws concerningthe Premises or Tenant’s use of the Premises, including the obligation atTenant’s sole cost to alter, maintain, and restore the Premises in compliancewith all applicable laws, even if the laws are enacted after the date of thisLease, even if compliance entails costs to Tenant of  a substantial nature, and even if compliance requires structuralalterations.  Such obligation to complywith laws includes compliance with the Americans With Disabilities Act of 1990(42 U.S.C. 12181 *et seq.*)** (the “ADA”).  If  Tenant’s particular use of the Premisesresults in the need for modifications or alterations, then Tenant shall promptlycause the completion of such modifications and alterations, at Tenant’s sole cost,in accordance with Article 12 below. Notwithstanding the foregoing, Tenant is not responsible for violationsof the Premises existing on or before possession of the applicable portion ofthe Premises is first delivered to Tenant.

 

5.3.  General Covenants and Limitations on Use.  Tenant may not do, bring, or keep anythingin or about the Premises that will cause a cancellation of any insurancecovering the Premises.  If the rate ofany insurance carried by Landlord is increased as a result of Tenant’s use,Tenant shall pay to Landlord, within 10 days after Landlord delivers to Tenant a notice of such increase, theamount of such increase.  Neither Tenantnor Tenant’s Invitees may do anything that will cause damage or waste.  No machinery, apparatus, or other appliancemay be used or operated in or on the Premises that will in any manner injure,vibrate, or shake all or any part of the Premises.

 

5.4.  Signs.   Tenant is entitled to 100% of the signage rights associated withthe Premises.  Tenant shall, at Tenant’ssole cost, make any changes to any sign on the Premises as required by any newor revised applicable laws, ordinances, rules, regulations or covenantsgoverning the Premises .  Tenant shallmaintain, repair, and replace all of Tenant’s signs in first class condition.

 

6.  Monthly Rent.  Tenant shall pay to Landlord as minimummonthly rent, without deduction, setoff, prior notice, or demand, the BasicMonthly Rent in advance, on or before the first day of each calendar monththroughout the Term commencing on the Rent Commencement Date.  Concurrent with execution of this Lease,Tenant shall deposit with Landlord $73,047.50 as estimated first month’s BasicMonthly Rent.  **THIS LEASE IS INTENDED TO BE A COMPLETELY “NET LEASE”AND EXCEPT AS SPECIFICALLY STATED TO THE CONTRARY IN THIS LEASE, TENANT ISSOLELY RESPONSIBLE FOR THE CARE, MAINTENANCE, TAXES, INSURANCE, UTILITIES,REPAIR AND OPERATING EXPENSES OF THE PREMISES**.  Allmonetary obligations of Tenant under this Lease constitute “rent” under this Lease.

 

7.  Operating Expenses.

 

7.1.  Definition of Operating Expenses.  Tenant is responsible for payment of allOperating Expenses of the Premises beginning on the Rent CommencementDate.  As used in this Lease, the term“Operating Expenses” means all costs and expenses paid or incurred by Landlordor Tenant relative to the operation, repair, restoration, replacement,maintenance, and management of the Premises, including:  (i) water, sewage disposal, drainage, refusecollection and disposal, gas, electricity, and other utility services, and themaintenance of all components, systems, and apparatus by which such utilitiesand services are provided, (ii) general maintenance and repair of thelandscaping, and structural components of the improvements located on thePremises (except to the extent the cost is solely Landlord’s responsibilityunder Article 9 below), janitorial, and security services (if any), (iii)expenses payable by Landlord pursuant to the provisions of any recordedCovenants, Conditions, and Restrictions, Reciprocal Basement Agreements, andany other existing recorded documents affecting the Premises as of the date ofthis Lease, (iv) all real property or real estate taxes, assessments,association dues, and other impositions, whether general, special, ordinary, orextraordinary, and of every kind and nature, which may be levied, assessed,imposed on the Premises on account of the period of this Lease, (“Real EstateTaxes”), subject to the limitation described below, (v) any personal property taxes,assessments, or other impositions levied, assessed, or imposed upon anypersonal property of Landlord used in connection with the Premises, (vi)Insurance Expenses (as defined below) imposed on the Premises on account of theperiod of this Lease, (vii) inspection fees and (viii) a property managementfee in the amount of 3% of Basic Monthly Rent, and (ix) capital improvements orstructural modifications required by any change in laws, ordinances, rules, orregulations governing the Premises, or other capital improvements or structuralmodifications deemed reasonably necessary by Landlord for health

 

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or safety purposes; *provided, however,* (a) Operating Expensesdo not include any capital costs required to repair or replace the structuralportions of the foundation, exterior walls, interior load bearing walls, roof,or slab, and (b) any costs of such capital improvements or structuralmodifications (except to the extent the cost is solely Landlord’s responsibilityunder Article 9 below) shall be amortized (including an interest factorreasonably determined by Landlord) over the anticipated useful life of suchcapital improvements or structural modifications.  *Notwithstanding the foregoing*,if Landlord sells the Premises during the initial 10-year period of this Lease,Operating Expenses will not include (and Tenant will not be responsible for)the portion of any increase in Real Estate Taxes arising from the sale to theextent based on the difference between the fair market value of the Premises onthe date Tenant’s Work is completed (as increased by 2% per year thereafter)and the sales price of the Premises.

 

7.2.  Payment of Operating Expenses.  Landlord shall deliver to Tenant an annualstatement setting forth the estimated Operating Expenses to be incurred byLandlord for the ensuing year (“Expense Statement”).  Landlord may, from time to time, modify the Expense Statementbased on reasonable changes to Landlord’s estimate of Operating Expensesincurred by it.  Tenant shall payLandlord one-twelfth of the amount set forth in each Expense Statement, inadvance, concurrent with each payment of Basic Monthly Rent.  Tenant’s payment obligations under thisparagraph constitute additional rent under this Lease.  Within 45 days after the end of eachcalendar year, Landlord shall provide Tenant a statement of Landlord’s actualOperating Expenses for the calendar year (a “Reconciliation Statement”).  If the sum of Tenant’s payments on accountof Operating Expenses during any calendar year exceeds the actual OperatingExpenses for the calendar year, then the excess will be credited against futureOperating Expenses due from Tenant, or paid directly to Tenant.  If the sum of Tenant’s Operating Expensepayments for any calendar year is less than the actual Operating Expenses forthe calendar year, then Tenant shall pay Landlord the amount of the deficiencywithin 10 days after delivery of Landlord’s statement reconciling the year’sOperating Expenses.  Landlord’s delay indelivering any Expense Statement or Reconciliation Statement will not releaseTenant of its obligation to pay any portion of the Operating Expenses.

 

Notwithstandingthe foregoing, Operating Expenses do not include (i) interest and principalpayments and all other debt service (including but not limited to brokeragefees and points) on all loans or indebtedness, whether or not secured by thePremises; (ii) costs for which Landlord is reimbursed by insurance proceeds orthird parties; (iii) leasing commissions; (iv) depreciation; (v) costs, fines,penalties or interest incurred due to Landlord’s failure to make timelypayments of any obligations under this Lease; (vi) repairs made underguaranties or warranties (i.e., at no cost to Landlord); (vii) any groundrents; (viii) sale and refinancing costs, including attorneys’ fees, brokeragecommissions and other marketing costs relating thereto; (ix) any amountsreceived by Landlord or paid by Tenant pursuant to another provision of thisLease; (x) costs to correct design or construction defects in the originalconstruction of the Building; and (xi) costs resulting from the failure of theBuilding to comply with all laws and permits when originally constructed.

 

7.3.  Audit.  If Tenant disputes the amount set forth in any ReconciliationStatement, then Tenant’s employees or an independent certified publicaccountant designated by Tenant, may, after reasonable notice to Landlord andat reasonable times, inspect Landlord’s records at Landlord’s offices pertainingto Landlord’s calculation of Operating Expenses.  If, after such inspection, Tenant notifies Landlord in writingthat Tenant still disputes such amounts, a certification as to the properamount shall be made, at Tenant’s expense, by an independent certified publicaccountant selected by Tenant and reasonably approved by Landlord and who is amember of a nationally or regionally recognized accounting firm.  If such certification by the accountantproves that the Operating Expenses set forth in the Reconciliation Statementwere overstated by more than 5.0%, then Tenant’s audit costs, including thecost of such certification, shall be promptly paid for by Landlord.  Promptly following the parties receipt ofsuch certification, the parties shall make such appropriate payments orreimbursements, as the case may be, to each other, as are determined to beowing pursuant to such certification. Tenant’s failure to dispute the amount of any Operating Expense orReconciliation Statement within 120 days after Tenant’s receipt of aReconciliation Statement for the applicable calendar year, is deemed Tenant’swaiver to ever make a claim based on Operating Expenses for that applicableyear.

 

8.  Utilities and Services.  Tenant shall arrange for and pay the cost ofall utilities and services (including any connection charges and taxes thereon)furnished to the Premises beginning on the date of this Lease, includingelectricity, water, heating, ventilating, air-conditioning, oil, sewer, gas,telephone, communication services, trash collection, janitorial, cleaning, andwindow washing.  Landlord has absolutelyno responsibility with respect to such utilities and other services.

 

9.  Maintenance.

 

9.1 Landlord’sDuties.  Landlord shall maintain andrepair the following aspects of the Premises (the costs of which constituteOperating Expenses):  landscaping andexterior pest-control, parking lot, exterior of the Building (including thefacade, exterior lighting, the roof, and window washing), exterior fireprotection components, the HVAC and other mechanical systems, and theelevator.  Landlord shall timely anddirectly pay the Insurance Expenses, Real Estate Taxes and exterior utilitiesassociated with the Premises, subject to reimbursement in accordance withArticle 7 above.  Notwithstandinganything to the contrary in this Lease, Landlord is solely responsible (at itsown cost without any right of reimbursement under Article 7) for repairingdamage to or defects in the foundation, slab, load bearing walls (but not thefascia of walls), and structural elements of the roof, except to the extent thedamage was caused by Tenant or its Invitees. Throughout the term of this Lease, Tenant may specifically enforce allconstruction warranties with respect to the Premises against the applicablecontractors and material providers.

 

9.2 Tenant’sDuties.  Beginning on the RentCommencement Date, Tenant shall at its sole cost (i) maintain and repair, allin good condition, all aspects and portions of the Premises, other than thoseaspects subject to Landlord’s duties described in Section 9.1; (ii) arrange forjanitorial services and the removal of trash from the Premises, and (iii)maintain a pest and termite control service agreement with respect to thePremises, reasonably acceptable to Landlord. Tenant shall provide Landlord with current copies of its maintenance,service and cleaning contracts throughout the Term.  Tenant is additionally liable for any damage to the Premisesresulting from the acts or omissions of Tenant or Tenant’s Invitees.  If Tenant fails to maintain or repair, anyportion of the Premises as provided above, then Landlord

 

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may maintain or repair, anysuch portion of the Premises and Tenant shall promptly reimburse Landlord forLandlord’s costs thereof, which sums constitute additional rent under thisLease; provided, however, if Tenant’s failure to maintain or repair has notresulted in an urgent need for repair or maintenance, Landlord shall first giveTenant notice of its failure to maintain or repair and a period of 10 daysafter such notice within to cure the failure; and provided further, if Tenant’sfailure to maintain or repair has not resulted in an urgent need for repair ormaintenance and if Landlord has not previously taken action under this sentencein the prior 18 months, then Landlord shall first give Tenant notice of itsfailure to maintain or repair and a period of 30 days after such notice withinto cure the failure (or such additional time, not to exceed 90 days from thedate of Landlord’s notice, as is reasonably necessary to cure the failure ifTenant begins cure within 10 days after Landlord’s notice and diligentlyprosecutes such cure to completion). Landlord may require Tenant to use specific contractors for the purposeof maintaining warranties or the integrity of the Premises.  Tenant waives the provisions of CaliforniaCivil Code Section 1942 (or any successor statute), and any similar principalsof law with respect to Landlord’s obligations for tenantability of the Premisesand Tenant’s right to make repairs and deduct the expense of such repairs fromrent.

 

10.  Insurance.

 

10.1.  Public Liability and Property DamageInsurance.  Tenant shall maintainpublic liability and property damage insurance (i) with a single combinedliability limit and property damage limit of not less than $2,000,000.00, (ii)insuring (a) against all liability of Tenant and Tenant’s Invitees arising outof or in connection with Tenant’s use or occupancy of the Premises, includingproducts liability coverage, and (b) performance by Tenant of the indemnityprovisions set forth in this Lease, and (iii) naming Landlord, its agents, andany lender holding a security interest in the Premises or any ground lessor ofthe Premises (“Lender”) as additional named insured, and (c) with umbrellacoverage of $10 million.  Not morefrequently than once every year, if, in the reasonable opinion of Landlord orat the request of any Lender, the amount of such insurance at that time is notadequate, then Tenant shall increase such insurance as reasonably required byLandlord.

 

10.2.  Fire and Extended Coverage Insurance.  Tenant shall maintain on Tenant’sAlterations and Tenant’s Personal Property (as defined below) a policy ofstandard fire and extended coverage insurance, with vandalism and maliciousmischief endorsements, coverage with respect to increased costs due to buildingordinances, demolition coverage, boiler and machinery insurance, and sprinklerleakage coverage, in each case to the extent of at least 100 percent of fullreplacement value, and business interruption insurance, issued in the names ofLandlord, Tenant, and any Lenders, as their interests may appear.  Such “full replacement value” shall bedetermined by the company issuing such policy at the time the policy isinitially obtained.  Not more frequentlythan once every two years, either Landlord or Tenant may notify the other thatit elects to have the replacement value re-determined by an insurancecompany.  Such re-determination shall bemade promptly and in accordance with the rules and practices of the Board ofFire Underwriters, or a like board recognized and generally accepted by theinsurance company, and Landlord and Tenant shall be promptly notified of theresults by the company.  Such policyshall be promptly adjusted according to such re-determination.  Tenant shall additionally maintain fullcoverage plate-glass insurance on the Premises, in which Landlord and anyLender be named as additional insureds.

 

10.3.  Intentionally Omitted.

 

10.4.  Tenant’s Insurance Generally.  Insurance required to be maintained byTenant under this Lease:  (i) shall beissued as a primary policy (not contributed with, and in excess of coverageLandlord may carry) by insurance companies authorized to do business inCalifornia with a Best’s Rating of at least “A-” and a Best’s Financial SizeCategory rating of at least “X,” as set forth in the most current edition of“Best’s Insurance Reports” (or such greater ratings as are required by any Lender);(ii) shall name Landlord and any Lender as additional named insureds, but thepolicy must provide that notwithstanding the fact that Landlord is anadditional insured, it is entitled to recover under the policy for any losssuffered by Landlord by reason of Tenant’s negligence; (iii) shall consist of“occurrence” based coverage, without provision for subsequent conversion to“claims” based coverage; (iv) may not be cancelable or subject to reduction ofcoverage or other modification except after 30-days’ prior written notice toLandlord and any Lender; and (v) may not provide for a deductible orco-insurance provision in excess of $25,000.00.  Tenant shall, at least 30 days before the expiration of each suchpolicy, furnish Landlord with a renewal of or “binder” extending thepolicy.  Tenant shall promptly uponrequest deliver to Landlord copies of such policy or policies or certificatesevidencing the existence and amounts of such insurance together with evidenceof payment of premiums.

 

10.5.  Landlord’s Insurance.  Landlord may maintain any of the followinginsurance, in such amounts and with such limits as Landlord determines in itsreasonable discretion:  (i) publicliability and property damage insurance and products liability insurance; (ii)fire and extended coverage insurance, with vandalism and malicious mischiefendorsements, coverage with respect to increased costs due to buildingordinances, demolition coverage, and sprinkler leakage coverage; (iii) boilerand machinery insurance; (iv) fidelity insurance; (v) earthquake insurance;(vi) plate-glass insurance; and (vii) rental interruption or businessinterruption insurance.  The premiums,costs, expenses, and deductibles (or similar costs or charges) of or withrespect to any such insurance (all of the preceding, collectively, “InsuranceExpenses”) are included in Operating Expenses; provided, however, OperatingExpenses will not include fidelity insurance or earthquake insurance unless theinsurance is either required by a Lender or otherwise becomes commonly carriedby owners of projects similar to the Premises.

 

10.6.  Waiver of Subrogation.  Landlord and Tenant release each other,Tenant’s Invitees , and Landlord’s guests, invitees, customers and licensees(collectively, “Landlord’s Invitees”) from all claims for damage, loss, orinjury to the Premises, to Tenant’s Personal Property, and to the fixtures andAlterations of either Landlord or Tenant in or on the Premises to the extentthe damage, loss or injury is covered by any insurance policies carried byLandlord and Tenant and in force at the time of such damage.  Landlord and Tenant shall each use its bestefforts to cause all insurance policies obtained by it pursuant to this Leaseto provide that the insurance company waives all right of recovery by way ofsubrogation against Landlord and Tenant in connection with any damage, loss, orinjury covered by such policy.

 

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11.  Taxes.   Tenant shall pay before delinquency all taxes, assessments,license fees, and other charges that are levied or assessed against, or basedon the value of, Tenant’s personal property installed or located in or on thePremises including trade fixtures, furnishings, equipment, and inventory(collectively, “Tenant’s Personal Property”). On demand by Landlord, Tenant shall furnish Landlord with satisfactoryevidence of such payments.  If any suchtaxes, assessments, license fees, or other charges are levied against Landlordor Landlord’s property, or if the assessed value of the Premises is increasedby the inclusion of a value placed on Tenant’s Personal Property, then Tenant,on demand, shall immediately reimburse Landlord for the sum of such taxes,assessments, license fees, and other charges so levied against Landlord, or theproportion of taxes resulting from such increase in Landlord’s assessment,which amounts constitute additional rent under this Lease.  Landlord may pay such taxes, assessments,license fees, or other charges or such proportion, and receive suchreimbursement, regardless of the validity of the levy.

 

12.  Alterations.  Tenant may make alterations, improvements,additions, installations, or changes to the Premises (any of the preceding,“Alterations”) only if:  (i) Tenantfirst obtains Landlord’s written consent after submitting to Landlord, inwritten form, proposed detailed plans of such Alterations, (ii) Tenant complieswith all conditions which may be reasonably imposed by Landlord, including butnot limited to Landlord’s selection of specific contractors or constructiontechniques (and Tenant shall retain, under a fixed fee or guaranteed-maximumprice construction contract an experienced and licensed contractor reasonablyacceptable to Landlord to perform the Alterations), and (iii) Tenant pays toLandlord the reasonable costs and expenses of Landlord for architectural,engineering, or other consultants which reasonably may be incurred by Landlordin determining whether to approve any such Alterations.  To compensate Landlord for its review of andinvolvement in the Alterations (including Tenant’s Work), Tenant shall payLandlord an administrative fee in the amount of one percent of all costs of theAlterations (payable pro-rata over the course of construction of theAlterations).  The TI Allowance may beapplied to the administrative fee relating to Tenant’s Work.  Tenant shall, before commencing anyAlterations, at Tenant’s sole cost, (i) acquire (and deliver to Landlord a copyof) a permit from appropriate governmental agencies to make such Alterations(any conditions of which permit Tenant shall comply with, at Tenant’s solecost, in a prompt and expeditious manner), (ii) obtain and deliver to Landlord(unless this condition is waived in writing by Landlord) a lien and completionbond for the proposed Alterations, to insure Landlord against any liability formechanics’ liens and to insure completion of the work, or other security orreasonable evidence and assurance of payment reasonably acceptable to Landlord,(iii) provide Landlord with 10 days’ prior written notice of the date theinstallation of the Alterations is to commence to expressly remind Landlord topost and record an appropriate notice of non-responsibility, and (iv) obtain(and deliver to Landlord proof of) reasonably adequate workers compensationinsurance with respect to any of Tenant’s employees installing or involved withsuch Alterations (which insurance Tenant shall maintain in force untilcompletion of the Alterations).  AllAlterations shall upon installation become the property of Landlord and shallremain on and be surrendered with the Premises on termination of this Lease,except that Landlord may, at its election, require Tenant to remove any or allof the Alterations, by so notifying Tenant in writing on or before the ExpirationDate or earlier termination of this Lease, in which event, Tenant shall, at itssole cost, on or before the Expiration Date or earlier termination of thisLease, repair and restore the Premises to the condition of the Premises priorto the installation of the Alterations which are to be removed.  Tenant shall pay all costs for Alterationsand other construction done or caused to be done by Tenant and Tenant shallkeep the Premises free and clear of all mechanics’ and materialmen’s lien’sresulting from or relating to any Alterations or other construction.  “Alterations” do not include trade fixtures,furniture or equipment.

 

13.  Surrender of Premises and Holding Over.  On the Expiration Date or earliertermination of this Lease, Tenant shall (i) surrender to Landlord the Premisesin good and clean condition (subject to reasonable wear and tear), along withall keys to the Premises (including any keys to any exterior or interiordoors), and (ii) remove all of Tenant’s Personal Property and perform allrepairs and restoration required by the removal of any Alterations or Tenant’sPersonal Property.  Landlord may electto retain or dispose of in any manner any Alterations or Tenant’s PersonalProperty that Tenant does not remove from the Premises on the Expiration Dateor earlier termination of this Lease (but only after Tenant has ceased regularoperations of its business from the Premises) as required by this Lease bygiving written notice to Tenant.  Anysuch Alterations or Tenant’s Personal Property that Landlord elects to retainor dispose of will vest in Landlord immediately on notice to Tenant.  If Tenant fails to remove its Alterations orPersonal Property as required above, Tenant waives all claims against Landlordfor any damage to Tenant resulting from Landlord’s retention or disposition ofany such Alterations or Tenant’s Personal Property and Tenant is liable toLandlord for Landlord’s costs for storing, removing or disposing of any suchAlterations or Tenant’s Personal Property. If Tenant fails to surrender the Premises to Landlord on the ExpirationDate or earlier termination of this Lease, Tenant shall indemnify Landlordagainst all liabilities, damages, losses, costs, expenses, attorneys’ fees andclaims resulting from such failure, including any claim for damages made by asucceeding tenant.  If Tenant, withLandlord’s consent, remains in possession of the Premises after the ExpirationDate or earlier termination of this Lease, such possession by Tenant shall bedeemed to be a month-to-month tenancy terminable on 30-days’ written noticegiven at any time by Landlord or Tenant. During any such month-to-month tenancy, Tenant shall pay, as BasicMonthly Rent, 125 percent of the Basic Monthly Rent in effect immediatelybefore the Expiration Date or earlier termination of this Lease, as the casemay be, unless Landlord and Tenant mutually agree otherwise in writing.  All provisions of this Lease other thanthose pertaining to Term apply to such month-to-month tenancy.

 

14.  Default.  The occurrence of any of the following constitutes a materialdefault and breach of this Lease by Tenant.

 

14.1.  Tenant’s failure to make any payment of rentwithin three days after Landlord gives notice to Tenant of the paymentdue.  No grace period before the impositionof a late charge extends the date when such rent is due and payable, and Tenantis in default under this Lease if such payment is not timely made.

 

14.2.  Tenant’s failure to observe or perform anyother provision of this Lease for a period of ten days after written notice ofsuch failure from Landlord to Tenant; provided, however, such notice is in lieuof, and not in addition to, any notice required under applicable unlawfuldetainer statute; and provided further, however, that if the nature of Tenant’sdefault is such that more than ten days are required for its cure, then Tenantis not deemed to be in default if

 

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Tenant commences such curewithin the ten-day period and thereafter diligently prosecutes such cure tocompletion within 90 days after Landlord’s written notice.

 

15.  Landlord’s Remedies.  Landlord is entitled to the followingremedies if Tenant commits a default or breach under this Lease; these remediesare not exclusive, but are cumulative and in addition to any remedies providedelsewhere in this Lease, or now or later allowed by law.

 

15.1.  Continuation of Lease.  No act by Landlord (including the acts setforth in the next sentence) terminates Tenant’s right to possession unless Landlordnotifies Tenant in writing that Landlord elects to terminate Tenant’s right topossession.  As long as Landlord doesnot terminate Tenant’s right to possession, Landlord may (i) continue thisLease in effect, (ii) continue to collect rent when due and enforce all theother provisions of this Lease, (iii) enter the Premises and relet them, or anypart of them, to third parties for Tenant’s account, for a period shorter orlonger than the remaining term of this Lease, and (iv) have a receiver appointedto collect rent and conduct Tenant’s business. Tenant shall immediately pay to Landlord all costs Landlord incurs insuch reletting, including brokers’ commissions, attorneys’ fees, advertisingcosts, and expenses of remodeling the Premises to a vanilla shell condition forsuch reletting.  If Landlord elects torelet all or any portion of the Premises as permitted above, rent that Landlordreceives from such reletting will be applied to the payment of, in the followingorder and priority, (i) any indebtedness from Tenant to Landlord other thanBasic Monthly Rent due from Tenant, (ii) all costs incurred by Landlord in thereletting in accordance with this paragraph, and (iii) Basic Monthly Rent (and,if applicable, percentage rent) due and unpaid under this Lease.  After applying the payments as referred toabove, any sum remaining from the rent Landlord receives from the relettingwill be held by Landlord and applied in payment of future rent as it becomesdue under this Lease.  Tenant will notbe entitled to any excess rent received by Landlord unless and until allobligations of Tenant under this Lease, including all future obligations, aresatisfied in full.

 

15.2.  Termination of Tenant’s Right to Possession.  In the event of such breach or default by Tenant,Landlord may terminate Tenant’s right to possession of the Premises at anytime, by notifying Tenant in writing that Landlord elects to terminate Tenant’sright to possession.  On termination ofthis Lease, Landlord has the right to recover from Tenant (i) the worth at thetime of the award of the unpaid rent which had been earned at the time of suchtermination, (ii) the worth at the time of the award of the amount by which theunpaid rent which would have been earned after such termination until the timeof award exceeds the amount of such loss of rent that Tenant proves could havebeen reasonably avoided, (iii) the worth at the time of the award of the amountby which the unpaid rent for the balance of the Term after the time of award(had there been no such termination) exceeds the amount of such loss of rentthat Tenant proves could be reasonably avoided, and (iv) any other amountnecessary to compensate Landlord for all detriment proximately caused byTenant’s failure to perform Tenant’s obligations under this Lease or in theordinary course of things would be likely to result therefrom.  The “worth at the time of the award” of theamounts referred to in Clauses (i) and (ii) above is to be computed by allowinginterest at the Default Rate, as set forth below.  The “worth at the time of the award” of the amount referred to inClause (iii) above is to be computed by discounting such amount at the discountrate of the Federal Reserve Bank of San Francisco at the time of award.

 

15.3.  Landlord’s Right to Cure Default.  Landlord, at any time after Tenant commits adefault or breach under this Lease, may cure such default or breach at Tenant’ssole cost.  If Landlord at any time, byreason of Tenant’s default or breach, pays any sum or does any act that requiresthe payment of any sum, such sum shall be due immediately from Tenant toLandlord at the time such sum is paid, and constitutes additional rent underthis Lease.

 

15.4.  Enforcement Costs.  On demand, Tenant shall pay Landlord allcosts and expenses incurred by Landlord in connection with collecting anyamounts and damages owing by Tenant under this Lease, or to enforce anyprovision of this Lease, including reasonable attorneys’ fees, whether or notany action is commenced by Landlord.

 

16.  Interest and Late Charges.  Late payment by Tenant to Landlord of rentwill cause Landlord to incur costs not contemplated by this Lease, the exactamount of which would be impracticable or extremely difficult to fix.  Costs include processing, collection and accountingcharges, and late charges that may be imposed on Landlord by the terms of anydeeds of trust covering the Premises. Therefore, if any rent or other payment is not received by Landlordwithin five days after its due date, then, without any requirement for noticeto Tenant, Tenant shall pay to Landlord an additional sum of five percent ofsuch overdue amount as a late charge. Such late charge represents a fair and reasonable estimate of the coststhat Landlord will incur by reason of any late payment by Tenant, and thereforethis paragraph is reasonable under the circumstances existing at the time thisLease is made.  Acceptance of such latecharge by Landlord does not constitute a waiver of Tenant’s default withrespect to such overdue amount, nor prevent Landlord from exercising any of theother rights and remedies available to Landlord under this Lease.  In addition to the late charge payable byTenant, if any rent is not paid within 30 days of the date such rent is due,then Tenant shall pay to Landlord interest on the overdue rent at the rateequal to the “reference rate” announced from time to time by Bank of America,NT&SA (if such reference rate ceases to be announced, then a reasonablycomparable “prime rate” shall be utilized, selected by Landlord), plus fivepercent per annum, or the maximum rate permitted by law, whichever is less (the“Default Rate”).  Such interest shalladditionally accrue and be payable by Tenant relative to any other amounts payableby Tenant to Landlord under the provisions of this Lease which are not paidwhen due.  All late charges and interestunder this paragraph constitute additional rent under this Lease.

 

17.  Habitual Defaults.  If a late charge is payable under thisLease, whether or not collected, for three installments of Basic Monthly Rent,Operating Expense, or other rent due under this Lease during any 18-monthperiod, Tenant’s monthly payments will automatically become due and payablequarterly in advance, rather than monthly. All monies paid to Landlord under this paragraph may be commingled withother monies of Landlord and will not bear interest.  If Tenant breaches any provision of this Lease, then any balanceremaining from funds paid to Landlord under the provisions of this paragraphmay, at Landlord’s election, be applied to the payment of any monetary defaultof Tenant.

 

18.  Security Deposit.  Tenant shall immediately deposit withLandlord cash in the amount of the Security Deposit to secure the performanceby Tenant of its obligations under this Lease, including Tenant’s obligations(i) to pay rent,

 

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(ii) to repair damages causedby Tenant or Tenant’s agents, employees, contractors, licensees, or invitees(collectively, “Tenant’s Invitees”), (iii) to clean the Premises on thetermination of this Lease, and (iv) to remedy any other defaults by Tenant inthe performance of any of its obligations under this Lease, If Tenant commitsany default under this Lease, Landlord may use the Security Deposit to curesuch defaults, and to compensate Landlord for damage suffered by Landlord fromsuch defaults, including attorneys’ fees and costs incurred by Landlord.  Tenant shall promptly pay to Landlord theamount necessary to replenish any portion of the Security Deposit so used byLandlord.  Following the Expiration Dateor earlier termination of this Lease, and within the time frame required byapplicable law, Landlord shall deliver to Tenant, at Tenant’s last known address,any portion of the Security Deposit not used by Landlord in accordance withthis paragraph.  Landlord may comminglethe Security Deposit with Landlord’s other funds and Landlord will not payinterest on such Security Deposit to Tenant.

 

19.  Destruction.  If the Premises is totally or partiallydestroyed during the Term, rendering the Premises totally or partiallyinaccessible or unusable, then (i) Landlord shall restore the Premises tosubstantially the same condition as it was in immediately before suchdestruction, (ii) Landlord will not be required to restore Tenant’s Alterationsor Tenant’s Personal Property unless they are an integral part of the Premisesand specifically covered by insurance proceeds received by Landlord, suchexcluded items being the sole responsibility of Tenant to restore, (iii) thedestruction will not terminate this Lease, and (iv) all obligations of Tenantunder this Lease will remain in effect, except that the Basic Monthly Rent willbe abated or reduced, between the date of the destruction and the date of completionof restoration, by the ratio of (a) the area of the Premises rendered unusableor inaccessible by the destruction to (b) the area of the Premises before thedestruction.  Notwithstanding anythingto the contrary in this Lease, Landlord or Tenant may terminate this Lease byso notifying the other in writing on or before the 30th day afterthe destruction, if (A) then-existing laws do not permit restoration of thePremises to substantially similar premises, (B) the destruction occurs duringthe last year of the Term, (C) restoration will require more than nine monthsafter the destruction.  Additionally,Landlord may terminate this Lease by so notifying Tenant in writing on orbefore the 60th day after Landlord’s receipt of the proceeds frominsurance maintained by Landlord, if (x) the destruction exceeds 25 percent ofthe then replacement value of the Premises, or (y) Landlord determines that thecost of the restoration exceeds the amount of insurance proceeds relating tothe destruction actually received by Landlord from insurance maintained byLandlord (unless Tenant funds the shortfall without any right or reimbursementor offset).   If Landlord or Tenant soterminates this Lease, then (1) Landlord has no obligation to restore thePremises, (2) Landlord retains all insurance proceeds relating to suchdestruction (except for proceeds on account of Tenant’s Personal Property orproceeds allocated by the applicable insurance policy specifically and solelyfor Tenant relocation costs or proceeds of Tenant’s own business interruptioninsurance), and (3) this Lease terminates as of 30 days after the notice oftermination from Landlord or Tenant to the other.  If Landlord restores the Premises as provided above, then Tenantwaives the provisions of California Civil Code Sections 1932(2) and 1933(4) orany successor statute with respect to any destruction of the Premises.

 

20.  Condemnation.  If during the Term there is any taking ofall or any part of the Premises or any interest in this Lease by the exerciseof any governmental power, whether by legal proceedings or otherwise, by anyentity or individual having the power of condemnation (any of the preceding a“Condemnor”), or a voluntary sale or transfer by Landlord to any Condemnor,either under threat of condemnation or while legal proceedings for condemnationare pending (any of the preceding, a “Condemnation”), then this paragraphapplies.  A temporary Condemnation ofall or any part of the Premises for less than 180 days does not constitute aCondemnation under this paragraph, but the Basic Monthly Rent is abated as tothe portion of the Premises affected during the temporary Condemnation.  If the Condemnation is of the entirePremises, then this Lease terminates on the date the Condemnor takes possessionof the Premises (the “Date of Condemnation”). If the Condemnation is of some, but not all, of the Premises, then thisLease remains in effect, except that, if the remaining portion of the Premisesis rendered unsuitable for Tenant’s continued use of the Premises, asreasonably determined by both Landlord and Tenant, then Tenant may elect toterminate this Lease by so notifying Landlord in writing (the “TerminationNotice”) within 30 days after the date that the nature and extent of theCondemnation have been determined.  Suchtermination becomes effective on the earlier of (i) the date that is 30 daysafter the Termination Notice, and (ii) the Date of Condemnation.  If Tenant does not give Landlord theTermination Notice within the 30-day period, then all obligations of Tenantunder this Lease remain in effect, except that (unless the Premises arerestored as set forth below) Basic Monthly Rent will prospectively be reducedby the ratio of (a) the area of the Building taken to (b) the area of theBuilding immediately before the Date of Condemnation.  Notwithstanding anything to the contrary in this paragraph, ifwithin 20 days after Landlord’s receipt of the Termination Notice Landlordnotifies Tenant that Landlord at its cost will add to the remaining Premises sothat the area of the Premises will be substantially the same after theCondemnation as they were before the Condemnation, and Landlord commences therestoration promptly and completes it within 180 days after Landlord sonotifies Tenant, then all obligations of Tenant under this Lease remain ineffect, except that Basic Monthly Rent shall be abated or reduced during theperiod from the Date of Condemnation until the completion of such restorationby the ratio of (A) the area of the Building taken to (B) the area of theBuilding immediately before the Date of Condemnation.  Unless Landlord restores the Premises pursuant to the precedingsentence, or unless Tenant gives Landlord the Termination Notice within the relevant30-day period, Tenant at its sole cost shall accomplish any restorationrequired by Tenant to use the Premises. All compensation, sums, or anything of value awarded, paid, or receivedon a total or partial Condemnation (the “Award”) belongs to and must be paid toLandlord, except that Tenant may receive from the Award any sum paid expresslyto Tenant from the Condemnor for Tenant’s loss of Tenant’s Personal Propertyand relocation costs.  Tenant has noright to any part of the Award, and Tenant hereby assigns to Landlord all ofTenant’s right, title, and interest in and to any part of the Award, exceptthat Tenant may receive from the Award any sum paid expressly to Tenant fromthe Condemnor for Tenant’s loss of Tenant’s Personal Property and relocationcosts.  Landlord and Tenant waive the provisionsof any statute (including California Code of Civil Procedure Section 1265.130or any successor statute) that allows Landlord or Tenant to petition thesuperior court (or any other local court) to terminate this Lease in the eventof a partial taking of the Premises.

 

21.  Assignment and Other Transfers.  Without Landlord’s prior written consent,which may not unreasonably be withheld, none of the following may occur (or bepermitted by Tenant to occur), voluntarily, involuntarily, by operation of law,or otherwise (any of the following, a “Transfer”):  (i) any assignment, sublease, disposition, sale, concession,

 

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license, mortgage, encumbrance,hypothecation, pledge, collateral assignment, or other transfer, by Tenant ofthis Lease, any interest in this Lease, or all or any portion of the Premises;or (ii) any assignment, disposition, sale, transfer, acquisition, or issuanceof equitable interests (whether stock, partnership or otherwise) in Tenant, toor by any person, entity, or group of related persons or affiliated entities,whether in a single transaction or in a series of related or unrelatedtransactions, which results in such person, entity, or group holding (orassigning, transferring, disposing of, or selling) fifty percent (50%) or moreof the aggregate legal or beneficial interests in Tenant.  Landlord will not be liable in damages toTenant or to any proposed subtenant, assignee or other transferee (any of thepreceding a “Proposed Transferee”) if such consent is adjudicated to have beenunreasonably withheld, in which case Tenant’s sole remedy is to have theproposed Transfer declared valid as if Landlord’s consent had been given(although Tenant will be entitled to reasonable attorney’s fees if Tenant isthe prevailing party in such litigation). No Transfer releases or discharges Tenant from any liability, whetherpast, present, or future, under this Lease and Tenant continues to remainprimarily liable under this Lease. Tenant irrevocably assigns to Landlord, as security for Tenant’sobligations under this Lease, all rent and other amounts from any Transfer, andLandlord, as assignee and as special attorney-in-fact for Tenant, or a receiverfor Tenant appointed on Landlord’s application, may collect such rent and otheramounts and apply them toward Tenant’s obligations under this Lease; exceptthat, unless Tenant defaults under this Lease and fails to cure the defaultwithin the applicable cure period, Tenant may collect such rent and otheramounts.  Tenant shall promptlyreimburse Landlord for Landlord’s reasonable costs (less any payment made byTenant with Landlord as set forth above) of reviewing, consenting to, rejectingor consummating any proposed Transfer, including reasonable attorneys’fees.  Tenant shall promptly pay toLandlord 50% of all rents and other consideration, of whatever nature, payableby the Proposed Transferee (or receivable by Tenant) pursuant to any Transfer,which exceeds the sum of all leasing commissions paid and tenant improvementallowances funded by Tenant to the extent reasonably incurred in directconjunction with the Transfer, plus: (1) if a sublease of a portion of the Premises, the portion of the BasicMonthly Rent that is allocable to the portion of the Premises subleased (suchallocation based on the area of the portion subleased), or (2) if any otherTransfer, the Basic Monthly Rent. Landlord additionally may, by giving written notice (the “RecaptureNotice”) to Tenant within 15 days after receipt of Tenant’s request for aConsent to Transfer which would result in cumulative Transfers of more than 50%of the Rentable Square Feet of the Premises, recapture the Premises andterminate this Lease.  If Landlord electsto exercise such right and delivers a Recapture Notice to Tenant, this Lease isautomatically terminated as of the commencement or effective date stated inTenant’s request for a Consent to Transfer, and Tenant shall surrenderpossession of the Premises as of such date, unless within two business daysafter Landlord’s Recapture Notice Tenant rescinds its request for a Consent toTransfer.  Notwithstanding anything tothe contrary in this paragraph, with prior written notice to Landlord, butwithout the requirement for Landlord’s consent, Tenant may assign this Lease toan entity which is controlled by Tenant or which is under common control withTenant, so long as the Transferee assumes Tenant’s obligations under this Leasein writing for the benefit of Landlord and Tenant concurrently executes aguaranty of this Lease (and Guarantor executes a reaffirmation of its Guarantyof Lease) for the benefit of Landlord in form and substance reasonablyacceptable to Landlord.

 

22.  Access by Landlord.  Landlord and any of Landlord’s agents oremployees may enter the Premises at all reasonable times, during normalbusiness hours if feasible under the circumstances, and after reasonablenotice, if feasible under the circumstances, (i) to determine whether thePremises are in good condition and whether Tenant is complying with itsobligations under this Lease, (ii) to do any necessary maintenance or make anyrestoration to the Premises that Landlord has the right or obligation toperform, (iii) to serve, post, or keep posted any notices required or allowed underthis Lease, (v) to post “for sale” or “for rent” or “for lease” signs, (vi) toshow the Premises to brokers, agents, prospective buyers, prospective tenants,or other persons interested in a listing of, financing, purchasing, oroccupying the Premises, and (vii) to shore the foundations, footings, and wallsof the Premises, and to erect scaffolding and protective barricades around andabout the Premises, but not so as to prevent entry to the Premises, and to doany other act or thing necessary for the safety or preservation of the Premisesif any excavation or other construction is undertaken or is about to beundertaken on any adjacent property or nearby street (which work must beperformed in as unobtrusive manner as is reasonably practicable).  In the event of an emergency Landlord mayenter the Premises at any time, without prior notice to Tenant.  Landlord’s rights under this paragraphextend, with Landlord’s consent, to the owner of adjacent property on whichexcavation or construction is to take place and the adjacent property owner’sagents, employees, officers, and contractors. Landlord will not be liable for any inconvenience, disturbance, loss ofbusiness, nuisance, or other damage arising out of any entry on the Premises asprovided in this paragraph except damage resulting directly from the grosslynegligent acts of Landlord or Landlord’s Invitees.  Tenant will not be entitled to any abatement or reduction of rentbecause of the exercise by Landlord of any rights under this paragraph.

 

23.  Indemnity and Exemption of Landlord fromLiability.  Tenant shall defend,indemnify, and hold harmless Landlord against all Claims (as defined below) andall costs, expenses, and attorneys’ fees incurred in the defense or handling ofany such Claims or any action or proceeding brought on any of such Claims.  For purposes of this Lease, “Claims” meansall liabilities, damages, losses, costs, expenses, attorneys’ fees, and claims(except to the extent they result from Landlord’s grossly negligent acts orwillful misconduct) arising from or which seek to impose liability under orbecause of (i) Tenant’s or Tenant’s Invitees’ use of the Premises, (ii) theconduct of Tenant’s business, (iii) any activity, work, or things done,permitted, or suffered by Tenant or any of Tenant’s Invitees in or about thePremises or elsewhere, (iv) any breach or default in the performance of anyobligation to be performed by Tenant under this Lease, (v) any negligence ofTenant or any of Tenant’s Invitees, or (vi) any event, act or omission arisingon, out of or around the Premises during the Term, except to the extent arisingfrom Landlord’s failure to perform its obligations under this Lease.  Except to the extent arising from Landlord’sfailure to perform its obligations under this Lease and to the extent caused byLandlord’s grossly negligent acts or willful misconduct, Tenant assumes allrisk of, Tenant waives all claims against Landlord in respect of, and Landlordis not liable for, any of the matters set forth above in this paragraph or anyof the following:  injury to Tenant’sbusiness, loss of income from such business, or damage or injury to the goods,wares, merchandise, or other property or the person of Tenant, Tenant’sInvitees, or any other persons in, on, or about the Premises, whether suchdamage, loss, or injury is caused by or results from criminal acts, fire,steam, electricity, gas, water, rain, the breakage, leakage, obstruction orother defects of pipes, sewer lines, sprinklers, wires, appliances, plumbing,air-conditioning or lighting fixtures, or any other cause, conditions arisingabout the Premises, or other sources or places, and regardless of whether thecause of such damage, loss, or injury or the means of repairing such damage,loss, or injury is inaccessible to Tenant. “Claims” also includes those arising from or relating to:  (i) any

 

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discharges, releases, orthreatened releases of noise, pollutants, contaminants, herbicides, pesticides,insecticides, or hazardous or toxic wastes, substances, or materials (any ofthe preceding a “Hazardous Material”) into ambient air, water, or land byTenant or Tenant’s Invitee’s, or otherwise from, on, under, or above thePremises (except to the extent Tenant establishes that the Hazardous Materialswere released onto the Premises before the date of this Lease), (ii) themanufacture, processing, distribution, use, treatment, storage, disposal,transport, or handling of pollutants, contaminants, or hazardous or toxic wastes,substances, or materials by Tenant or Tenant’s Invitees, or otherwise from, on,or under, the Premises, or (iii) a violation of any environmental or regulationlaw on, under, or above the Premises (except to the extent Tenant establishesthat the contamination was released before Landlord first delivered possessionto Tenant of the applicable portion of the Premises or was a continued releaseof such pre-possession contamination which was not exacerbated by Tenant’s actsor omissions).

 

24.  Hazardous Substances.  Landlord represents and warrants to Tenantthat, to Landlord’s actual knowledge, the Premises do not contain any HazardousMaterials in violation of applicable law. Landlord, and not Tenant, is responsible for the Hazardous Materialcondition of Premises as it exists before the date of this Lease (but it isTenant’s burden to establish that the Hazardous Materials in question existedon the Premises before the date of this Lease).  Neither Tenant nor any of Tenant’s Invitees may use, manufacture,store, or dispose of any Hazardous Materials anywhere within the Premises whichare or could (a) be detrimental to the Premises, human health, or theenvironment, except in accordance with all applicable laws, or (b) adverselyaffect the value of the Premises.  Ifthe Premises are contaminated (or, due to the acts or omissions of Tenant orTenant’s Invitees, the Premises is contaminated) by any Hazardous Materialduring the Term, then (1) Tenant shall promptly notify Landlord in writing ofsuch contamination, and (2) Landlord may elect to either (A) demand that Tenantperform all remediation required by Landlord (to Landlord’s satisfaction and atTenant’s sole cost, necessary to return the Premises to at least as good acondition as the Premises are in as of the date of this Lease, which Tenantshall immediately do upon receipt of notice from Landlord, or (B) proceed tocause such investigation, clean-up, and remediation work which Landlord deemsnecessary or desirable to be undertaken, whereupon the entire cost thereof(plus a supervisory fee equal to ten percent of such cost) will be payable byTenant to Landlord upon demand as additional rent.  If Tenant does not promptly commence and diligently pursue suchremediation, then Landlord may perform or cause to be performed suchremediation and Tenant shall immediately, upon demand, pay the cost thereof,plus a supervisory fee in the amount of ten percent of such cost.  Tenant’s obligations and liability underthis paragraph shall survive the termination of Tenant’s tenancy and the Termof this Lease, except that nothing contained in this paragraph shall be deemedto impose liability on Tenant for any contamination arising after the Term ofthis Lease provided neither Tenant nor Tenant’s Invitees contributed to suchproblem during the Term of the Lease.

 

25.  Prohibition Against Asbestos-ContainingMaterials.  Tenant may not allow orpermit any materials which contain asbestos in any form or concentration(“Asbestos-Containing Materials”) to be used or stored in the Premises or usedin the construction of any improvements or alterations to the Premises,including building or construction materials and supplies.   Such prohibition againstAsbestos-Containing Materials shall apply regardless of whether the Asbestos-ContainingMaterials may be considered safe or approved for use by a manufacturer,supplier, or governmental authority, or by common use or practice.

 

26.  Security Measures.  Tenant acknowledges (i) that the BasicMonthly Rent does not include the cost of any security measures for any portionof the Premises (ii) that Landlord has no obligation to provide any securitymeasures, (iii) that Landlord has made no representation to Tenant regardingthe safety or security of the Premises, and (iv) that Tenant is solelyresponsible for providing any security it deems necessary to protect itself,its property, and Tenant’s Invitees in, on, or about the Premises.  Landlord has no duty to warn Tenant of anycriminal acts or dangerous conduct that has occurred in or near the Premises,regardless of Landlord’s knowledge of such crimes or conduct.

 

27.  Subordination and Attornment.  Within one week after Landlord’s writtenrequest (which may be made from time to time throughout the Term), Tenant shallexecute a Subordination, Non-Disturbance, and Attornment Agreement in theapplicable Lender’s standard form (“SNDA”). The SNDA must provide Tenant with basic non-disturbance protection andmay provide, among other things, that this Lease is subject and subordinate tothe interests of the Lender (and to all renewals, modifications,consolidations, replacements, or extensions thereof), and that if the Lendersucceeds to the rights of Landlord under this Lease, whether by foreclosure,deed in lieu of foreclosure or otherwise, then (i) such successor landlord willnot be subject to any offsets or defenses which Tenant might have againstLandlord, (ii) such successor landlord will not be bound by any prepayment byTenant of more than one month’s installment of rent, (iii) such successorlandlord will not be subject to any liability or obligation of Landlord exceptthose arising after such succession, (iv) Tenant shall attorn to and recognizesuch successor landlord as Tenant’s landlord under this Lease, (v) Tenant shallpromptly execute and deliver any instruments that may be necessary to evidencesuch attornment, and (vi) on such attornment, this Lease shall continue ineffect as a direct lease between such successor landlord and Tenant.  Tenant irrevocably constitutes and appointsLandlord as its special attorney-in-fact to execute and deliver the SNDA ifTenant fails to deliver it to Landlord within the one-week period describedabove.  If Landlord fails to provideTenant, within 60 days after the date of this Lease, an SNDA signed by all ofits Lenders (who have an interest in the Premises as of such 60thday) on the Lender’s standard form, Tenant may terminate this Lease by givingwritten notice of termination to Landlord between the 61st and 68thday following the date of this Lease (in which case Landlord shall return toTenant any prepaid rent and Security Deposit and neither party will have anyfurther obligation to the other under this Lease, except for Tenant’s indemnityobligations on account of the period preceding the termination).  Additionally, if any new Lender obtains aninterest in the Premises after the date of this Lease, Landlord shalldiligently pursue an SNDA from the new Lender.

 

28.  Estoppel Certificates.  Within 10 days after notice from Landlord,Tenant shall execute and deliver to Landlord, in recordable form, a certificatestating (i) that this Lease is unmodified and in full force and effect, or infull force and effect as modified, and stating all modifications, (ii) thethen-current Basic Monthly Rent, (iii) the dates to which Basic Monthly Renthas been paid in advance, (iv) the amount of any security deposit, prepaid rentor other payment constituting rent which has been paid (including OperatingExpenses), (v) whether or not Tenant or Landlord is in default under this Leaseand whether there currently exist any defenses or rights of offset under theLease, and (vi)

 

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such other matters as Landlordshall reasonably request.  Tenant’sfailure to deliver the certificate within the 10-day period shall be conclusiveupon Tenant for the benefit of Landlord, and any successor in interest toLandlord, any Lender or proposed Lender, and any purchaser of the Premisesthat, except as may be represented by Landlord, this Lease is unmodified and infull force and effect, no rent has been paid more than 30 days in advance, andneither Tenant nor Landlord is in default under this Lease.  Tenant irrevocably constitutes and appointsLandlord as its special attorney-in-fact to execute and deliver suchcertificate to any third party if Tenant fails to deliver such certificatewithin such 10-day period.  Conversely,within 10 days after notice from Tenant, Landlord shall execute and deliver toTenant, in recordable form, a certificate stating the items describedabove.  Landlord’s failure to deliverthe certificate within the 10-day period shall be conclusive upon Landlord forthe benefit of Tenant, and any successor in interest to Tenant, that, except asmay be represented by Tenant, this Lease is unmodified and in full force andeffect, no rent has been paid more than 30 days in advance, and neither Tenantnor Landlord is in default under this Lease. Landlord irrevocably constitutes and appoints Tenant as its special attorney-in-factto execute and deliver such certificate to any third party if Landlord fails todeliver such certificate within such 10-day period.

 

29.  Waiver.  No delay or omission in the exercise of any right or remedy ofLandlord in the event of any default by Tenant shall impair such right orremedy or be construed as a waiver.  Thereceipt and acceptance by Landlord of delinquent rent does not constitute awaiver of any default other than the particular rent payment accepted.  Landlord’s receipt and acceptance fromTenant, on any date (the “Receipt Date”), of an amount less than the amount dueon such Receipt Date, or to become due at a later date but applicable to aperiod before the Receipt Date, does not release Tenant of its obligation (i)to pay the full amount due on such Receipt Date or (ii) to pay when due thefull amount to become due at a later date but applicable to a period beforesuch Receipt Date.  No act or conduct ofLandlord, including the acceptance of the keys to the Premises, constitutes anacceptance by Landlord of the surrender of the Premises by Tenant before theExpiration Date.  Only a written noticefrom Landlord to Tenant stating Landlord’s election to terminate Tenant’s rightto possession of the Premises constitutes acceptance of the surrender of thePremises and accomplishes a termination of this Lease.  Landlord’s consent to or approval of any actby Tenant requiring Landlord’s consent or approval may not be deemed to waiveor render unnecessary Landlord’s consent to or approval of any other orsubsequent act by Tenant.  Any waiver byLandlord of any default must be in writing and does not constitute a waiver ofany other default concerning the same or any other provision of this Lease.  Tenant waives any rights granted to Tenantunder California Code of Civil Procedure Section 1179, California Civil CodeSection 3275, and any successor statue(s). Tenant represents and warrants that if Tenant breaches this Lease and,as a result, this Lease is terminated, Tenant will not suffer any unduehardship as a result of the termination and, during the Term, will make suchalternative or other contingency plans to provide for its vacation of thePremises and relocation in the event of such termination.  Tenant acknowledges that Tenant’s waiversset forth in this paragraph are a material part of the consideration forLandlord’s entering into this Lease and that Landlord would not have enteredinto this Lease in the absence of such waivers.

 

30.  Brokers.  Landlord and Tenant each represents that no real estate broker,agent, finder, or other person is responsible for bringing about or negotiatingthis Lease except as identified in Article 2 above (the “Brokers”) and neitherLandlord nor Tenant has dealt with any real estate broker, agent, finder, orother person, relative to this Lease in any manner to whom compensation is dueon account of this Lease, other than Brokers. Landlord and Tenant shall defend, indemnify, and hold harmless the otheragainst all liabilities, damages, losses, costs, expenses, attorneys’ fees andclaims arising from any claims that may be made against the indemnified partyby any real estate broker, agent, finder, or other person (other than as setforth above), alleging to have acted on behalf of or to have dealt with theindemnifying party.  Landlord is solelyresponsible for compensating Brokers in accordance with a separate writtenagreement between Landlord and Brokers.

 

31.  Easements.  Landlord may from time to time grant such easements, rights anddedications, and cause the recordation of parcel maps, easement and operatingagreements, and restrictions affecting the Premises so long as such actions donot interfere with Tenant’s use of the Premises.  Tenant shall promptly sign any documents or instruments to accomplishthe foregoing upon request by Landlord. Tenant irrevocably appoints Landlord as Tenant’s specialattorney-in-fact to execute and deliver such documents or instruments on behalfof Tenant if Tenant refuses or fails to do so.

 

32.  Limitations on Landlord’s Liability.  If Landlord is in default of this Lease, andas a consequence Tenant recovers a money judgment against Landlord, suchjudgment shall be satisfied only out of the proceeds of sale received uponexecution of such judgment and levy against the right, title, and interest ofLandlord in the Premises, and out of rent or other income from the Premisesreceivable by Landlord or out of the consideration received by Landlord fromthe sale or other disposition of all or any part of Landlord’s right, title,and interest in the Premises.  NeitherLandlord nor Landlord’s affiliates, members, managers, shareholders, officers,directors, agents, or employees shall be personally liable for any deficiency.

 

33.  Sale or Transfer of Premises.  If Landlord sells or transfers any portionof the Premises, Landlord, on consummation of the sale or transfer, shall bereleased from any liability thereafter accruing under this Lease.  If any security deposit or prepaid rent hasbeen paid by Tenant, Landlord may transfer the security deposit or prepaid rentto Landlord’s successor-in-interest and on such transfer Landlord shall bedischarged from any further liability arising from the security deposit orprepaid rent.

 

34.  Quitclaim Deed and Memorandum.  Tenant shall execute and deliver to Landlordon the Expiration Date or earlier termination of this Lease, promptly onLandlord’s request, a quitclaim deed to the Premises, in recordable form,designating Landlord as transferee. Landlord and Tenant shall execute a Memorandum of Lease in the form ofthe attached *Exhibit D,* inrecordable form, and Tenant may cause the Memorandum to be recorded in theOfficial Records of San Diego County, California.

 

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35.  No Merger. The voluntary or othersurrender of this Lease by Tenant, or a mutual cancellation of this Lease, or atermination by Landlord, shall not work a merger, and shall, at the option ofLandlord, terminate any existing subleases or may, at the option of Landlord,operate as an assignment to Landlord of any such subleases.

 

36.  Miscellaneous.

 

36.1. FinancialStatements.  Upon Landlord’s writtenrequest, Tenant shall promptly furnish to Landlord, from time to time,financial statements certified by Tenant to be correct and complete, reflectingTenant’s then current financial condition. Such financial statements shall include a current balance sheet and aprofit and loss statement covering the most recent 12-month period available.  During any period Tenant’s stock ispublicly-traded on a U.S. national exchange, the financial statements shall belimited to those publicly available.  Inaddition, except when Tenant’s stock is publicly-traded on a U.S. nationalexchange, upon Landlord’s written request, Tenant shall allow Landlord, or acertified public accountant of Landlord’s choosing, to determine Tenant’scurrent financial condition by reviewing Tenant’s current financial books,records, and accounts.

 

36.2.  Governing Law, Venue and Jurisdiction.  This Lease is governed by and construed inaccordance with the laws of the State of California, irrespective ofCalifornia’s choice-of-law principles. All actions and proceedings arising in connection with this Lease mustbe tried and litigated exclusively in the State and Federal courts located inthe County of San Diego, State of California, which courts have personaljurisdiction and venue over each of the parties to this Lease for the purposeof adjudicating all matters arising out of or related to this Lease.  Each party authorizes and accepts service ofprocess sufficient for personal jurisdiction in any action against it ascontemplated by this paragraph by registered or certified mail, return receiptrequested, postage prepaid, to its address for the giving of notices set forthin this Lease.

 

36.3.  Further Assurances.  Each party to this Lease shall execute anddeliver all instruments and documents and take all actions as may be reasonablyrequired or appropriate to carry out the purposes of this Lease.

 

36.4.  Time of Essence.  Time and strict and punctual performance areof the essence with respect to each provision of this Lease.

 

36.5.  Attorney’s Fees.  The prevailing party(ies) in any litigation,arbitration, mediation, bankruptcy, insolvency or other proceeding(“Proceeding”) relating to the enforcement or interpretation of this Lease mayrecover from the unsuccessful party(ies) all costs, expenses, and actualattorney’s fees (including expert witness and other consultants’ fees andcosts) relating to or arising out of (a) the Proceeding (whether or not theProceeding proceeds to judgment), and (b) any post-judgment or post-awardproceeding including, without limitation, one to enforce or collect anyjudgment or award resulting from the Proceeding.  All such judgments and awards shall contain a specific provisionfor the recovery of all such subsequently incurred costs, expenses, and actualattorney’s fees.

 

36.6.  Modification.  This Lease may be modified only by acontract in writing executed by the party to this Lease against whomenforcement of the modification is sought.

 

36.7.  Prior Understandings.  This Lease and all documents specificallyreferred to and executed in connection with this Lease:  (a) contain the entire and final agreementof the parties to this Lease with respect to the subject matter of this Lease,and (b) supersede all negotiations, stipulations, understandings, agreements,representations and warranties, if any, with respect to such subject matter,which precede or accompany the execution of this Lease.

 

36.8.  Interpretation.  Whenever the context so requires in thisLease, all words used in the singular may include the plural (and vice versa)and the word “person” includes a natural person, a corporation, a firm, apartnership, a joint venture, a trust, an estate or any other entity.  The terms “includes” and “including” do notimply any limitation.  No remedy orelection under this Lease is exclusive, but rather, to the extent permitted byapplicable law, each such remedy and election is cumulative with all otherremedies at law or in equity.  Theparagraph headings in this Lease:  (a)are included only for convenience, (b) do not in any manner modify or limit anyof the provisions of this Lease, and (c) may not be used in the interpretationof this Lease.  All provisions, whethercovenants or conditions, to be performed or observed by Tenant shall be deemedto be both covenants and conditions. The obligations of Tenant are the joint and several obligations of eachof them.

 

36.9.  Partial Invalidity.  Each provision of this Lease is valid andenforceable to the fullest extent permitted by law.  If any provision of this Lease (or the application of suchprovision to any person or circumstance) is or becomes invalid orunenforceable, the remainder of this Lease, and the application of suchprovision to persons or circumstances other than those as to which it is heldinvalid or unenforceable, are not affected by such invalidity orunenforceability.

 

36.10.  Notices.  Each notice and other communication required or permitted to begiven under this Lease (“Notice”) must be in writing.  Notice is duly given to another party upon:  (a) hand delivery to the other party, (b)receipt by the other party when sent by facsimile to the address and number forsuch party set forth in Article 2 (provided, however, that the Notice is noteffective unless a duplicate copy of the facsimile Notice is promptly given byone of the other methods permitted under this paragraph), (c) three businessdays after the Notice has been deposited with the United States postal serviceas first class certified mail, return receipt requested, postage prepaid, andaddressed to the party as set forth in Article 2, or (d) the next business dayafter the Notice has been deposited with a reputable overnight deliveryservice, postage prepaid, addressed to the party as set forth in Article 2 withnext business-day delivery guaranteed, provided that the sending party receivesa confirmation of delivery from the delivery-service-provider.  Each party shall make a reasonable, goodfaith effort to ensure that it will accept or receive Notices to it that aregiven in accordance with this paragraph. A party may change its address for purposes of this paragraph by givingthe other party(ies) written notice of a new address in the manner set forthabove.

 

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36.11.  Drafting Ambiguities.  Each party to this Lease and its legalcounsel have reviewed and revised this Lease. The rule of construction that ambiguities are to be resolved against thedrafting party or in favor of the party receiving a particular benefit under anagreement may not be employed in the interpretation of this Lease or anyamendment to this Lease.

 

36.12.  Third Party Beneficiaries.  Nothing in this Lease is intended to conferany rights or remedies on any person or entity other than the parties to thisLease and their respective successors-in-interest and permitted assignees.

 

This Lease is not effectiveagainst Landlord unless and until, within one week after the date of thisLease, Landlord receives (a) a fully executed original of this Lease and theGuaranty of Lease below executed by Invision Technologies Company, a Delawarecorporation (“Guarantor”), and (b) evidence reasonably satisfactory to Landlordof the due authorization and execution of this Lease by Tenant and the Guarantyof Lease by Guarantor.

 
| LANDLORD:                                                               |                                       | TENANT:                                            |
|-------------------------------------------------------------------------|--------------------------------------------|----------------------------------------------------|
|                                                                    |                                       |                                               |
|                                                                    |                                       |                                               |
| CARMEL  MOUNTAIN #8 ASSOCIATES, L.P.,  a California limited partnership |                                       | QUANTUM  MAGNETICS, INC., a California corporation |
|                                                                    |                                       |                                               |
| By:                                                                     | CHANCELLOR  DEVELOPMENT CORPORATION        | By:                                                |  /s/  L. J. Burnett |   |
|                                                                    | a California  corporation, General Partner |                                               |   | L. J.  Burnett | , President |   |
|                                                                    |                                       |                                               |   |
|                                                                    |                                       |                                               |   |
|                                                                    |                                       |                                               | By: |   |   |
|                                                                    |                                       |                                               |   |   | , Secretary |   |
|                                                                    | By:                                        | /s/ Roger A.P. Joseph                              |   |   |   |
|                                                                    |                                       | Roger A.P. Joseph, President                       |   |   |   |
|                                                                    |                                       |                                               |
| CARMEL  MOUNTAIN ENVIRONMENTAL, LLC,                                    |                                       |                                               |
| a California  limited liability company                                 |                                       |                                               |
|                                                                    |                                       |                                               |
| By:                                                                     | /s/ Bruce E. Tabb                          |                                               |   |   |
|                                                                    | Bruce E. Tabb, Managing Member             |                                               |   |   |
|                                                                         |                                            |                                                    |  |  |  |  |  |  |  |  |

 

**GUARANTY OF LEASE**

 

Theundersigned, INVISION TECHNOLOGIES COMPANY, a Delaware corporation(“Guarantor”), absolutely and unconditionally guarantees, on demand, to and forthe benefit of Landlord, the full, timely, and complete payment and performanceof all of Tenant’s obligations, whether monetary or otherwise, set forth in orarising out of the foregoing Single-Tenant Net Lease Agreement (collectively,the “Guaranteed Obligations”).  ThisGuaranty constitutes an absolute, direct, immediate, and unconditionalguarantee of timely payment and performance, and not merely of collectibility,and includes all primary, secondary, direct, indirect, fixed, and contingentobligations of Tenant to pay Basic Monthly Rent, Operating Expenses, and allother rent including late charges, insurance, taxes, indemnifications, andother fees, charges, sums, costs, and expenses which may be owing by Tenant atany time in connection with the Guaranteed Obligations, as they may bemodified, amended, extended, or renewed from time to time.  If a specific amount outstanding and owingby Tenant under the Lease or the Guaranteed Obligations is determined by acourt of competent jurisdiction, that determination is conclusive and bindingon Guarantor, regardless of whether or not Guarantor was a party to theproceeding in which the determination was made.  If Tenant defaults in the payment of any amount when due underthe Lease, Guarantor shall pay to Landlord or order, on demand, all sums dueand owing under the Lease. Additionally, Guarantor shall assume responsibility for and shall fullyperform all of the other Guaranteed Obligations promptly on receiving writtennotice from Landlord.  No delay byLandlord in providing notice of a default by Tenant or making demand onGuarantor affects Guarantor’s obligations under this Guaranty.  The obligations of Guarantor under thisGuaranty are independent of the obligations of Tenant or any otherguarantor.  The obligations of Guarantorunder this Guaranty are continuing and irrevocable until all of the GuaranteedObligations have been fully satisfied. If at any time all or any part of any payment received by Landlord fromTenant, Guarantor, or any other person under or with respect to the Lease orthis Guaranty is refunded or rescinded pursuant to any court order (includingany court order arising out of the insolvency, bankruptcy, or reorganization ofTenant, a Guarantor or any other guarantor), then the Guarantor’s obligationsunder this Guaranty shall, to the extent of the payment refunded or rescinded,be deemed to have continued in existence, notwithstanding previous receipt ofpayment by Landlord, regardless of any contrary action by Landlord, as thoughsuch previous payment to Landlord had never occurred (and such contrary actionhad not been taken).  This Guaranty isnot affected or limited in any manner if recovery against Tenant is barred byany statute of limitations or is otherwise unenforceable against Tenant, or ifany of the Guaranteed Obligations arises from transactions which may bevoidable as the result of bankruptcy, insolvency, fraudulent conveyance, receivership,or offsets not arising out of the Lease; provided, however, Guarantor will notbe liable for obligations for which Tenant is not obligated to perform becauseof the express terms of the Lease.  ThisGuaranty shall not be affected or limited in any manner by whether Tenant maybe liable, with respect to the Guaranteed Obligations individually, jointlywith

 

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others, primarily, orsecondarily.

 

This Guarantyshall not be affected or limited in any manner by (a) any assignment of, or anymodification or amendment (by agreement, course of conduct, or otherwise) to,all or any portion of any lease, agreement, instrument, or document withrespect to or that evidences the Guaranteed Obligations, or (b) the renewal,extension, or modification, at any time, of any of the Guaranteed Obligations;provided, however, in the event of a Transfer by Tenant to an unaffiliatedthird party and the subsequent modification(s) of the Lease by Landlord and theTransferee, Guarantor will not be obligated to perform the increasedobligations resulting from the modification(s).  By this Guaranty, Guarantor guarantees Tenant’s performance ofthe Guaranteed Obligations as so amended, assigned, renewed, extended, ormodified, whether or not the amendment, assignment, renewal, extension, ormodification is made with the consent of or notice to Guarantor.

 

If Tenantdefaults with respect to any of the Guaranteed Obligations, and if Guarantordoes not satisfy Tenant’s obligations immediately upon its receipt of writtennotice of such default from Landlord, Landlord may, at its election, proceedimmediately against any Guarantor (as if such default arose from the direct andprimary obligation of Guarantor), any other guarantor, or Tenant, or anycombination of Tenant, Guarantor, and any other guarantor.  In the event of any default under thisGuaranty, an action or actions may be brought and prosecuted against theGuarantor, whether or not Tenant or any other guarantor is joined in suchaction(s) or a separate action or actions are brought against Tenant or anyother Guarantor or guarantor.  Landlordmay maintain successive actions for separate defaults.  Unless and until the Guaranteed Obligationshave been fully satisfied or waived in writing by Landlord, Guarantor shall notbe released from its obligations under this Guaranty irrespective of (i) theexercise by Landlord of any of Landlord’s rights or remedies (includingcompromise or adjustment of the Guaranteed Obligations or any part thereof),(ii) any release by Landlord of Tenant or any other Guarantor or guarantor,(iii) any such action or any number of successive actions, or (iv) thesatisfaction by Guarantor of any liability under this Guaranty incident to aparticular default.  Landlord mayperform any or all of Guarantor’s obligations hereunder, in which case,Guarantor shall reimburse Landlord immediately upon demand for all costs andexpenses, including all reasonable attorneys’ fees, that Landlord incurs inperforming such obligations, together with interest on those sums from andafter the date(s) they are incurred at the rate of eighteen percent (18%) perannum.

 

Guarantorwaives all rights afforded a surety or guarantor under applicable law,including all benefits it may otherwise be entitled to under California CivilCode Sections 2787 through 2855, and similar laws, and the following:

 

a.  Guarantor waives all rights it wouldotherwise have to require Landlord, as a condition to Landlord’s exercise ofany of its rights under this Guaranty, to (i) proceed against Tenant or anyother guarantor, (ii) perfect, retain, protect, proceed against, or exhaust anysecurity that Landlord holds or may hold from Tenant, or (iii) pursue any otherremedy in Landlord’s power.

 

b.  Guarantor waives the benefit of all statutesof limitations affecting Guarantor’s liability under this Guaranty to theextent permitted by law.

 

c.  Guarantor waives all defenses whichGuarantor might otherwise have to its obligations under this Guaranty by reasonof any disability of Tenant or any other person(s), including the incapacity,lack of authority, death, or disability of Tenant or any other person(s) or thefailure of Landlord to file or enforce a claim against the estate (inadministration, bankruptcy or any other proceeding) of Tenant or any otherperson(s).

 

d.  Guarantor waives all defenses and rightswhich Guarantor might otherwise have to exoneration under this Guaranty,including all rights under California Civil Code Section 2819 and similar laws,based on any alteration, modification, compromise, renewal, extension, orassignment of the Lease or any of the Guaranteed Obligations, whether done withor without the knowledge or consent of Guarantor, and Guarantor grants Landlordthe right to take any such action relative to the Guaranteed Obligationswithout the knowledge or consent of Guarantor without in any manner affectingthe liability of Guarantor under this Guaranty.

 

e.  Guarantor waives all other defenses based onthe termination of Tenant’s liability from any cause or the impairment of anyother collateral or security for the Guaranteed Obligations provided, however,Guarantor will not be liable for obligations for which Tenant is notobligated to perform because of the express terms of the Lease.

 

f.  Guarantor subordinates to Landlord all ofGuarantor’s rights to participate in any security now or later held byLandlord.

 

g.  Guarantor waives all presentments, demandsfor performance, notices of non-performance, protests, notices of protest,notices of dishonor, notices of non-payment, and all other notices of any kind,including all notices of the existence, creation, or incurring of new oradditional obligations and any notice of acceptance of this Guaranty, which,upon execution by Guarantor, shall

 

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immediately be binding uponGuarantor.

 

h.  Guarantor waives all duties Landlord mayhave to investigate the authority of any representative, or purportedrepresentative, of Tenant to incur any obligation or enter into any agreementon behalf of Tenant.

 

i.  Guarantor waives all rights it may otherwiseattain by reason of Landlord’s failure to enforce, or delay in enforcing, anyof Landlord’s rights with respect to the Guaranteed Obligations.

 

All rights,powers and remedies of Landlord under this Guaranty shall be cumulative and notalternative and such rights, powers and remedies shall be in addition to allrights, powers and remedies given to Landlord by law.

 

Guarantorrepresents and warrants that the following are accurate and complete as of thedate of this Guaranty and shall be true at all times in the future while thisGuaranty is outstanding:  (i) thisGuaranty is executed at Tenant’s request and not at the request ofLandlord;  (ii) Guarantor has sufficientnet worth and sufficient liquidity of assets to enable Guarantor to promptlyperform all of the Guaranteed Obligations as and when they are due;  (iii) Landlord has made no representation toGuarantor as to the creditworthiness or financial condition of Tenant; and  (iv) Guarantor has carefully read andnegotiated all provisions of this Guaranty and has consulted with competentlegal counsel in connection therewith.

 

Guarantorcovenants that it is intimately aware of Tenant’s business and financialcondition and that it has conducted a thorough investigation of all materialfactors regarding the making of the Lease and this Guaranty. Furthermore,Guarantor represents that it has the resources, access, and opportunity toremain informed at all times of the financial status of Tenant and of all othermaterial information relative to the Lease and Guarantor’s obligations underthis Guaranty; and Guarantor covenants to remain informed relative to all suchmatters as long as this Guaranty remains in effect.  On the basis of the foregoing, Guarantor waives any obligationwhich Landlord might otherwise have as a condition to enforcing Guarantor’sobligations under this Guaranty, to keep Guarantor informed relative to anyinformation regarding the Lease, the Tenant, any security for the Lease, or anyother factors affecting the obligations of Tenant of Guarantor.

 

In the eventof Tenant’s insolvency or the disposition of the assets of Tenant, throughbankruptcy, by an assignment for the benefit of creditors, by voluntaryliquidation, or otherwise, the assets of Tenant applicable to the payment ofall claims of Landlord and of each Guarantor shall be paid to Landlord andshall be first applied by Landlord to the Guaranteed Obligations.  Guarantor assigns to Landlord all claimswhich the Guarantor may have or acquire against Tenant or any assignee ortrustee in bankruptcy of Tenant; provided, that such assignment shall beeffective only for the purpose of assuring to Landlord full payment and performanceof all of the Guaranteed Obligations. All promissory notes now or hereafter evidencing any indebtedness ofTenant to Guarantor must be marked with a legend that such indebtedness shallbe subordinate to the Guaranteed Obligations and, if Landlord so requests,shall be delivered to Landlord. Guarantor authorizes Landlord to, from time to time, execute and file,on Guarantor’s behalf, financing statements and continuation statements and toexecute such other documents and to take such other action as Landlord deemsnecessary or appropriate to perfect, preserve and enforce Landlord’s rightsunder this Guaranty.

 

All of theprovisions of the foregoing Lease Agreement in Article 36 are incorporated intoand repeated here in this Guaranty, but with each reference to “Tenant”replaced with “Guarantor” and each reference to “this Lease” replaced with“this Guaranty”.

 
| GUARANTOR: | INVISION  TECHNOLOGIES COMPANY, a Delaware corporation |
|------------|--------------------------------------------------------|
|       |                                                   |
|       |                                                   |
|       | By:                                                    | /s/ Ross Mulholland |   |   |
|       |                                                   | Ross Mulholland, CFO |   |   |
|       |                                                   |   |   |   |
|       |                                                   |   |   |   |
|       | By:                                                    | /s/ Ian Johnston |   |   |
|       |                                                   | Ian Johnston, Secretary |   |   |

 

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Exhibit A – Premises

 

Lot 8 ofRancho Carmel Unit No. 2, in the City of San Diego, County of San Diego, Stateof California, according to Map thereof No. 10382, filed in the Office of theCounty Recorder of said County, April 29, 1982.

 

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Exhibit B – Description of Expansion Improvements

 

A 5,000 squarefoot out-building to be constructed in the rear parking lot behind the existingBuilding, in compliance with H-1 occupancy type construction, including thickreinforced concrete walls and roof with explosion resistant exteriordoors.  It will have roof-mounted air conditioning(hidden from view) for interior occupancy of Tenant’s employees.  Interior clear ceiling height to beapproximately 12 feet.

 

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Exhibit C – Schematic Plans of Tenant Improvements

 

 

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[GRAPHIC]

 

FIRST FLOOR PRELIMINARY SPACEPLAN

 

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[GRAPHIC]

 

SECOND FLOOR PRELIMINARY SPACEPLAN

 

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[GRAPHIC]

 

TEST BUILDING

 

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Addendum No. 1 to Single-Tenant Net Lease Agreement – Extension Option

 

So long asTenant is not in default under this Lease, and the original Tenant named inthis Lease (or an assignee of the entire Lease approved by Landlord) remainsthe Tenant under this Lease and continues to occupy and operate the entirePremises, Tenant may once extend the Term by an additional ten years (the“Extension Period”), at an initial Basic Monthly Rent equal to the fair marketrent of the entire Premises (including the Expansion Improvements) determinedin accordance with this Addendum (“FMR”). The initial Basic Monthly Rent of the Extension Period automatically isincreased on the first day of the calendar month which is two years after thefirst day of the Extension Period, and every two years after such date of rentincrease (an “Adjustment Date”), to an amount equal to 107% of the BasicMonthly Rent payable on account of the calendar month immediately preceding theAdjustment Date.  Tenant may exercisethe option granted in this paragraph only by giving Landlord written notice ofTenant’s irrevocable election to extend the Term, which notice must be receivedby Landlord at least nine months (and no more than 14 months) before theapplicable Extension Period begins. Thereafter, Landlord and Tenant shall use good faith efforts to arriveat a mutually acceptable FMR by the date which is at least 100 days before theapplicable Extension Period.  If,however, Landlord and Tenant do not timely agree on the FMR, the FMR will bedetermined in accordance with the following procedures:

 

1.  On or before the date which is 100 daysbefore the applicable Extension Period, Landlord and Tenant each shall deliverwritten notice to Landlord’s counsel (or another mutually agreed on thirdparty), in a sealed envelope, of its own best estimate of the fair marketmonthly rental value for the Premises during the first year of the applicableExtension Period (each party’s “Offer”). Promptly after such deadline, Landlord’s counsel shall open the sealedOffers and notify each party of the other’s Offer.  Either party may accept the other party’s Offer within five daysafter its receipt thereof by giving the other party its written notice ofacceptance, in which case the accepted Offer becomes the FMR.  If the Offers are within five percent ofeach other (or if both parties accept the other’s Offer), the FMR will be theaverage of the two Offers.  If only oneof the parties timely delivers an Offer, that Offer will be the FMR.

 

2.  If the FMR is not timely established underthe preceding paragraph, the FMR will be determined as follows:  On or before the 60th day before the InitialExpiration Date, Landlord and Tenant each shall appoint a California licensedMAI appraiser and give written notice of the name and address of such appraiserto the other party.  If either partyfails to appoint an appraiser as required by the preceding sentence, theappraiser appointed by the other party shall appoint the second appraiser.  The parties shall instruct the twoappraisers to determine the fair market monthly rental value for the Premisesduring the first year of the new Extension Period in light of all other termsof this Lease within four weeks after both appraisers are selected.  If the fair market monthly rental valuesdetermined by the appraisers fall within five percent of each other, the FMRwill be the average of those two values. Otherwise, within ten days after the expiration of the 4-week appraisalperiod, the two appraisers shall appoint a third California licensed MAIappraiser and deliver written notice of the name and address of the thirdappraiser to Landlord and Tenant.  Ifthe two appraisers fail to appoint a third appraiser within the time required,either Landlord or Tenant may petition the Superior Court of San Diego County,California, for the appointment of the third appraiser.  Within two weeks after her appointment, thethird appraiser shall determine which of the two prior appraisals is mostaccurate (the “Chosen Appraisal”).  Thefair rental value established by the Chosen Appraisal will be the FMR.  The fees and costs of both/all of theappraisers must be paid by the party whose Offer differs from the FMR by thelargest dollar amount.

 

This extension option automaticallyterminates and becomes void if three times in any 18-month period Tenantdefaults under this Lease.

 

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Addendum No. 2 to Single-Tenant Net Lease Agreement – Disbursement ofTI Allowance

 

Before beginningTenant’s Work, Tenant shall provide Landlord with a written representation(including reasonable supporting documentation) of the total costs and fees tocomplete Tenant’s Work and prepare the Premises and the Expansion Space forTenant’s use and occupancy, including the contractors’ overhead, profit,architectural, construction, permitting, utility connection and “tap-in”charges, etc., as well as fees and costs of third parties including Architect,and other charges in having the Plans prepared and the Tenant Improvementsconstructed, inspected and operational (the “TI Costs”).  Tenant shall also provide evidence thatTenant has the funds immediately available to fund the positive difference, ifany, between the TI Costs minus the TI Allowance (the “Shortfall”).  All costs of Tenant’s Work to the extent ofthe Shortfall (as it may change from time to time) must be paid by Tenantbefore Tenant requests any disbursement (or further disbursement) of the TIAllowance.  If the TI Costs ultimatelyprove to be less than the TI Costs previously anticipated, then the unusedportion of the TI Allowance must be funded to Tenant to the extent necessary toreimburse Tenant for any Shortfall funded by Tenant that would otherwise havebeen funded from the TI Allowance.

 

So long asTenant is not in default under this Lease and no Shortfall then exists,Landlord shall disburse funds from the TI Allowance (subject to a 10%retention) to pay TI Costs directly, or by joint checks, to the applicablepayees on a monthly basis if Landlord receives at least one week before thescheduled disbursement an application (the “Application”) specifying the amountand date of the disbursement for which Tenant is applying.  The Application shall be completed andcertified to be accurate by Tenant, the Contractor and the Architect and shallspecifically identify the nature of each expense by reference to items inTenant’s TI Costs statement.  EachApplication must contain, or be accompanied by, an itemized statement providingall information reasonably required by Landlord, including:

 

(a)  The total amount expended or incurred byTenant and due and payable to the Contractor, subcontractors, laborers, andmaterialmen, for work performed, and material or equipment furnished, since thepreceding Application.

 

(b)  A description of the items for whichdisbursement is requested, which description shall refer to the line items ofTenant’s TI Cost statement provided to Landlord for which disbursement isrequested.

 

(c)  Invoices and a signed conditional waiver andrelease of lien in a form approved by Landlord from Contractor and from eachsubcontractor, materialman, and laborer, to be paid in full or in part from therequested disbursement of TI Allowance proceeds, together with unconditional lienreleases in form approved by Landlord from each subcontractor, materialman, andlaborer and from the Contractor for all work, services and/or materials paidfor out of the previous disbursement.

 

(d)  A statement of the names, addresses, andtypes of business entity of all subcontractors, materialmen, and laborers withrespect to whom a disbursement is requested, and certificates that each isfully qualified and complies in all respects with the requirements of theLease.

 

(f)  A certificate from the Architect certifyingthat all work has been completed in accordance with the Plans, in a good andworkmanlike manner and in accordance with sound construction practices, andthat the undisbursed proceeds of the TI Allowance are sufficient to pay for thelien free completion of Tenant’s Work.

 

The persons authorized byTenant to execute Applications include Russ Lowell and anyone authorized inwriting by Mr. Lowell.

 

Landlord willfund the balance of the retention promptly after Landlord receives evidence oflien-free completion of Tenant’s Work in a good and workmanlike manner, andcomplete as-built plans and specifications for Tenant’s Work along with copiesof all warranties and owner’s manuals in connection with the components ofTenant’s Work, all of which are automatically assigned to Landlord ontermination of this Lease to the extent in effect (and Tenant may notprematurely terminate them and shall ensure that all contracts, plans andwarranties specifically provide for such assignment).

 

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