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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-28088
MODACAD, INC.
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(Exact name of small business issuer as specified in its charter)
California 95-4145930
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1954 Cotner Avenue, Los Angeles 90025
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(Address of principal executive offices) (Zip Code)
(310) 312-9826
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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(Title of Class)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The registrant's revenues for its most recent fiscal year were $4,449,857.
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $64,979,397 based on the average bid and asked prices of $16.75
per share as quoted on the NASDAQ National Market on March 13, 1998.
The number of outstanding shares of the registrant's common stock, as of March
13, 1998, was 6,060,974.
Documents Incorporated by Reference: Portions of the registrant's definitive
Proxy Statement to be delivered to shareholders in connection with their Annual
Meeting of Shareholders to be held in June 1998 are incorporated into Part III
of this Annual Report.
Transitional Small Business Disclosure Format: Yes No X
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PART I
Item 1. Description of Business
The Company
ModaCAD, Inc. ("ModaCAD" or the "Company") was incorporated in 1988 to develop,
market and support software products based on its proprietary modeling and
rendering technology for use in industrial design applications, including the
apparel, textile and home furnishings industries. The Company's goal was to
develop software operating on personal computers ("PCs") that would enable
non-technical users to create and model 3-D synthetic objects from 2-D images
and render such objects in real time with photo-realistic quality. The Company
initially focused its efforts on developing computer aided design ("CAD")
products for the industrial design segments of the textile and apparel
industries. Beginning in 1993, the Company began broader marketing efforts,
including the introduction of electronic merchandising products, which efforts
were increased starting in 1994. In late 1995, the Company began efforts to
expand its business into consumer PC software, initially through the
development of a new consumer software product line, entitled 3D Home Interiors
(TM), aimed at the do-it-yourself home decorating and design marketplace.
In 1996, the Company completed development of 3D Home Interiors which has been
licensed to Broderbund Software, Inc. ("Broderbund") for publication, marketing
and distribution. In late 1997, the Company continued to expand its business
into e-commerce consumer oriented applications by signing an agreement with
Intel Corporation ("Intel") to distribute and co-develop an Internet
(or e-commerce) content manager software. Content managers are defined as
web-enabled software designed to present content necessary for e-commerce.
As such, content managers are the key "front-end" to emerging e-commerce
applications. The Company anticipates that this first e-commerce software will
be released during the third quarter of 1998, but there can be no assurance
that such release will occur at that time.
Discussion of certain matters contained in this Annual Report on Form 10-K may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act") and, as
such, may involve risks and uncertainties. Those forward-looking statements
relate to, among other things, expectations of the business environment in
which the Company operates, projections of future performance, product
introductions, perceived opportunities in the market and statements regarding
the Company's mission and vision. The Company's actual results, performance
and achievements may differ materially from the results, performance and
achievements expressed or implied in such forward-looking statements.
From time to time, the Company details other risks with respect to its business
and financial results and conditions in its filings with the Commission.
Products
ModaCAD's current and future products are divided into three principal product
groups: commercial (CAD and electronic merchandising products), consumer
(3D Home Interiors products), and e-commerce (Internet content manager fashion
application being co-developed with Intel). The Company's products are built
principally using object-oriented technology and written in the C++ programming
language. Most of the products are available on Windows and Macintosh
operating systems. ModaCAD's products are based principally on its proprietary
"core" rendering technology. The main features of this core technology are (i)
real-time rendering performance on standard PC hardware platforms (e.g., PCs
equipped with Intel Pentium 133MHz or better microprocessors and at least 16
megabytes of random access memory), (ii) photo-realistic visual simulations and
(iii) easy authoring processes.
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Current Products
CAD Products
The Company's CAD software comprises a family of four products - ModaDRAPE
(Registered), ModaToolkit (TM), ModaSKETCH (TM) and ModaWEAVE (Registered)-
designed to perform modeling, rendering and support tasks. The target market
for these products is major industrial design companies. ModaDRAPE,
ModaToolkit and ModaSKETCH are "bundled" together as the ModaDESIGN PRO (TM)
textile suite; ModaWEAVE, which runs only on the Macintosh operating system, is
sold separately.
Traditionally, manufacturers of design-intensive items such as fashion,
textiles, footwear, home furnishings, furniture and home improvement products
have marketed their products by first prototyping them and then producing
samples for buyers to evaluate. Because of the time and expense of the
sampling process, manufacturers have increasingly been turning to the concept
of "virtual sampling." Currently, the Company's CAD software is used to
model 3D product visualizations from simple 2D images, render a photo-realistic
picture of simulated products, place them inside a simulated 3D space, such as
a room interior, and perform the entire rendering process in real
time without the need for special or customized hardware. The ease of use,
operability on standard PCs and the photo-realistic 3D image production of the
ModaCAD industrial design product line serves to decrease the time and expense
of product design.
The ModaDESIGN PRO textile suite is a fully integrated design system capable of
real-time rendering, modeling 3D surface details onto 2D images, image
processing, artwork development and catalog authoring. ModaDESIGN PRO includes
several powerful applications developed to assist design and merchandising
teams in all phases of product, textile and catalog development.
ModaDESIGN PRO's components include a proprietary textile design system, an
embedded draping system as well as image processing, sketching and painting
tools.
ModaDRAPE is the modeling and real-time rendering software component.
ModaToolkit is the software component that controls color management, texture
management, repeat generation, screen printing separations, color reduction
function and color changes. ModaSKETCH is the artwork development, image photo
retouching and image processing software developed by and licensed from a third
party. The ModaDESIGN PRO system is sold with various options depending upon
the user's application, and the ModaWEAVE textile weaving simulation software
is sold separately. The Company also sells an entry-level version of the
ModaDRAPE software, called Envision (Registered), which offers a more limited
feature set than ModaDRAPE.
ModaDESIGN PRO provides a direct interface with leading graphic software
programs, enabling designers to access ModaDESIGN PRO directly without having
to shut down other graphic design applications. ModaDESIGN PRO is intended to
streamline design and merchandising tasks, thereby reducing product development
time and expense. ModaDESIGN PRO features the functionality to create "virtual
samples" prior to actual product development and is designed to allow users to
create presentations, storyboards, and promotional material. ModaDESIGN PRO
also enables users to create comprehensive interactive image databases for use
in the Company's electronic merchandising catalogs, sales representative
systems and kiosk programs.
Major companies which are users of the Company's CAD products include Jantzen,
Burlington Industries, Hasbro, Pendleton Mills, Fleetwood Enterprises,
Williamson-Dickies, Woolworth Canada, Oxford Industries and VF Corporation.
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Electronic Merchandising Products
The Company's electronic merchandising software was designed to enable
retailers to reduce expensive product inventories by allowing "virtual" samples
of products to be presented on a computer screen directly to customers. This
software is used together with interactive kiosks and other desktop PC-based
point-of-sale systems in retail stores for special-order products to allow
consumers to visualize, in an interactive format, special order options (such
as fabric styles or finishes) and preview their "customized" products prior to
purchasing.
The Company's electronic merchandising technology represents an improvement
over traditional multimedia kiosk software by offering, in addition to catalogs
of products, the ability to manipulate or "design" customized products in a
photo-realistic, real-time 3D environment. The Company believes that the
interactive "design" function of its technology is of critical importance to
industries offering special order merchandise, such as home furnishings, home
design and home improvements. As part of its electronic merchandising
business, the Company has received orders from major retailers and
manufacturers to produce numerous electronic catalogs on CD-ROMs containing
"digital product content" used at the point-of-sale together with the
Company's electronic merchandising software. An example of such implementation
is a furniture retailer using a ModaCAD-produced CD-ROM catalog to access a
manufacturer's lines of upholstered furniture and to visualize in
photo-realistic detail the "draping" of special-order fabrics onto available
furniture frames.
The Company's electronic merchandising products are divided into three
categories: (i) client/server technology, (ii) software products with embedded
rendering functions for special-order product visualization compatible with
kiosk hardware and desktop PCs and (iii) CD-ROM-based product catalogs in a
compatible format. Such products feature real-time rendering for
visualization, electronic order collection and special order visualization and
validation. ModaFINITY (TM) is the Company's point-of-sale electronic
merchandising software for in-store cataloging and visualization of products.
ModaFINITY is available with the following product options: ModaCATALOG (TM),
an apparel-specific version; and the Server version, using a Local Area Network
to manage network client/server implementations of ModaFINITY. The ModaFINITY
software can also be effectively used as an internal line development and
merchandising tool in large retail and manufacturing operations.
ModaPLAN (TM) was released in 1997 and is a new strategic space management
software solution which is derived from the Company's proprietary 3D rendering
and electronic merchandising technologies. ModaPLAN enables retailers and
store designers to create and view 3D, photo-realistic renderings of store
layouts and "planograms" via powerful client/server-based technology.
ModaPLAN is designed to allow the user to integrate store layouts and
planograms from one centralized database which contains both product and
fixture information. ModaPLAN is expected to distinguish itself from other
similar software by the quality of its 3D rendering of objects in layout form
as well as the ability to provide unlimited views of virtual store plans and
layouts. ModaPLAN merges the Company's advanced virtual reality technology and
relational databases into a productive planning, merchandising and analysis
tool for the retail marketplace.
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ModaVISION (TM) is a new commercial product which combines the Company's
patented rendering technology, 3D photo-realistic visualization and proprietary
electronic merchandising technology to create a powerful point-of-purchase
sales tool for retailers. Targeted primarily for use by retailers as well as
home-builders, ModaVISION is designed to be an in-store sales tool and the
Company expects it to have broad interest to a number of industries.
ModaVISION enables sales representatives working with customers, to create a
virtual shopping cart of actual retail-branded products and then drag and drop
desired selections into a virtual room scene designed for customers to
visualize such products in a simulated 3D environment. Although ModaVISION is
considered to be a professional design application, its familiar and easily
understood menus, toolbars and shortcuts do not require the skills of a
professional designer.
Major companies that use the Company's electronic merchandising,
manufacturer-specific catalogs for use with point-of-sale interactive kiosks,
and store planning products include Sears, Levitz Furniture, Crate & Barrel,
Broyhill Furniture, Ashley Furniture and Duckhead.
Consumer Products
During the fourth quarter of 1996, the Company completed development of the
initial title in its CD-ROM-based consumer home decorating software series
utilizing the Company's proprietary visualization and content management
technologies. This consumer software package was licensed to Broderbund
Software, Inc. for publication, marketing and distribution. Broderbund
unveiled the product under the name 3D Home Interiors during the first
quarter of 1997 and released the product during the Spring of 1997. 3D Home
Interiors is being marketed as a complementary product to Broderbund's existing
3D Home Architect (TM) software. Both products represent the first two titles
of Broderbund's 3D Home Series (TM). 3D Home Interiors and subsequent
ModaCAD-authored titles in the 3D Home Series are expected to enable consumers
to perform sophisticated home design and decorating on PCs, using digital
content catalogs of merchandise readily available through retailers, in an
interactive, photo-realistic, 3D environment. 3D Home Interiors is targeted
primarily at specific interior and home design projects which the Company
considers to be of broad consumer appeal.
3D Home Interiors employs the Company's 3D virtual reality, real-time rendering
and expert design technology for consumer use. The products contain
comprehensive cataloging features for electronic product browsing and
visualization in cooperation with product manufacturers and retailers.
The inclusion of electronic catalogs of actual merchandise for use in the
Company's design software, with drag and drop simplicity, combined with
information on special-order options, allows each user to become a "contract
specifier" for his or her home decorating project.
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In addition to revenues from the sales of 3D Home Interiors and subsequent 3D
Home Series titles that ModaCAD intends to author, the Company envisions that
as such products achieve substantial market penetration, they may generate
revenues from "publishing and advertising" fees charged to vendors who want
their products to be featured in the 3D Home Series. Although the Company
currently receives some small fees from retailers and manufacturers for
inclusion of their products in 3D Home Interiors, there is no assurance that
the product will generate demand sufficient to charge significant fees. The
Company has established relationships with some content providers
(manufacturers and retailers) essential for 3D Home Interiors and subsequent
ModaCAD-authored 3D Home Series titles and has produced digital content
component catalogs of their products for use with 3D Home Interiors. The
Company continues to establish relationships with new vendors to feature their
product catalogs in subsequent versions of 3D Home Interiors and the 3D Home
Series. The Company believes that the time and effort it would take a third
party to establish such relationships and produce such digital component
catalogs provide the Company with a competitive advantage, although there can
be no assurance that competitors of the Company will not devote the resources
necessary to establish relationships and produce such digital component
catalogs.
The digital content underlying the product catalogs contained within 3D Home
Interiors features the names of major retailers such as JCPenney, Wallpapers To
Go, Hunter Douglas Window Fashions, Marvin Windows and Doors, Z Gallerie,
Phillips, GE Appliances and Ikea as well as their brand name products.
Future Products
E-Commerce Content Managers
In several recent publications sources, including Business Week, have
identified e-commerce as the fastest growing segment of the computer
visualization and graphics industry. Furthermore, it is estimated that
e-commerce alone will evolve into a $327 billion market by 2002, according to a
report published by Forrester Research cited in the Los Angeles Times in July
1997.
A key goal of ModaCAD's future growth strategy is to deliver a series of
e-commerce (or Internet) content managers based upon the Company's proprietary
photo-realistic rendering and content management technologies for each major
retail segment throughout U.S. commerce. ModaCAD-developed 3D Home Interiors,
published by Broderbund, is the first example of these types of content
managers that bridge visualization requirements and practical e-commerce
applications, with a particular focus on the home furnishing and home design
arenas. In the Company's third quarter of 1998, ModaCAD expects to launch its
first e-commerce content management software for the apparel/fashion industry
which represents one of the largest segments of retailing and e-commerce
potential in general, but there can be no assurance that such release will
occur at that time. ModaCAD is co-developing with Intel on this first fashion
product. Additionally, ModaCAD's goal is to unveil additional e-commerce
content managers during fiscal 1998 and 1999 which will be targeted at a
variety of horizontal markets.
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The Company believes its e-commerce content manager's capabilities offer value
to consumers beyond traditional printed catalogs. This technology combines
powerful visualization tools with the ability to organize, filter and manage
digital product information in an advanced technological environment that
showcases merchandise and services in a way that is informative, practical and
useful to consumers. The Company believes that having the ability to shop,
research product information and visualize potential purchases in a
photo-realistic virtual reality environment creates an incentive for consumers
to purchase goods and services on-line in that it enables consumers to
circumvent time and travel issues which can be key problems associated with
unenjoyable shopping experiences.
The Company anticipates that its e-commerce product will generate revenues
during 1998; however, the amount of revenues and timing of their receipt will
depend on the Company's success in marketing, and consumer acceptance of the
product.
E-Script Software Development Kit
The Company refers to its core e-commerce (or Internet) content manager
technology as "E-Script." E-Script technology is an object-oriented software
development kit based on the distributed COM architecture and is compatible
with Microsoft's ActiveX controls. Such compatibility allows the Company to
mix the core functionality of E-Script with the ease of interface development
of Visual Studio, including Java, C++ and HTML. Additionally E-Script
architecture is fully compatible with web-based tools. E-Script technology is
ideally suited to creating content management technology.
One of the Company's goals is to pursue multiple areas of consumer trade as it
applies to e-commerce, using its E-Script technology. The Company intends to
enable many industry specific content managers from this common E-Script
technology. The concept is to offer specialized applications that offer value
to consumers in each specific area of commerce, while maintaining a common
content format and delivery mechanism.
E-Script allows for the following main functions: reality-accurate 3D
rendering; 2D image processing in real-time including image composition and
alpha blending; progressive refinement push technology; rule-based behaviors
and business rules modeling (including pricing and validation); peer-to-peer
data communication and data sharing and real-time 3D virtual reality browsing
and data-management functions. ModaCAD's development strategy is to use the
common core E-Script technology at the heart of all its end-user content
managers and to wrap each one with an interface which is industry-specific
using standard HTML & Java layers. This strategy allows for fast application
development from a common architecture.
Marketing, Sales and Distribution
Commercial Products
The Company markets its commercial products through its direct sales force and
a network of authorized dealers and distributors. During 1998, the Company
intends to implement a value-added reseller ("VAR") distribution channel for
its commercial product lines, but will maintain a limited direct sales force
for key customers and major national accounts. This scaled down sales force
will also be responsible for managing VAR activities and productivity.
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The Company or VAR will (i) provide the customer with appropriate software for
use under license, (ii) advise the customer of any computer hardware it needs
to buy, upgrade or adapt in order to utilize the software, (iii) assist the
customer in the creation of the database of the customer's products or designs,
and (iv) provide ongoing training and support in the use of the product package.
The Company employs 10 sales people and 19 marketing people. In addition to
its Los Angeles headquarters, the Company maintains one additional sales office
in New York. Internationally, the Company has established an exclusive
distribution arrangement for certain European territories with ModaCAD Europe
and has established nonexclusive dealerships in locations such as Japan, South
Korea, Australia, India, Columbia, Brazil, New Zealand and Thailand. ModaCAD
Europe has been the largest purchaser of the Company's commercial products
since it was established. Sales to ModaCAD Europe decreased in 1997 compared
to 1996. In 1996 and 1997, such sales accounted for approximately 12% and 8%,
respectively, of the Company's total sales.
ModaCAD licenses its software under either license agreements or site license
agreements, the latter being used principally for major corporate accounts.
ModaCAD offers quantity discounts for multiple-unit purchases and special
discounts to accredited educational institutions. The Company advertises its
products in trade magazines and conducts direct mail, telemarketing and a media
editorial campaign in industry trade press and general business publications.
In addition, the Company participates in major computer industry, home
furnishings and fixtures, store planning and apparel trade shows throughout the
United States.
Consumer Products
In March 1996, the Company entered into a Software Development and Publishing
Agreement with Broderbund ("the Broderbund Agreement"), appointing Broderbund
as publisher of the ModaCAD-developed 3D Home Interiors and subsequent ModaCAD
authored 3D Home Series software titles. Broderbund has been distributing and
marketing 3D Home Interiors domestically and internationally to PC hardware and
software retailers and resellers, home furnishing and fixture retailers and
home improvement stores since the product's release in late Spring 1997. Under
the Broderbund Agreement, the Company is responsible for the design and
development of the 3D Home Interiors and related derivative works, including
upgrades and foreign language adaptations, subject to Broderbund's final
editorial control over the products. Broderbund has been granted exclusive
worldwide rights to publish 3D Home Interiors and derivative works thereof.
Broderbund is responsible for marketing and promotion of the products and for
customer support after publication.
Broderbund is a leading software publisher and distributor. During 1997,
Broderbund reported that it released over 40 new software products including
new titles, upgrades to existing titles and transfers of existing titles to new
hardware platforms.
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The Company and Broderbund also intend to market 3D Home Interiors and
subsequent 3D Home Series titles through the Internet and other on-line
services and direct-to-consumer channels. The Company plans to use the Internet
and other emerging on-line media to create sites relating to home decorating
and home furnishings on the World Wide Web and other on-line networks. The
Company envisions using 3D Home Interiors, together with websites or other
computerized or networked "environments" created by the Company or third-party
manufacturers, vendors or sellers of advertising space (such as magazines) to
present an array of complementary services, product shopping, updating options
and other services. Through such channels of distribution, consumers
interested in home decorating could experience interactive demonstrations of 3D
Home Interiors and order the product on-line. The Company believes that in
implementing such measures, it will establish itself in the emerging e-commerce
or on-line marketplace as a leading provider of digital content managers of
products for home shopping, for home furnishing, for in-home decorating and,
eventually, for products in other industries which the Company's software
products may penetrate.
E-Commerce Products
ModaCAD entered into an Agreement with Intel Corporation in November 1997 to
develop an e-commerce content manager targeted for distribution to the fashion
and apparel industry. Although specific product details have not been
disclosed, the two companies have agreed to work together to develop and
deliver rich visual and interactive content that is optimized for Pentium
(Registered) II processor-based PCs. Using advanced Internet push technology
and multimedia enhancements, the Company believes that this e-commerce fashion
solution will enable a rich and personalized end-user shopping experience.
The Company will also be exploring new methods by which to distribute
e-commerce consumer software applications. The Company's ultimate goal is to
develop a complete product line of fashion products and other focused
applications that are intended to service the broader e-commerce market segment.
Competition
The computer software design and electronic merchandising markets are
intensely competitive and subject to rapidly changing technologies and evolving
product standards. In the broad computer software design and electronic
merchandising markets, the Company competes with numerous companies providing
CAD and rendering software, including companies such as Computer Design Inc.,
Gerber Garment Technology, Inc., Info Design, Lectra Systems, Inc., and
Intellitek Computer Corporation. Some of the Company's existing and potential
competitors in the software design and electronic merchandising markets have
significantly greater financial, technical, sales and marketing resources than
the Company, have longer operating histories than the Company, and have better
brand name recognition.
The Company believes that principal competitive factors in the commercial
product markets in which the Company competes include product functionality and
ease of use, product performance and reliability, customer service and support,
vendor credibility and brand awareness, technological advantages and
price/performance characteristics. The Company believes that its products
compete favorably with the products of its competitors principally due to the
advantages of their real-time photo-realistic modeling and rendering functions,
ease-of-use with existing Macintosh and Windows operating systems, and in the
case of its electronic merchandising and 3D Home Interiors products,
integration with a digital database of manufacturers' product catalogs.
Although the Company believes that it competes favorably in the markets it
serves, there can be no assurance that new or established competitors will not
offer products superior to, or lower in price than, those of the Company.
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The consumer software market is increasingly competitive, with numerous
suppliers directing new products into a highly differentiated and rapidly
developing marketplace. The Company believes that the principal competitive
factors in the consumer software market include product features and
performance, product reliability, ease-of-use, product reputation, price,
timeliness of product upgrades and quality of customer support and service.
The Company's competitors in this market include several large companies with
substantially greater financial, technical, marketing and other resources than
the Company, as well as numerous companies of varying sizes and resources,
including Broderbund, SoftKey Software, Inc., Expert Software, Inc., Softdesk,
Inc., Autodesk, Inc. and Books-that-Work. Although Broderbund and ModaCAD have
entered into a Publishing and Distribution Agreement for 3D Home Interiors
which contains certain mutual non-compete covenants, this agreement does not
prohibit Broderbund from publishing or distributing similar products which
could compete with the Company's products, including Broderbund's previously
released 3D Home Architect. Additionally, the Company expects increased
competition from new competitors who may in the future publish competitive home
decorating software products. The Company believes that the use of its core
rendering technology in its 3D Home Interiors product, and use of digitized
catalogs of actual products with the system, give its products the sufficient
attributes to provide an initial competitive advantage in the consumer software
market.
Estimates of the existing and future size and scope of the e-commerce market as
well as the on-line business-to-consumer segment vary from industry analyst to
industry analyst. While dollar amounts attributed to this market growth vary,
sources appear to agree upon the fact that e-commerce, Internet shopping or any
derivatives thereof are likely to become a very large business. ModaCAD
believes that technology developers that enable this revolution in making
e-commerce a pervasive means of transacting business, stand to generate sizable
revenues and reap substantial profits. The industry as such is highly
fragmented at this time, and the Company has no knowledge of any direct
competitor to ModaCAD's recently unveiled e-commerce fashion solution. The
Company believes it has a legitimate opportunity to capture material market
share for both its new and future product lines and formats within the rapidly
emerging e-commerce arena.
Dependence on Significant Customers
During 1996 and 1997, the Company's largest commercial product purchaser,
ModaCAD Europe, accounted for approximately 12% and 8%, respectively, of the
Company's total revenues. During 1996 and 1997, Broderbund, accounted for
approximately 44% and 6.7%, respectively of the Company's total revenues.
During 1997, Intel accounted for approximately 34% of the Company's total
revenues. The Company may continue to be dependent on these three or more
significant customers, the loss of which could have a material and adverse
effect on the Company's business.
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Patents and Proprietary Rights
The Company holds two United States patents. The first one covers the
Company's core rendering and modeling technology. The second one covers 3D
modeling techniques. In addition to patent protection, the Company relies on a
combination of (i) trade secret, copyright and trademark laws, (ii)
confidentiality and nondisclosure agreements and (iii) other contractual and
technical measures to protect its proprietary rights. There is no assurance
that these measures will deter misappropriation of the Company's proprietary
rights. The Company employs a "lock and key" system with respect to the
proprietary information underlying its software. This system is designed to
ensure that only certain key employees have access to such information, all of
whom have signed confidentiality and nondisclosure agreements. The Company has
five trademarks and eight registered trademarks, including the mark ModaCAD.
The Company believes that its products, trademark and other proprietary rights
do not infringe on the proprietary rights of third parties. There can be no
assurance, however, that third parties will not assert infringement claims
against the Company in the future with respect to current or future products
or that any such asserted claims may not result in costly litigation.
Research and Development
ModaCAD believes that its success will depend primarily on its ability to
maintain and enhance its current product lines, develop new products, maintain
technological competitiveness, fulfill an expanding range of customer
requirements and to pursue expansion opportunities into new markets. ModaCAD's
management has consistently explored and will continue to explore innovative
new technologies, business strategies and opportunities in an effort to broaden
the usability of its proprietary rendering and content management technologies.
The Company also believes that research and development is a key element of its
continued success and is striving to bring market enhancements to its products
and updates on a continual basis, to enable its customers to take advantage of
new technologies as they are developed. ModaCAD's primary expenses for research
and development include the personnel costs of the Company's specialists in
engineering, software infrastructure, interface development, database
technologies and 3D computer graphic design. Research and development expenses
also include the depreciation and cost of maintenance of computer hardware used
in research and development.
The Company's development teams are continuously working toward new
developments, extensions and enhancements to its core rendering engine in an
ongoing effort to maintain and extend ModaCAD's leadership in this area. The
Company is also exploring the feasibility of developing a line of less
sophisticated, lower-priced "pro-sumer" software products that would be
marketed and sold through a VAR channel. The adaptation of ModaCAD's
professional design and rendering tools into "pro-sumer" applications are being
designed to appeal to smaller industrial designers and retailers that would
otherwise find the Company's products cost prohibitive.
ModaCAD conducts research and development in a variety of advanced technical
areas, including object-oriented technology, specifications and rule-driven
technology, as well as evolving imaging technologies. ModaCAD is also
developing a series of extensions to traditional scene-based 3D environments
that are capable of achieving higher rendering resolution and increased levels
of photo-realism.
10
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To date, the Company has designed and developed all of its products internally
with the exception of two utility software products offered with the ModaDESIGN
system. The Company was principally a product development company with respect
to its industrial design and electronic merchandising products until 1993, when
the Company developed marketing and product distribution capability. As of
December 31, 1997, 42 of the Company's 86 full-time employees were employed in
various aspects of research and development activities. The Company's research
and development expenditures (other than expenses that are required to be
capitalized under FASB 86) totaled $2,217,000 or 66% of revenues in 1996 and
$2,828,000 or 64% of revenues in 1997. During such periods, no significant
amount of the Company's research and development expenditures was customer
sponsored.
Employees
As of December 31, 1997, the Company employed 86 full-time employees, including
27 in sales and marketing, 22 in engineering, 21 in product development, 12 in
administration and 4 in customer support services. The Company also employs 9
consultants who work in product development. The Company believes that its
future success will depend, in part, on its ability to continue to attract,
hire and retain highly qualified personnel. The competition for such personnel
in the computer software industry is intense. None of the Company's employees
are represented by a labor union, and the Company has never experienced a work
stoppage. The Company believes that its relations with its employees are good.
Item 2. Description of Property
The Company is in the process of moving its executive headquarters to a 23,000
square-foot facility in Culver City, California, under a lease that will expire
in December 2005 with an option to extend the lease term for ten years. The
facility was necessary to accommodate the Company's recent growth in its sales,
marketing and engineering personnel. The Company acquired this additional
space at commercially reasonable terms. ModaCAD intends to sub-lease its
current Los Angeles properties and does not foresee any difficulty in doing so.
Currently, ModaCAD's executive headquarters are located in a 5,100 square-foot
facility in Los Angeles, California, under a lease that expires in November
2000. The Company also maintains a second 10,000 square-foot office in Los
Angeles for its engineering operations under a lease that expires in June 2002.
The Company leases approximately 2,400 square feet in High Point, North
Carolina, under a lease that expires in June 1999, for production and customer
service activities, directed primarily at electronic merchandising customers
and consumer product lines. The Company leases approximately 1,500 square feet
in New York primarily for facilitating sales and marketing support activities
in the Northeast region under a lease that expires in August 1999. The Company
previously maintained a small office in Los Angeles for computerized catalog
production under a month-to-month lease which was terminated in May 1997.
The Company anticipates that it may require additional space in High Point in
the first half of 1998 to handle the expected increased levels of production
and customer support activities. The Company believes it can readily acquire
any needed additional space when and as needed on commercially reasonable terms.
11
<PAGE>
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
12
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Trading Prices of Securities
Prior to November 11, 1997, the Company's common stock and warrants were traded
in the NASDAQ SmallCap Market under the trading symbols "MODA" and "MODAW,"
respectively. On November 11, 1997, the Company's common stock commenced
trading in the NASDAQ National Market under the same trading symbol "MODA".
The high and low bid prices for each quarter of 1996 and 1997 for the Company's
common stock and warrants are as follows:
Bid Prices
High Low
Common Stock
1st Quarter 1996 6-1/8 4-1/8
2nd Quarter 1996 6-11/16 3-3/4
3rd Quarter 1996 5-3/4 4
4th Quarter 1996 6-1/4 4-1/2
1st Quarter 1997 10 5-5/8
2nd Quarter 1997 17-5/8 7-3/8
3rd Quarter 1997 19 12-5/8
4th Quarter 1997 25-5/8 15-1/2
Warrants
1st Quarter 1996 2-1/4 1-3/8
2nd Quarter 1996 2-5/8 1-3/8
3rd Quarter 1996 2-3/8 1-1/2
4th Quarter 1996 2-13/16 1-1/2
1st Quarter 1997 4-11/16 1-7/16
2nd Quarter 1997 10-3/8 2-1/8
3rd Quarter 1997 11-3/4 6-1/16
4th Quarter 1997 - -
The first quarter 1996 figures above are based on trading prices of the
Company's securities on March 29, 1996, the only trading day for the Company's
securities in that quarter after the effective date of the Company's SB-2
Registration Statement in connection with the Company's initial public offering
("IPO"). Market prices for the listed warrants were not available after the
warrants were deleted from listing in the NASDAQ SmallCap Market at July 30,
1997. Such deletion from listing resulted from warrants being exercised by the
warrant holders or redeemed by the Company during the period between June 19,
1997 and July 29, 1997. At December 31, 1997, the Company had approximately
1,700 shareholders of record. The Company did not declare or pay dividends on
its common stock during 1996 or 1997 and does not intend to pay dividends in
the foreseeable future.
13
<PAGE>
Recent Sales of Unregistered Securities
During 1997, the Company sold the following securities which were not
registered under the Securities Act of 1933, as amended (the "1933 Act"):
(a) On August 28, 1997, the Company granted to a non-employee director in
consideration for services to the Company a five-year warrant to
purchase 2,000 shares of common stock at an exercise price of $17.00
per share. On October 27, 1997, the Company granted to two
non-employee directors in consideration for services to the Company
ten-year warrants to purchase a total of 4,000 shares of common stock
at an exercise price of $17.50 per share.
(b) On November 13, 1997, the Company, in conjunction with entering a
software development agreement with Intel Corporation("Intel"),
granted Intel a five-year warrant to purchase 126,316 shares of common
stock at an exercise price of $19.00 per share.
Exemption from the registration provisions of the 1933 Act for all of the
transactions described above is claimed pursuant to Section 4(2) of the 1933
Act and/or Rule 504 of Regulation D promulgated thereunder on the grounds that
such transactions did not involve any public offering. The purchasers in such
transactions represented their intention to acquire the securities for
investment only and not with a view to the distribution thereof. Appropriate
legends were affixed to the certificates evidencing the securities issued in
such transactions. All purchasers either received adequate information about
the Company or had access to such information.
In April 1996, the Company completed its initial public offering ("IPO") of
securities and received approximately $6,300,000 net proceeds from the offering
after paying underwriters' fees and costs associated with the offering as of
March 1996. The Company used the net proceeds of that offering approximately
as follows:
Repurchase of the Company's Common Stock $ 900,000
Repayment of Principal and Interest of Bridge Loan 415,000
Repayment of Short-term Note to the Company's Officers/shareholders 315,000
Marketing and Distribution of the Company's Products 300,000
Payment of Accrued Officer Incentive Compensation 166,000
Expansion of Office 102,000
Costs of Additional Personnel 150,000
Research and Development of the Company's Products (other than 3DHI) 2,554,000
Research and Development of the 3-D Home Interiors Product 618,000
Purchase of Equipment 780,000
----------
Total Proceeds Used $6,300,000
==========
The uses of the proceeds comply with the use of proceeds section of the
Company's prospectus dated March 27, 1996 in connection with the Company's IPO
with the exception of $618,000 used in research and development of the 3-D
Home Interiors product and $780,000 used in purchase of the equipment.
14
<PAGE>
Proceeds used in research and development of the Company's 3-D Home Interiors
product increased to approximately $618,000, which is $218,000 over the
$400,000 allocated such uses as described in the use of proceeds section of
the Company's prospectus. The increase was primarily due to expanded scope of
development of the 3-D Home Interiors product beyond its initial specifications
to increase features and functionality provided to the users. The expansion
caused the company spend additional personnel costs, including in connection
with development and production of computerized catalogs relative to the
project.
Proceeds used in purchase of equipment increased to approximately $780,000,
which is $530,000 over the $250,000 allocated such uses as described in the use
of proceeds section of the Company's prospectus. The increase was primarily
due to the expansion of the Company's software development. As the number of
personnel in the research and development group increased, more computer
equipment and software were acquired for their use.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the information
under "Item 7. Financial Statements" and the Company's financial statements
and notes thereto and other financial data included elsewhere herein. Certain
statements under this caption constitute "forward-looking statements" under the
Reform Act which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in such forward-looking
statements. Factors that could cause actual results to differ materially
include the following: (i) unforeseen technical or other obstacles in the
development or production of the Company's software products, (ii) customer
acceptance of the new, updated or revised versions of the Company's software
products, (iii) the Company's ability to produce its products on a
cost-effective and timely basis and (iv) factors not directly related to the
Company, such as the marketing plans of the Company's 3-D Home Interiors
software by the publisher, competitive pressures on pricing, market conditions
in general, competition, technological progression, product obsolescence and
the changing needs of potential customers and the software, textile, apparel,
home furnishings and home design industries in general.
General
The Company was incorporated in 1988 to develop, market and support software
products based on its proprietary modeling and rendering technology for use in
industrial design applications including the apparel, textile and home
furnishings industries. The Company's products utilize the Company's
proprietary modeling and rendering technology, operate on standard personal
computers running Macintosh or Windows operating systems and are grouped
into two principal product groups: commercial (computer aided design or "CAD"
and electronic merchandising products) and consumer.
The Company's CAD software products are used principally by industrial
designers to model three-dimensional synthetic objects from two-dimensional
images and to render such objects in real time with photorealistic imagery.
The Company's electronic merchandising products combine the Company's
technology with digital product catalogs produced by the Company or by product
manufacturers using the Company's CAD software. During 1997, the Company's
revenues generated from sales of its CAD and electronic merchandising products
experienced a 39% growth from the previous year.
15
<PAGE>
In 1996, the Company completed its development of the 3-D Home Interiors
product and recognized $1,500,000 revenue in connection with the completion of
the development of such product. In the second quarter of 1997, the Company
commenced receiving royalties from sales of that consumer product by its
publisher.
In November 1997, the Company signed an agreement with Intel for the
co-development and distribution of interactive software to be used in
connection with Intel's Pentium (Registered) II processor. The companies
agreed to co-develop an e-commerce solution for fashion retailers and
manufacturers using advanced Internet push technology and multimedia
enhancements which are intended to enable a rich and personalized end-user
shopping experience. In the fourth quarter of 1997, the Company generated a
significant portion of its total revenue in 1997 as a result of the fulfillment
of certain obligations pursuant to the agreement with Intel.
Results of Operations
The following table sets forth selected items from the Company's statements of
operations (in thousands) for the years ended 1997 and 1996 and the percentages
that such items bear to net sales:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996
------------------- ------------------
<S> <C> <C> <C> <C>
Net sales $ 4,450 100.0% $ 3,370 100.0%
Cost of sales 87 1.9 115 3.4
Selling, general and administrative 3,394 76.3 2,338 69.3
Research and development 172 3.9 78 2.3
Amortization of software development costs 774 17.4 295 8.8
-------- ----- --------- -----
Total expenses 4,427 99.5 2,826 83.8
-------- ----- --------- -----
Income from operations 23 0.5 544 16.2
Investment income 331 7.5 102 3.0
-------- ----- --------- -----
Net income $ 354 8.0% $ 646 19.2%
======== ===== ========= =====
</TABLE>
1997 Compared with 1996
Net Sales
Net sales increased $1,080,000, or 32%, to $4,450,000 in 1997 from $3,370,000
in 1996 primarily due to sales increases in the Company's commercial products
(electronic merchandising and CAD products) and revenue increases from consumer
products, consulting and training services and maintenance fees. However, net
sales attributable to hardware sales decreased by $8,000 due to the Company's
decision in 1995 to phase out its hardware sales. The Company generated no
hardware sales revenue in 1997.
Sales of electronic merchandising software and CAD products increased $646,000,
or 39%, to $2,285,000 in 1997 from $1,639,000 in 1996 primarily due to $400,000
of sales revenue generated from two of the Company's new customers in 1997.
The remaining $246,000 increase from 1996 to 1997 represents an overall sales
increase from the Company's existing customers.
16
<PAGE>
Revenue generated from consumer products increased net sales by $282,000, or
19%, to $1,802,000 in 1997 from $1,520,000 in 1996 due to $125,000 consumer
software development services provided to and $181,000 royalty payments
received from the Company's publisher, Broderbund Software ("Broderbund"), in
connection with the sales of the Company's 3-D Home Interiors product in 1997.
In 1997, $1,500,000 revenue was generated from the Company's fulfillment of
certain obligations pursuant to an agreement with Intel in connection with the
co-development of consumer software. In 1996, $1,500,000 revenue was
attributable to an agreement between the Company and Broderbund of its interior
home decorating consumer software products.
The Company received $136,000 in revenue generated from consulting services in
1997 compared to no revenue from consulting services in 1996. Those revenues
were attributable to the software consulting services provided to the Company's
customers in conjunction with the sales of commercial products and the
customer's annual conference meeting.
Training services revenue increased by $15,000, or 28%, to $69,000 in 1997 from
$54,000 in 1996 primarily due to the Company's decision to terminate the
relationship with an independent contractor and to provide customer training
itself. Net sales resulting from products maintenance fees increased $9,000 in
1997 from 1996.
Cost of Sales
Cost of sales decreased $28,000, or 24%, to $87,000 in 1997 from $115,000 in
1996. This decrease is primarily due to a $58,000 decrease in cost of hardware
sales, which was offset by a $30,000 increase in the cost of commercial product
sales. The decrease in the cost of hardware sales was due to the Company's
decision to phase out its hardware sales which historically generated low
profit margins. The increase in the cost of commercial product sales reflected
the sales increase in commercial products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1,056,000, or 45%, to
$3,394,000 in 1997 from $2,338,000 in 1996. This increase was primarily due to
three factors. First, personnel costs increased $390,000, or 33%, to
$1,573,000 in 1997 from $1,183,000 in 1996. The increase in personnel costs
resulted from the hiring of additional personnel in late 1996 and 1997 to
support the Company's increased operating activities. Second, certain related
costs including travel, marketing, telephone and office supplies expenses
increased $477,000, or 72%, to $1,143,000 in 1997 from $666,000 in 1996. The
increases in the marketing expenses reflect the implementation of the Company's
planned expansion into new markets in late 1996 and 1997. Third, professional
services including accounting, legal and consulting services increased
$264,000, or 148%, to $442,000 in 1997 from $178,000 in 1996. The increase in
professional services was primarily due to the Company's increased requirements
for these services in 1997 compared to 1996 as a result of the Company's status
as a public company and increased business activities in 1997.
17
<PAGE>
Research and Development
The Company incurred $3,000,000 of research and development costs in 1997, of
which $2,828,000 was capitalized as software development costs and $172,000 was
expensed, compared to $2,217,000 for 1996, of which $2,139,000 was capitalized
and $78,000 was expensed. The 35% increase in research and development
expenditure from 1996 to 1997 was primarily due to the hiring of additional
personnel to perform software programming services in connection with the
further development of the Company's commercial and consumer products.
Amortization of Software Development Costs
The amortization of software development costs increased $479,000, or 162%, to
$774,000 in 1997 from $295,000 in 1996 as the Company began marketing
(and amortizing development costs associated with) several new versions of
software products in 1997.
Investment Income
Investment income increased $229,000, or 225%, to $331,000 in 1997 from
$102,000 in 1996 due to the increase in income generated from a money market
account in which the unexpended proceeds from the Company's IPO and the
proceeds received upon the exercise by warrant holders of the Company's public
warrants after notice of redemption made in June 1997 are maintained.
Income Taxes
The Company recorded no provision for income taxes in 1997 and 1996 due to the
utilization of net operating loss carryforwards.
18
<PAGE>
Liquidity and Capital Resources
On June 19, 1997, upon meeting the requisite criteria for redemption of
redeemable common stock purchase warrants issued in the Company's IPO (i.e. the
closing bid price for the Company's common stock averaged in excess of
$7.50 for a period of 20 consecutive trading days ending within 15 days of the
notice of redemption), the Company notified the holders of the publicly traded
warrants that it intended to redeem any unexercised warrants outstanding on
July 29, 1997. As a result of the notification, the warrant holders exercised
warrants to purchase 1,609,084 shares of the Company's common stock for an
aggregate exercise price of $10,459,046 and the Company redeemed the remaining
916 unexercised warrants for $9.
In connection with loans made to the Company by a third party in December 1995
and January 1996, the Company granted such third-party lender warrants to
purchase an aggregate of 200,000 units which warrants had a two-year term, each
with an exercise price of $4.00 per unit. Each warrant provided the holder
with the right to purchase one unit, comprised of one share of the Company's
common stock and one redeemable warrant exercisable to purchase one share of
common stock at a price of $6.50 per share for a period of five years beginning
March 27, 1996. In 1997, the warrant holder (or its transferees) exercised
warrants to purchase 200,000 units for an exercise price of $800,000.
The warrant holder further exercised his redeemable common stock purchase
warrants to purchase 200,000 shares of common stock for an exercise price of
$1,300,000.
In connection with the IPO, the Company issued to the principal underwriter in
the IPO, for $1,400, a warrant to purchase 140,000 units, at a per unit
exercise price of $6.00, each unit consisting of one share of Common Stock and
one redeemable warrant exercisable to purchase one share of Common Stock at an
exercise price of $9.10 per share. Such warrants are exercisable for a
four-year period which began March 27, 1997. In 1997, the underwriter (or
assignees of the underwriter) exercised a portion of the warrants to purchase
an aggregate of 88,300 shares of the Company's common stock and 88,300
redeemable common stock purchase warrants for an aggregate exercise price of
$529,800. The underwriter (or its assignees) further exercised redeemable
common stock purchase warrants to purchase 30,800 shares of the Company's
common stock for $280,280.
The Company's gross accounts receivable balance increased $788,000, or 54%, to
$2,243,000 at December 31, 1997, from $1,455,000 at December 31, 1996. This
increase was primarily due to a total receivable balance of $843,000 at
December 31, 1997, related to the sales generated from six of the Company's
major customers in 1997. At December 31, 1997, a $750,000 receivable balance
was related to revenue recognized in relation to the Company's fulfillment of
certain obligations pursuant to an agreement with Intel in connection with the
co-development consumer software. At December 31, 1996, a non-recurring
$750,000 receivable balance attributable to an agreement between the Company
and Broderbund in connection with its interior home decorating software
products. The $750,000 receivable from Borderbund was received in March 1997.
The Company anticipates continuing to use its capital primarily to fund the
activities related to the design, development, marketing, sales and support of
the Company's products. Together with its existing capital received from the
exercise of warrants as a result of the Company's notice of warrant redemption
in June 1997 and anticipated funds from operations, the Company believes that
its capital resources will be sufficient to provide its anticipated cash needs
for working capital and capital expenditure for at least the next 18 months
although the Company may seek to raise additional capital before then,
depending on various considerations and developments. Thereafter, if cash
generated from operations is insufficient to satisfy the Company's capital
requirements, the Company may have to sell additional equity or debt securities
or obtain credit facilities, assuming the Company can do so on acceptable terms.
19
<PAGE>
Item 7. Financial Statements
MODACAD, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
20
<PAGE>
MODACAD, INC.
CONTENTS
December 31, 1997
================================================================================
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 23
FINANCIAL STATEMENTS
Balance Sheet 24
Statements of Operations 25
Statements of Stockholders' Equity 26
Statements of Cash Flows 27 - 28
Notes to Financial Statements 29 - 40
21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
ModaCAD, Inc.
We have audited the accompanying balance sheet of ModaCAD, Inc. as of December
31, 1997, and the related statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ModaCAD, Inc. as of December
31, 1997, and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 2, 1998
22
<PAGE>
MODACAD, INC.
BALANCE SHEET
December 31, 1997
================================================================================
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets
Cash and cash equivalents $ 12,419,992
Accounts receivable,
net of allowance for doubtful accounts of $81,500 2,161,152
Prepaid expenses and other current assets 747,776
-------------
Total current assets 15,328,920
Capitalized computer software development costs,
net of accumulated amortization of $1,149,119 4,853,560
Furniture and equipment, net (Note 2) 1,074,604
Investment in and advances to unconsolidated subsidiary (Note 6) 55,324
Other assets 91,648
-------------
Total assets $ 21,404,056
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses (Note 3) $ 360,720
Deferred income 104,281
-------------
Total current liabilities 465,001
-------------
Commitments (Note 3)
Stockholders' equity (Note 4)
Common stock, no par value
15,000,000 shares authorized
6,022,974 shares issued and outstanding 25,517,352
Accumulated deficit (4,578,297)
-------------
Total stockholders' equity 20,939,055
-------------
Total liabilities and stockholders' equity $ 21,404,056
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
MODACAD, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
================================================================================
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net sales (Note 5) $ 4,449,857 $ 3,370,222
----------- -----------
Expenses
Cost of sales 87,470 114,854
Selling, general and administrative 3,393,765 2,338,227
Research and development 171,769 78,105
Amortization of capitalized software development costs 774,135 295,465
----------- -----------
Total expenses 4,427,139 2,826,701
----------- -----------
Income from operations 22,718 543,521
Other income
Other income 11,190 -
Investment income 320,367 101,914
----------- -----------
Total other income 331,557 101,914
Net income $ 354,275 $ 645,435
=========== ===========
Basic earnings per share $ 0.07 $ 0.20
=========== ===========
Diluted earnings per share $ 0.06 $ 0.20
=========== ===========
Weighted average common shares outstanding 4,800,918 3,247,766
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
MODACAD, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
================================================================================
<TABLE>
<CAPTION>
Common Stock Accumulated
Shars Amount Deficit Total
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 1,418,454 $ 1,618,117 $(5,578,007) $(3,959,890)
Sale of common stock 1,610,000 7,930,728 7,930,728
Offering cost (1,672,984) (1,672,984)
Conversion of notes payable
and accrued interest-
related parties 900,000 4,545,175 4,545,175
Repurchases of shares (312,168) (900,000) (900,000)
Stock issued for compensation 12,549 62,744 62,744
Warrants exercised 236,955 9,125 9,125
Issueance of warrants for
services 1,000 1,000
Net income 645,435 645,435
---------- ------------ ------------ ------------
Balance, December 31, 1996 3,865,790 11,593,905 (4,932,572) 6,661,333
Common stock issued for
Stock options exercised 29,000 149,376 149,376
Warrants exercised 2,128,184 13,369,126 13,369,126
Warrant redemption cost (167,055) (167,055)
Issuance of warrants for
services 572,000 572,000
Net income 354,275 354,275
---------- ------------ ------------ ------------
Balance, December 31, 1997 6,022,974 $25,517,352 $(4,578,297) $20,939,055
========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
MODACAD, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
================================================================================
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 354,275 $ 645,435
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 65,655 23,859
Amortization of capitalized software
development costs 774,135 295,465
Provision for loss on accounts receivable 52,000 209,386
Issuance of warrants for services rendered 12,000 1,000
(Increase) decrease in
Accounts receivable (870,299) (1,173,611)
Prepaid expenses and other current assets (34,343) (139,463)
Other assets (69,208) (10,480)
Increase (decrease) in
Accounts payable and accrued expenses (10,022) (41,669)
Deferred income 29,501 14,782
---------- -----------
Net cash provided by (used in) operating activities 303,704 (175,296)
---------- -----------
Cash flows from investing activities
Purchase of furniture and equipment (616,166) (617,468)
Capitalized computer software development cost (2,682,956) (2,069,104)
----------- -----------
Net cash used in investing activities (3,299,122) (2,686,572)
----------- -----------
Cash flows from financing activities
Payments on note payable - (250,000)
Payments on officers/stockholders note payable (75,000) (200,000)
Purchase of common stock - (900,000)
Sale of common stock - 7,930,728
Stock options exercised 149,376 -
Warrants exercised 13,369,126 9,125
Offering cost - (1,602,246)
Warrant redemption cost (167,055) -
----------- -----------
Net cash provided by financing activities 13,276,447 4,987,607
----------- -----------
Net increase in cash 10,281,029 2,125,739
Cash and cash equivalents, beginning of year 2,138,963 13,224
------------ -----------
Cash and cash equivalents, end of year $12,419,992 $2,138,963
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
MODACAD, INC.
STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
================================================================================
Supplemental disclosures of cash flow information
During the years ended December 31, 1997 and 1996, the Company paid no income
taxes and $0 and $14,700, respectively, in interest.
Supplemental schedule of non-cash investing and financing activities
In 1996, the Company converted the note payable - related party principal
amount of $3,073,713 and $1,471,462 of accrued interest into 900,000 shares of
common stock of the Company, concurrently with the closing of the IPO.
During the year ended December 31, 1996, the Company issued common stock of
12,549 to certain employees for stock awards accrued in prior years. During
the year ended December 31, 1997, the Company issued 126,316 warrants valued
at $560,000 for development expenses that will be performed in 1998.
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
ModaCAD, Inc. (the "Company") was incorporated in California on
February 4, 1988. The Company designs, markets, and supports advanced
virtual reality, rendering, and modeling software for industrial design
and retail customers primarily in the apparel, textile, home
furnishings, and home design industries.
Cash and Cash Equivalents
For purpose of the statements of cash flows, the Company considers all
highly-liquid investments purchased with original maturities of three
months or less to be cash equivalents. As of December 31, 1997, the
cash and cash equivalents included amounts held in a checking and a
money market account of approximately $60,000 and $12,360,000,
respectively.
Software Development Costs
Software development costs are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Cost of Computer Software to Be Sold, Leased, or
Otherwise Marketed." Capitalization of software development costs
begins upon the establishment of technological feasibility and is
discontinued when the product is available for sale. The establishment
of technological feasibility and the ongoing assessment for
recoverability of capitalized software development costs require
considerable judgment by management with respect to certain external
factors, including, but not limited to, technological feasibility,
anticipated future gross revenues, estimated economic life, and
changes in software and hardware technologies. Capitalized software
development costs are comprised primarily of direct overhead, payroll
costs, and consultants' fees of individuals working directly on the
development of specific software products.
Amortization of capitalized software development costs is provided on
a product-by-product basis on the straight-line method over the
estimated economic life of the products (not to exceed three years).
Management periodically compares estimated net realizable value by
product to the amount of software development costs capitalized for
that product to ensure the amount capitalized is not in excess of the
amount to be recovered through revenues. Any such excess of
capitalized software development costs over expected net realizable
value is expensed at that time.
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation and
amortization are provided using the straight-line method over an
estimated useful life of five years. Maintenance and minor
replacements are charged to expenses as incurred. Gains and losses on
disposals of furniture and equipment are included in the results of
operations.
28
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Joint Venture Investment and Advances
The Company has a 40% interest in ModaMAGIC, Inc. ("ModaMAGIC").
ModaMAGIC was formed to produce an interactive, multi-media CD-ROM for
the consumer market. As of December 31, 1997, ModaMAGIC had no
revenues and is actively marketing its product.
The Company reports its share of income and losses of ModaMAGIC under
the equity method of accounting.
Revenue Recognition
The Company recognizes revenues related to software licenses and
software maintenance in compliance with the American Institute of
Certified Public Accountants ("AICPA") Statements of Position No. 97-2,
"Software Revenue Recognition." Product revenue is recorded at the
time of shipment, net of estimated allowances and returns. Any
insignificant post-contract support obligations are accrued for at the
time of the sale. Post contract customer support ("PCS") that is
bundled with an initial licensing fee, and is for one year or less is
recognized at the time of the initial licensing, if collectability of
the resulting receivables is probable. When a PCS is sold under a
separate agreement, the revenue is recognized on a straight-line basis
over the life of the PCS agreement, generally twelve months.
Research and Development Costs
Research and development costs are charged to expense as incurred.
These costs consist primarily of salaries, consulting fees, and direct
overhead.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred taxes are provided on a
liability method whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more
likely than not that some portion of all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date
of enactment.
29
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Income Per Share
For the year ended December 31, 1997, the Company adopted SFAS No.
128, "Earnings per Share." Basic earnings per share is computed by
dividing income available to common stockholders by the weighted
average number of common shares outstanding. Diluted earnings per
share is computed similar to basic earnings per share except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive.
Earnings per share for 1996 has been restated using the methodologies
of SFAS No. 128.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in
accordance with generally accepted accounting principles. For certain
of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, and accounts payable and accrued
expenses, the carrying amounts approximate fair value due to their
short maturities.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and trade receivables.
The Company places its cash with high quality financial institutions
and at times may exceed the FDIC $100,000 insurance limit. The Company
sells products on a worldwide basis and extends credit based on an
evaluation of the customer's financial condition, generally without
requiring collateral. Exposure to losses on receivables is principally
dependent on each customer's financial condition. The Company
monitors its exposure for credit losses and maintains allowances for
anticipated losses.
30
<PAGE>
NOTE 2 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1997 consisted of the
following:
<TABLE>
<S> <C>
Office equipment $ 85,097
Computer equipment and software 1,355,891
Furniture and fixtures 166,753
Leasehold improvements 89,067
------------
1,696,808
Less accumulated depreciation 622,204
------------
Total $ 1,074,604
============
</TABLE>
Depreciation expense for the years ended December 31, 1997 and 1996
was $210,712 and $93,818, respectively, of which $145,047 and $69,959,
respectively, were capitalized as software development costs.
NOTE 3 - COMMITMENTS
Leases
The Company leases certain facilities for its corporate and operations
offices under long-term, non-cancelable operating lease agreements
that expire through November 30, 2000.
Future minimum aggregate lease payments under non-cancelable operating
leases with initial or remaining terms of one year or more at December
31, 1997 were as follows:
<TABLE>
<CAPTION>
Years Ending
December 31,
<S> <C>
1998 $ 531,181
1999 577,631
2000 542,262
2001 480,396
2002 437,898
Thereafter 1,317,997
------------
Total $ 3,887,365
============
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996 was
approximately $192,000 and $81,000, respectively, of which $120,000
and $74,000, respectively, were capitalized as software development
costs.
31
<PAGE>
NOTE 3 - COMMITMENTS (Continued)
Employment Agreements
The Company has entered into employment agreements, expiring through
December 31, 2002, with certain key officers of the Company. These
officers will receive aggregate annual salaries of $300,000. Also, an
aggregate bonus of 10% of net income before taxes is payable, not to
exceed $300,000; as of December 31, 1997, the Company has accrued
approximately $44,000 for these bonuses. In addition, if the market
value of the Company's common stock is greater than $10 per share for
any 20 consecutive trading days during any fiscal year, the Company
will grant options to purchase an aggregate of 100 shares of common
stock for each $1,000 of net income before taxes in that fiscal year
up to a maximum of 120,000 options over the life of the employment
agreements. These options will be exercisable at a price equal to the
market value per share as of the date of the grant. During the years
ended December 31, 1997 and 1996, 74,454 and 0 options, respectively,
were granted related to these agreements.
NOTE 4 - STOCKHOLDERS' EQUITY
Sale of Common Stock
In 1996, the Company completed an initial public offering ("IPO") of
its common stock. The offering consisted of 1,400,000 units at $5.01
per unit, each unit consisting of one share of common stock and one
redeemable common stock purchase warrant. The 1,400,000 warrants have
an exercise price of $6.50 per share and expire in March 2001. Also,
the Company granted the principal underwriters a 45-day option to
purchase up to 210,000 additional units at $5.01 solely for the
purpose of covering over-allotment. The underwriters exercised this
option on April 25, 1996.
In connection with the IPO, the Company issued to the principal
underwriter in the IPO, for $1,400, a warrant to purchase 140,000
units, at a per unit exercise price of $6.00, each unit consisting of
one share of common stock and one redeemable warrant exercisable to
purchase one share of common stock at an exercise price of $9.10 per
share. Such warrants are exercisable for a four-year period which
began March 27, 1997. In 1997, the underwriter (or assignees of the
underwriter) exercised a portion of the warrants to purchase an
aggregate of 88,300 shares of the Company's common stock and 88,300
redeemable common stock purchase warrants for an aggregate exercise
price of $529,800. The underwriter (or its assignees) further
exercised redeemable common stock purchase warrants to purchase 30,800
shares of the Company's common stock for $280,280.
32
<PAGE>
NOTE 4 - STOCKHOLDERS' EQUITY (Continued)
Sale of Common Stock (Continued)
On June 19, 1997, upon meeting the requisite criteria for redemption
of redeemable common stock purchase warrants issued in the Company's
1996 IPO (i.e., the closing bid price for the Company's common stock
averaged in excess of $7.50 for a period of twenty consecutive trading
days ending within fifteen days of the notice of redemption), the
Company notified the holders of the publicly traded warrants that it
intended to redeem any unexercised warrants outstanding on July 29,
1997. As a result of the notification, the warrant holders exercised
warrants to purchase 1,609,084 shares of the Company's common stock
for an aggregate exercise price of $10,459,046, and the Company
redeemed the remaining 916 unexercised warrants for $9.
In connection with loans made to the Company by a third party in
December 1995 and January 1996, the Company granted such third-party
lender warrants to purchase an aggregate of 200,000 units which
warrants had a two-year term, each with an exercise price of $4.00 per
unit. Each warrant provided the holder with the right to purchase one
unit, comprised of one share of the Company's common stock and one
redeemable warrant exercisable to purchase one share of common stock
at a price of $6.50 per share for a period of five years beginning
March 27, 1996. In 1997, the warrant holder exercised warrants to
purchase 200,000 units for an exercise price of $800,000. The warrant
holder further exercised his redeemable common stock purchase warrants
to purchase 200,000 shares of common stock for an exercise price of
$1,300,000.
Repurchase of Shares
In connection with the IPO by the Company, the Company repurchased
from a stockholder 312,168 shares of common stock for $900,000.
Stock Split
In connection with the IPO by the Company, the Board of Directors and
stockholders of the Company approved in December 1995, a .2596772 for
one reverse stock split of its outstanding common stock. In addition,
the number of authorized shares of common stock was increased to
15,000,000 shares. All per share data presented has been
retroactively restated to show the effects of this stock split.
Shares Issued for Services
During 1996, the Company issued 12,549 shares of common stock to
employees of the Company for employee stock awards accrued for in
prior years. The value of the compensation was based on the price of
the Company's stock on the date the stock awards were quoted.
33
<PAGE>
NOTE 4 - STOCKHOLDERS' EQUITY (Continued)
Warrants
In December 1996, the Company issued 250,000 common stock purchase
warrants to an outside consultant that are exercisable at a price of
$5.00 per share, expiring in December 1999. In accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
the Company has valued these warrants at the current market value of
the services to be rendered by the warrant holder. For the years
ended December 31, 1997 and 1996, the Company has recognized $12,000
and $1,000, respectively, of consulting expense related to these
warrants. As of December 31, 1997, these warrants have not been
exercised.
In 1997, the Company entered into a distribution and development
agreement. Under the agreement, the Company has issued 126,316
warrants to purchase its common stock at an exercise price of $19.00
for services to be provided to the Company under this agreement. In
accordance with SFAS No. 123, the Company has valued these warrants at
the current market value of the services to be rendered by the warrant
holder. As of December 31, 1997, the Company has recorded a prepaid
expense of $560,000 for the services to be rendered to the Company in
1998.
Stock Option Plan
In 1995, the Company adopted the 1995 Stock Option Plan (the "Plan")
which expires in 2006. In June 1997, the Plan was amended, upon
receipt of shareholder approval, to increase the number of shares of
common stock authorized for issuance pursuant to the exercise of stock
options under the Plan from 300,000 to 750,000 shares. As of December
31, 1997, the Company had granted options to purchase a total of
487,000 shares of common stock to employees with exercise prices
ranging from $4.6875 to $16.25 per share.
The Company has adopted only the disclosure provisions of SFAS No.
123. It applies Accounting Principles Bulletin ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than
for restricted stock and options/warrants issued to outside third
parties. If the Company had elected to recognize compensation expense
based upon the fair value at the grant date for awards under its plan
consistent with the methodology prescribed by SFAS No. 123, the
Company's net income and earnings per share would be reduced to the
pro forma amounts indicated below:
34
<PAGE>
NOTE 4 - STOCKHOLDERS' EQUITY (Continued)
Stock Option Plan (Continued)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------
1997 1996
-------------- --------------
Net income (loss)
<S> <C> <C>
As reported $ 354,275 $ 645,435
============ ============
Pro form $ (1,365,274) $ 327,435
============ ============
Basic earnings (loss) per common share
As reported $ 0.07 $ 0.20
============ ============
Pro forma $ (0.28) $ 0.10
============ ============
</TABLE>
These pro forma amounts may not be representative of future
disclosures because they do not take into effect pro forma
compensation expense related to grants made before 1995. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the years ended December 31, 1997 and 1996: dividend
yields of 0% and 0%, respectively; expected volatility of 65% and 45%,
respectively; risk-free interest rates of 5.7% and 7%, respectively;
and expected life of 4.1 and 7.2 years, respectively. The weighted
average fair value of options granted during the years ended December
31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Exercise price exceeds grant date market price $ 7.55 $ -
Exercise price equal to grant date market price $ 4.23 $ 2.88
Exercise price less than grant date market price $ 9.76 $ -
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
The following summarizes the stock options transactions under the
stock option plan:
35
<PAGE>
NOTE 4 - STOCKHOLDERS' EQUITY (Continued)
Stock Option Plan (Continued)
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average
Stock Options Exercise Other Exercise
Outstanding Price Warrants Price
------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, December 31,
1995 - $ - - $ -
Granted 204,000 $ 4.96 2,202,000 $ 6.07
------------- ----------
Balance, December 31,
1996 204,000 $ 4.96 2,202,000 $ 6.07
Granted 733,454 $ 16.29 420,616 $ 10.95
Exercised (29,000) $ 5.15 (2,128,184) $ 6.28
Canceled - $ - (916) $ 6.50
------------- ----------
Outstanding, December
31, 1997 908,454 $ 14.10 493,516 $ 9.31
============= ==========
Exercisable, December
31, 1996 84,000 $ 4.91
=============
Exercisable, December
31, 1997 371,854 $ 11.74 493,516
============= ==========
The weighted average remaining contractual lives of the options and
warrants are 7.52 and 2.84, respectively, at December 31, 1997.
</TABLE>
NOTE 5 - SALES
Major Customers
During the year ended December 31, 1997, the Company did business with
one customer whose sales comprised approximately 34% of net sales.
During the year ended December 31, 1996, the Company did business with
two customers whose sales comprised approximately 45% and 12%,
respectively, of net sales.
Export Sales
For the year ended December 31, 1997, the Company had export sales of
approximately $957,000 principally comprised of $761,000 in Europe,
$91,000 in Asia, and $105,000 in other geographic regions.
36
<PAGE>
NOTE 5 - SALES (Continued)
Export Sales (Continued)
For the year ended December 31, 1996, the Company had export sales of
approximately $510,000 principally comprised of $398,000 in Europe,
$54,000 in Asia, and $58,000 in other geographic regions.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company has an agreement to provide computer programming services
to ModaMAGIC which is billed at cost. For both of the years ended
December 31, 1997 and 1996, the Company billed $0 in services.
In 1996, the Company converted the note payable - related party
principal amount of $3,073,713 and accrued interest of $1,471,462 into
900,000 shares of common stock of the Company, concurrently with the
closing of the IPO.
NOTE 7 - PROFIT SHARING
In 1996, the Company adopted the ModaCAD 401(k) Plan (the "Plan").
The Plan is available to substantially all employees who meet length
and service requirements. On September 1, 1996, all permanent and
full-time employees of the Company became participants. Participants
may elect to contribute not less than 3% and no more than 15% of their
annual compensation. The Plan has a Company discretionary profit
sharing provision which the Company, for years with income before
taxes, will contribute from 0% to 5% of income before taxes. The
amount of the profit sharing contribution will be determined each year
by the Company. For the years ended December 31, 1997 and 1996,
employer contributions under the Plan were approximately $22,000 and
$34,000, respectively.
37
<PAGE>
NOTE 8 - INCOME TAXES
A reconciliation of the provision for income tax expense with the
expected income tax computed by applying the federal statutory income
tax rate to income before provision for income taxes is as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1996
----- -----
<S> <C> <C>
Income tax computed at federal statutory tax rate 34.0% 34.0%
State taxes (net of federal benefit) 6.3 6.3
Utilization of net operating loss carryforwards (40.3) (40.3)
----- -----
Total -% -%
===== =====
</TABLE>
As of December 31, 1997, the Company has federal net operating loss
carryforwards of approximately $3,497,000 which expire through 2012.
Significant components of the Company's deferred tax liabilities and
assets for federal income taxes consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets
Net operating loss carryforwards $ 1,290,686
Capitalized research and development cost for tax 111,992
Research credits 565,820
Other 81,456
-----------
2,049,954
Valuation allowance for deferred tax assets (1,828,335)
-----------
221,619
Deferred tax liabilities
Furniture and equip (85,712)
Deferred state taxe (135,907)
-----------
Net deferred tax asset $ -
===========
</TABLE>
At December 31, 1997, the Company has provided a valuation allowance
for the deferred tax asset since management has not been able to
determine that the realization of that asset is more likely than not.
The net change in the valuation allowance for the year ended December
31, 1997 was a decrease of $96,665.
38
<PAGE>
NOTE 9 - EARNINGS PER SHARE
Earnings per share for the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
Income available to common
stockholders $ 354,275 4,800,918 $ 0.07
Effect of dilutive securities
Options and warrants - 706,664
---------- ---------
Diluted EPS
Income available to common
stockholders plus
assumed conversions $ 354,275 5,507,582 $ 0.06
========== ==========
</TABLE>
39
<PAGE>
Item 8. Changes in and Disagreements with Accounts on Accounting and
Financial Disclosure
None
40
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with section 16(a) of the Exchange Act
Incorporated by reference to the sections of the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held in June 1998 (the
"Proxy Statement"), entitled "Election of Directors," "Executive Officers" and
"Common Stock Ownership of Principal Shareholders and Management-Section 16(a)
Beneficial Ownership Reporting Compliance" to be filed with the Commission.
Item 10. Executive Compensation
Incorporated by reference to the section of the Company's Proxy Statement
entitled "Executive Compensation" to be filed with the Commission.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the section of the Company's Proxy Statement
entitled "Security Ownership of Certain Beneficial Owners and Management" to be
filed with the Commission.
Item 12. Certain Relationships and Related Transactions
Incorporated by reference to the section of the Company's Proxy Statement
entitled "Certain Relationships and Related Transactions" to be filed with the
Commission.
41
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Amended and Restated Articles of Incorporation(1)
3.2 Bylaws of Registrant, as amended(1)
*4.1 Warrant dated as of November 13, 1997 issued to Intel
Corporation(2)
10.1 Facilities lease dated November 6, 1997 between
Sepulveda Group, LLC, as lessor, and Registrant, as
lessee(2)
*10.2 Development Agreement between the Registrant and Intel
Corporation dated November 12, 1997(2)
23.1 Consent of Singer, Lewak, Greenbaum & Goldstein,
L.L.P.(2)
27.1 Financial Data Schedule (2)
(b) Reports on Form 8-K
None
* Confidential treatment is being requested with respect to portions of this
exhibit, and such confidential portions have been deleted and separately filed
with the Securities Exchange Commission pursuant to Rule 24b-2 promulgated
under the Exchange Act of 1934.
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (Commission File No. 333-1166-LA) filed with the Commission on
February 7, 1996.
(2) This exhibit is being filed electronically in the electronic format
specified by EDGAR.
42
<PAGE>
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ModaCAD, INC.
Date: March 18, 1998 By: /s/ JOYCE FREEDMAN
-------------------------
Joyce Freedman
Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<S> <C> <C>
/s/ JOYCE FREEDMAN Chairman of the Board and March 18, 1998
- ------------------------ Chief Executive Officer -----------------
Joyce Freedman Date
/s/ MAURIZIO VECCHIONE President, March 18, 1998
- ------------------------ Chief Operating Officer and -----------------
Maurizio Vecchione Director Date
/s/ LEE FREEDMAN Vice President, Finance, March 18, 1998
- ------------------------ Chief Financial Officer and -----------------
Lee Freedman Director Date
/s/ ANDREA VECCHIONE Secretary and Director March 18, 1998
- ------------------------ -----------------
Andrea Vecchione Date
/s/ STEPHEN WYLE Director March 18, 1998
- ------------------------ -----------------
Stephen Wyle Date
/s/ PETER FRANK Director March 18, 1998
- ------------------------ -----------------
Peter Frank Date
/s/ LESLIE SALESON Director March 18, 1998
- ------------------------ -----------------
Leslie Saleson Date
</TABLE>
43
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Number Description Numbered Page
- --------------- ---------------------------------------------- -------------
<S> <C> <C>
3.1 Amended and Restated Articles of
Incorporation(1)
3.2 Bylaws of Registrant, as amended(1)
*4.1 Warrant dated as of November 13, 1997 issued
to Intel Corporation(2)
10.1 Facilities lease dated November 6, 1997 between
Sepulveda Group, LLC, as lessor, and Registrant,
as lessee(2)
*10.2 Development Agreement between the Registrant and
Intel Corporation dated November 12, 1997(2)
23.1 Consent of Singer, Lewak, Greenbaum & Goldstein,
L.L.P.(2)
27.1 Financial Data Schedule(2)
</TABLE>
* Confidential treatment is being requested with respect to portions of this
exhibit, and such confidential portions have been deleted and separately filed
with the Securities Exchange Commission pursuant to Rule 24b-2 promulgated
under the Exchange Act of 1934.
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (Commission File No. 333-1166-LA) filed with the Commission on
February 7, 1996.
(2) This exhibit is being filed electronically in the electronic format
specified by EDGAR.
44
<PAGE>
Warrant Agreement
WARRANT
THE WARRANT EVIDENCED OR CONSTITUTED HEREBY, AND ALL SHARES OF COMMON STOCK
ISSUABLE HEREUNDER HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("THE ACT") AND MAY NOT BE SOLD, OFFERED FOR
SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT REGISTRATION UNDER THE ACT
UNLESS EITHER (i) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, IN FORM AND
SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT
REGISTRATION IS NOT REQUIRED IN CONNECTION WITH SUCH DISPOSITION OR (ii) THE
SALE OF SUCH SECURITIES IS MADE PURSUANT TO SECURITIES AND EXCHANGE COMMISSION
RULE 144.
WARRANT TO PURCHASE COMMON STOCK OF ModaCAD, Inc.
(Subject to Adjustment)
NO. __ November 13, 1997
THIS CERTIFIES THAT, for the consideration received pursuant to Sections 4.2 and
4.3 of that certain Development Agreement as such term is defined below, Intel
Corporation, or its permitted registered assigns ("Holder"), is entitled,
subject to the terms and conditions of this Warrant, at any time or from time to
time after the issuance date of this Warrant (the "Effective Date"), and before
5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date (the
"Expiration Date"), to: (1) purchase from ModaCAD, Inc., a California
corporation (the "Company"), One Hundred Twenty-Six Thousand, Three-Hundred
Sixteen (126,316) shares of Common Stock of the Company at a price per share of
** (the "Purchase Price"); and (2), on the first business day which is one
year after the first customer shipment of the Company's product code named "New
York" (the "Purchase Date"), purchase from the Company a number of shares, X,
computed using the following formula:
X = ((2.75 multiplied by A) - B)) / C
Where A = **, the sum of the value of the services as stated in Sections
4.2 and 4.3 of that certain Development Agreement between Company and Holder
effective November 13, 1997 (the "Development Agreement").
B = the total amount of royalties the Company has paid to Holder, pursuant to
the terms of the Development Agreement, as of 10 days prior to the Purchase
Date, and
C = the lower of the Purchase Price or the Fair Market Value (as defined in
Section 2 below) of the Company's Common Stock 10 days prior to the Purchase
Date.
(a) Both the number of shares of Common Stock purchasable upon exercise of
this Warrant and the Purchase Price are subject to adjustment and change as
provided herein.
2. CERTAIN DEFINITIONS. As used in this Warrant the following
terms shall have the following respective meanings:
2.1. "Fair Market Value" of a share of Common Stock as of a particular date
shall mean:
(a) If traded on a securities exchange or the Nasdaq National Market, the
Fair Market Value shall be deemed to be the average of the closing prices of
the Common Stock of the Company on such exchange or market over the five (5)
trading days ending immediately prior to the applicable date of valuation;
(b) If actively traded over-the-counter, the Fair Market Value shall be
deemed to be the average of the closing bid prices over the thirty (30)-day
period ending immediately prior to the applicable date of valuation; and
(c) If there is no active public market, the Fair Market Value shall be
the value thereof, as agreed upon by the Company and the Holder; provided,
however, that if the Company and the Holder cannot agree on such value, such
value shall be determined by an independent valuation firm experienced in
valuing businesses such as the Company and jointly selected in good faith by
the Company and the Holder. Fees and expenses of the valuation firm shall
be paid for by the Company.
2.2. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
2.3. "Warrant" as used herein, shall include this Warrant and any warrant
delivered in substitution or exchange therefor as provided herein.
2.4. "Common Stock" shall mean the Common Stock of the Company and any other
securities at any time receivable or issuable upon exercise of this Warrant.
3. EXERCISE OF WARRANT
3.1. Payment. Subject to compliance with the terms and conditions of this
Warrant and applicable securities laws, this Warrant may be exercised, in
whole or in part at any time or from time to time, from and after the Effective
Date and on or before the Expiration Date, by surrendering this Warrant at the
principal office of the Company together with:
(a) the form of Notice of Exercise attached hereto as Exhibit 1 (the "Notice
of Exercise") duly executed by the Holder, and
(b) payment, (i) in cash (by check) or by wire transfer, (ii) by
cancellation by the Holder of indebtedness of the Company to the Holder; or
(iii) by a combination of (i) and (ii), of an amount equal to the product
obtained by multiplying the number of shares of Common Stock being purchased
upon such exercise by the then effective Purchase Price (the "Exercise
Amount"), except that if Holder is subject to HSR Act Restrictions (as
defined in Section 3.4 below), the Exercise Amount shall be paid to the Company
within five (5) business days following the termination of all HSR Act
Restrictions.
3.2. Net Issue Exercise. In lieu of the payment methods set forth in Section
3.1((b)) above, the Holder may elect to exchange all or some of this Warrant for
shares of Common Stock equal to the value of the amount of the Warrant being
exchanged on the date of exchange. If Holder elects to exchange this Warrant
as provided in this Section 3.2, Holder shall tender to the Company the
Warrant for the amount being exchanged, along with written notice of Holder's
election to exchange some or all of the Warrant, and the Company shall issue to
Holder the number of shares of the Common Stock computed using the following
formula1:
X = Y (A-B)
-------------
A
Where X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock purchasable under
the amount of the Warrant being exchanged (as adjusted to
the date of such calculation).
A = the Fair Market Value of one share of the Common Stock.
B = Purchase Price (as adjusted to the date of such calculation).
.
3.3. "Easy Sale" Exercise. In lieu of the payment methods set forth in Section
3.1((b)) above, when permitted by law and applicable regulations (including
Nasdaq and NASD rules), the Holder may pay the Purchase Price through a
"same day sale" commitment from the Holder (and if applicable a broker-dealer
that is a member of the National Association of Securities Dealers (an "NASD
Dealer")), whereby the Holder irrevocably elects to exercise this Warrant and
to sell a portion of the shares so purchased to pay the Purchase Price and the
Holder (or, if applicable, the NASD Dealer) commits upon sale (or, in the case
of the NASD Dealer, upon receipt) of such shares to forward the Purchase Price
directly to the Company.
3.4. Stock Certificates; Fractional Shares. As soon as practicable on or after
the date of any exercise of this Warrant, the Company shall issue and deliver
to the person or persons entitled to receive the same a certificate or
certificates for the number of whole shares of Common Stock issuable upon
such exercise, together with cash in lieu of any fraction of a share equal to
such fraction of the current Fair Market Value of one whole share of Common
Stock as of such date of exercise. No fractional shares or scrip representing
fractional shares shall be issued upon an exercise of this Warrant.
3.5. HSR Act. The Company hereby acknowledges that exercise of this Warrant by
Holder may subject the Company and/or the Holder to the filing requirements of
the HSR Act and that Holder may be prevented from exercising this Warrant
until the expiration or early termination of all waiting periods imposed by
the HSR Act ("HSR Act Restrictions"). If on or before the Expiration Date
Holder has sent the Notice of Exercise to Company and Holder has not been able
to complete the exercise of this Warrant prior to the Expiration Date
because of HSR Act Restrictions, the Holder shall be entitled to complete the
process of exercising this Warrant in accordance with the procedures contained
herein notwithstanding the fact that completion of the exercise of this
Warrant would take place after the Expiration Date.
3.6. Partial Exercise; Effective Date of Exercise. In case of any partial
exercise of this Warrant, the Company shall cancel this Warrant upon surrender
hereof and shall execute and deliver a new Warrant of like tenor and date for
the balance of the shares of Common Stock purchasable hereunder. This Warrant
shall be deemed to have been exercised immediately prior to the close of
business on the date of its surrender for exercise as provided above. However,
if Holder is subject to HSR Act filing requirements this Warrant shall be
deemed to have been exercised on the date immediately following the date of the
expiration of all HSR Act Restrictions. The person entitled to receive the
shares of Common Stock issuable upon exercise of this Warrant shall be treated
for all purposes as the holder of record of such shares as of the close of
business on the date the Holder is deemed to have exercised this Warrant.
3.7. Investment Representations. On the written request of the Company, Holder
shall renew the investment representations set forth in Section 11 in writing
prior to exercising the Warrant.
4. VALID ISSUANCE: TAXES. All shares of Common Stock issued upon the exercise
of this Warrant shall be validly issued, fully paid and non-assessable, and the
Company shall pay all taxes and other governmental charges that may be
imposed in respect of the issue or delivery thereof. The Company shall not be
required to pay any tax or other charge imposed in connection with any
transfer involved in the issuance of any certificate for shares of Common
Stock in any name other than that of the Holder of this Warrant, and in such
case the Company shall not be required to issue or deliver any stock certificate
or security until such tax or other charge has been paid, or it has been
established to the Company's reasonable satisfaction that no tax or other
charge is due.
5. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The number of shares of
Common Stock issuable upon exercise of this Warrant (or any shares of stock or
other securities or property receivable or issuable upon exercise of this
Warrant) and the Purchase Price are subject to adjustment upon occurrence of the
following events:
5.1. Adjustment for Stock Splits, Stock Subdivisions or Combinations of
Shares.The Purchase Price of this Warrant shall be proportionally decreased and
the number of shares of Common Stock issuable upon exercise of this Warrant (or
any shares of stock or other securities at the time issuable upon exercise of
this Warrant) shall be proportionally increased to reflect any stock split or
subdivision of the Company's Common Stock. The Purchase Price of this Warrant
shall be proportionally increased and the number of shares of Common Stock
issuable upon exercise of this Warrant (or any shares of stock or other
securities at the time issuable upon exercise of this Warrant) shall be
proportionally decreased to reflect any combination of the Company's Common
Stock.
5.2. Adjustment for Dividends or Distributions of Stock or Other Securities or
Property. In case the Company shall make or issue, or shall fix a record date
for the determination of eligible holders entitled to receive, a dividend or
other distribution with respect to the Common Stock (or any shares of stock or
other securities at the time issuable upon exercise of the Warrant) payable in
(a) securities of the Company or (b) assets (excluding cash dividends paid or
payable solely out of retained earnings), then, in each such case, the Holder of
this Warrant on exercise hereof at any time after the consummation, effective
date or record date of such dividend or other distribution, shall receive, in
addition to the shares of Common Stock (or such other stock or securities)
issuable on such exercise prior to such date, and without the payment of
additional consideration therefor, the securities or such other assets of the
Company to which such Holder would have been entitled upon such date if such
Holder had exercised this Warrant on the date hereof and had thereafter, during
the period from the date hereof to and including the date of such exercise,
retained such shares and all such additional securities or other assets
distributed with respect to such shares as aforesaid during such period giving
effect to all adjustments called for by this Section 5.
5.3. Reclassification.
If the Company, by reclassification of securities or otherwise, shall change any
of the securities as to which purchase rights under this Warrant exist into the
same or a different number of securities of any other class or classes, this
Warrant shall thereafter represent the right to acquire such number and kind of
securities as would have been issuable as the result of such change with respect
to the securities that were subject to the purchase rights under this Warrant
immediately prior to such reclassification or other change, and the Purchase
Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 5. No adjustment shall be made pursuant
to this Section 5.3 upon any conversion or redemption of the Common Stock which
is the subject of Section 5.5.
5.4. Adjustment for Capital Reorganization, Merger or Consolidation.
In case of any capital reorganization of the capital stock of the Company (other
than a combination, reclassification, exchange or subdivision of shares
otherwise provided for herein), or any merger or consolidation of the Company
with or into another corporation, or the sale of all or substantially all the
assets of the Company then, and in each such case, as a part of such
reorganization, merger, consolidation, sale or transfer, lawful provision shall
be made so that the Holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, during the period specified herein and
upon payment of the Purchase Price then in effect, the number of shares of stock
or other securities or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer that a holder of the
shares deliverable upon exercise of this Warrant would have been entitled to
receive in such reorganization, consolidation, merger, sale or transfer if
this Warrant had been exercised immediately before such reorganization,
merger, consolidation, sale or transfer, all subject to further adjustment
as provided in this Section 5. The foregoing provisions of this Section 5.4
shall similarly apply to successive reorganizations, consolidations,
mergers, sales and transfers and to the stock or securities of any other
corporation that are at the time receivable upon the exercise of this Warrant.
If the per-share consideration payable to the Holder hereof for shares in
connection with any such transaction is in a form other than cash or
marketable securities, then the value of such consideration shall be determined
in good faith by the Company's Board of Directors. In all events, appropriate
adjustment (as determined in good faith by the Company's Board of Directors)
shall be made in the application of the provisions of this Warrant with respect
to the rights and interests of the Holder after the transaction, to the end that
the provisions of this Warrant shall be applicable after that event, as near as
reasonably may be, in relation to any shares or other property deliverable after
that event upon exercise of this Warrant.
5.5. Conversion of Common Stock. In case all or any portion of the authorized
and outstanding shares of Common Stock of the Company are redeemed or converted
or reclassified into other securities or property pursuant to the Company's
Certificate of Incorporation or otherwise, or the Common Stock otherwise ceases
to exist, then, in such case, the Holder of this Warrant, upon exercise hereof
at any time after the date on which the Common Stock is so redeemed or
converted, reclassified or ceases to exist (the "Termination Date"), shall
receive, in lieu of the number of shares of Common Stock that would have been
issuable upon such exercise immediately prior to the Termination Date, the
securities or property that would have been received if this Warrant had been
exercised in full and the Common Stock received thereupon had been
simultaneously converted immediately prior to the Termination Date, all subject
to further adjustment as provided in this Warrant. Additionally, the Purchase
Price shall be immediately adjusted to equal the quotient obtained by dividing
(x) the aggregate Purchase Price of the maximum number of shares of Common Stock
for which this Warrant was exercisable immediately prior to the Termination Date
by (y) the number of shares of Common Stock of the Company for which this
Warrant is exercisable immediately after the Termination Date, all subject to
further adjustment as provided herein.
6. CERTIFICATE AS TO ADJUSTMENTS.
In each case of any adjustment in the Purchase Price, or number or type of
shares issuable upon exercise of this Warrant, the Chief Financial Officer or
Controller of the Company shall compute such adjustment in accordance with the
terms of this Warrant and prepare a certificate setting forth such adjustment
and showing in detail the facts upon which such adjustment is based, including a
statement of the adjusted Purchase Price. The Company shall promptly send (by
facsimile and by either first class mail, postage prepaid or overnight delivery)
a copy of each such certificate to the Holder.
7. LOSS OR MUTILATION. Upon receipt of evidence reasonably satisfactory to the
Company of the ownership of and the loss, theft, destruction or mutilation of
this Warrant, and of indemnity reasonably satisfactory to it, and (in the case
of mutilation) upon surrender and cancellation of this Warrant, the Company will
execute and deliver in lieu thereof a new Warrant of like tenor as the lost,
stolen, destroyed or mutilated Warrant.
8. RESERVATION OF COMMON STOCK. The Company hereby covenants that at all times
there shall be reserved for issuance and delivery upon exercise of this Warrant
such number of shares of Common Stock or other shares of capital stock of the
Company as are from time to time issuable upon exercise of this Warrant and,
from time to time, will take all steps necessary to amend its Certificate of
Incorporation to provide sufficient reserves of shares of Common Stock issuable
upon exercise of this Warrant. All such shares shall be duly authorized, and
when issued upon such exercise, shall be validly issued, fully paid and
non-assessable, free and clear of all liens, security interests, charges and
other encumbrances or restrictions on sale and free and clear of all preemptive
rights, except encumbrances or restrictions arising under federal or state
securities laws. Issuance of this Warrant shall constitute full authority to the
Company's Officers who are charged with the duty of executing stock certificates
to execute and issue the necessary certificates for shares of Common Stock upon
the exercise of this Warrant.
9. TRANSFER AND EXCHANGE. Subject to the terms and conditions of this Warrant
and compliance with all applicable securities laws, this Warrant and all rights
hereunder may be transferred to any Holder's parent, subsidiary or affiliate, in
whole or in part, on the books of the Company maintained for such purpose at the
principal office of the Company referred to above, by the Holder hereof in
person, or by duly authorized attorney, upon surrender of this Warrant properly
endorsed and upon payment of any necessary transfer tax or other governmental
charge imposed upon such transfer. Upon any permitted partial transfer, the
Company will issue and deliver to the Holder a new Warrant or Warrants with
respect to the shares of Common Stock not so transferred. Each taker and holder
of this Warrant, by taking or holding the same, consents and agrees that when
this Warrant shall have been so endorsed, the person in possession of this
Warrant may be treated by the Company, and all other persons dealing with this
Warrant, as the absolute owner hereof for any purpose and as the person entitled
to exercise the rights represented hereby, any notice to the contrary
notwithstanding; provided, however that until a transfer of this Warrant is duly
registered on the books of the Company, the Company may treat the Holder hereof
as the owner for all purposes.
10. RESTRICTIONS ON TRANSFER. The Holder, by acceptance hereof, agrees that,
absent an effective registration statement filed with the Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 Act"), covering the disposition or sale of this Warrant or the
Common Stock issued or issuable upon exercise hereof, as the case may be, and
registration or qualification under applicable state securities laws, such
Holder will not sell, transfer, pledge, or hypothecate any or all of this
Warrant or such Common Stock, as the case may be, unless either (i) the
Company has received an opinion of counsel, in form and substance reasonably
satisfactory to the Company, to the effect that such registration is not
required in connection with such disposition or (ii) the sale of such securities
is made pursuant to SEC Rule 144.
11. COMPLIANCE WITH SECURITIES LAWS. By acceptance of this Warrant, the Holder
hereby represents, warrants and covenants that any shares of stock purchased
upon exercise of this Warrant shall be acquired for investment only and not with
a view to, or for sale in connection with, any distribution thereof; that the
Holder has had such opportunity as such Holder has deemed adequate to obtain
from representatives of the Company such information as is necessary to permit
the Holder to evaluate the merits and risks of its investment in the Company;
that the Holder is able to bear the economic risk of holding such shares as may
be acquired pursuant to the exercise of this Warrant for an indefinite period;
that the Holder understands that the shares of stock acquired pursuant to the
exercise of this Warrant will not be registered under the 1933 Act (unless
otherwise required pursuant to exercise by the Holder of the registration
rights, if any, granted to the Holder) and will be "restricted securities"
within the meaning of Rule 144 under the 1933 Act and that the exemption from
registration under Rule 144 will not be available for at least one (1) year from
the date of exercise of this Warrant, subject to any special treatment by the
SEC for exercise of this Warrant pursuant to Section 3.2, and even then will not
be available unless a public market then exists for the stock, adequate
information concerning the Company is then available to the public, and other
terms and conditions of Rule 144 are complied with; and that all stock
certificates representing shares of stock issued to the Holder upon exercise of
this Warrant or upon conversion of such shares may have affixed thereto a legend
substantially in the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER
OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS
IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
12. NO RIGHTS OR LIABILITIES AS STOCKHOLDERS. This Warrant shall not entitle the
Holder to any voting rights or other rights as a stockholder of the Company. In
the absence of affirmative action by such Holder to purchase Common Stock by
exercise of this Warrant or Common Stock upon conversion thereof, no provisions
of this Warrant, and no enumeration herein of the rights or privileges of the
Holder hereof shall cause such Holder hereof to be a stockholder of the Company
for any purpose.
13. REGISTRATION RIGHTS. All shares of Common Stock issuable upon exercise of
this Warrant shall be "Registrable Securities" within the meaning given to such
term in Exhibit 3 to this Warrant.
14. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to Holder that:
14.1. Due Authorization; Consents. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for (a) the
authorization, execution and delivery of, and the performance of all obligations
of the Company under, this Warrant, and (b) the authorization, issuance,
reservation for issuance and delivery of all of the Common Stock issuable upon
exercise of this Warrant, has been duly taken. This Warrant constitutes a valid
and binding obligation of the Company enforceable in accordance with its terms,
subject, as to enforcement of remedies, to applicable bankruptcy, insolvency,
moratorium, reorganization and similar laws affecting creditors' rights
generally and to general equitable principles. All consents, approvals and
authorizations of, and registrations, qualifications and filings with, any
federal or state governmental agency, authority or body, or any third party,
required in connection with the execution, delivery and performance of this
Warrant and the consummation of the transactions contemplated hereby and thereby
have been obtained.
14.2. Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of California and has
all requisite corporate power to own, lease and operate its property and to
carry on its business as now being conducted and as currently proposed to be
conducted.
14.3. SEC Reports; Financial Statements.
(a) The Company has duly filed with the SEC the Company's annual report on
Form 10-K for the year ended December 31, 1996 and its quarterly reports on
Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997 (collectively,
the "ModaCAD, Inc. SEC Reports"). As of their respective filing dates,
the ModaCAD, Inc. SEC Reports complied in all material respects with the
requirements of the Securities Exchange Act of 1934, as amended, and none of
the SEC Documents contains any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances in which they were
made, not misleading, except to the extent corrected by a subsequently filed
document with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the ModaCAD, Inc. SEC Reports complied as to
form in all material respects with the applicable published rules and
regulations of the SEC with respect thereto, was prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes to such
financial statements or, in the case of unaudited statements, as permitted for
by Form 10-Q) and presented fairly, in all material respects, the consolidated
financial position of the Company and its subsidiaries as at the respective
dates and the consolidated results of its operations and cash flows for the
periods indicated, except that the unaudited interim financial statements are
subject to normal and recurring year-end adjustments which are not expected to
be material in amount.
14.4. Capitalization. The authorized capital stock of the Company consists of
15,000,000 shares of Common Stock. As of July 31, 1997: (1) 5,617,304 shares of
common stock of the Company were issued and outstanding, all of which are
validly issue, fully paid and nonassessable; (ii) 750,000 share of Common Stock
of the Company were reserved for issuance under the Company's 1995 Stock Option
Plan, 223,000 shares of which were subject to options outstanding on such date;
(iii) 504,7000 shares of the Common Stock of the Company were reserved for
issuance upon exercise of outstanding warrants. No material change in such
capitalization has occurred between July 31, 1997 and the issuance date of this
Warrant, except that on September 30, 1997, 5,815,574 shares of Common Stock of
the Company were issued and outstanding.
15. INFORMATION RIGHTS. The Company shall deliver to each holder of this Warrant
or any securities issued (directly or indirectly) upon exercise hereof, upon
request, copies of the Company's reports on Forms 10-K, 10-Q, and 8-K and Annual
Reports to Shareholders promptly after such documents are filed with the SEC.
16. NOTICES. Except as may be otherwise provided herein, all notices and other
communications permitted under this Warrant shall be in writing and shall be
conclusively deemed to have been duly given (a) when hand delivered to the other
party; (b) when received when sent by facsimile to the address and number set
forth below (provided, however, that notices given by facsimile shall not be
effective unless either (i) a duplicate copy of such facsimile notice is
promptly given by one of the other methods described in this Section 16, or (ii)
the receiving party delivers a written confirmation of receipt for such notice
either by facsimile or any other method described in this Section 16); (c) three
business days after deposit in the U.S. mail with first class or certified mail
receipt requested postage prepaid and addressed to the other party as set forth
below; or (d) the next business day after deposit with a national overnight
delivery service, postage prepaid, addressed to the parties as set forth below
with next-business-day delivery guaranteed, provided that the sending party
receives a confirmation of delivery from the delivery service provider.
To Holder: To the Company:
Intel Corporation ModaCAD, Inc.
2200 Mission College Blvd. 1954 Cotner Avenue
Santa Clara, CA 95052 Los Angeles, CA 90025
Attn: Treasurer
Fax Number: (408) 765-6038
With copies to: With copies to:
Intel Corporation Coudert Brothers
2200 Mission College Blvd. 1055 West 7th Street
Santa Clara, CA 95052 20th Floor
Attn: General Counsel Los Angeles, CA 90017
Fax Number: (408) 765-1859 Attn:John A. St.Clair,Esq.
A party may change or supplement the addresses given above, or designate
additional addresses, for purposes of this Section 16 by giving the other party
written notice of the new address in the manner set forth above.
17. HEADINGS. The headings in this Warrant are for purposes of
convenience in reference only, and shall not be deemed to constitute a
part hereof.
18. LAW GOVERNING. This Warrant shall be construed and enforced in accordance
with, and governed by, the laws of the State of California.
19. NO IMPAIRMENT.The Company will not, by amendment of its Certificate of
Incorporation or bylaws, or through reorganization, consolidation, merger,
dissolution, issue or sale of securities, sale of assets or any other voluntary
action,avoid or seek to avoid the observance or performance of any of the terms
of this Warrant, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder of this Warrant against
impairment. Without limiting the generality of the foregoing, the Company (a)
will not increase the par value of any shares of stock issuable upon the
exercise of this Warrant above the amount payable therefor upon such exercise,
and (b) will take all such action as may be necessary or appropriate in order
that the Company may validly and legally issue fully paid and non-assessable
shares of Common Stock upon exercise of this Warrant.
20. NOTICES OF RECORD DATE. In case:
20.1. the Company shall take a record of the holders of its Common Stock
(or other stock or securities at the time receivable upon the exercise of this
Warrant), for the purpose of entitling them to receive any dividend or other
distribution, or any right to subscribe for or purchase any shares of stock of
any class or any other securities or to receive any other right; or
20.2. of any consolidation or merger of the Company with or into another
corporation, any capital reorganization of the Company, any reclassification of
the Capital Stock of the Company, or any conveyance of all or substantially all
of the assets of the Company to another corporation in which holders of the
Company's stock are to receive stock, securities or property of another
corporation; or
20.3.of any voluntary dissolution, liquidation or winding-up of the Company; or
20.4. of any redemption or conversion of all outstanding Common Stock; then, and
in each such case, the Company will mail or cause to be mailed to the Holder of
this Warrant a notice specifying, as the case may be, (i) the date on which a
record is to be taken for the purpose of such dividend, distribution or right,
or (ii) the date on which such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation, winding-up, redemption or
conversion is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock or (such stock or securities as at the
time are receivable upon the exercise of this Warrant), shall be entitled to
exchange their shares of Common Stock (or such other stock or securities), for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation or
winding-up. Such notice shall be delivered at least thirty (30) days prior to
the date therein specified.
21. SEVERABILITY. If any term, provision, covenant or restriction of this
Warrant is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Warrant shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
22. COUNTERPARTS. For the convenience of the parties, any number of counterparts
of this Warrant may be executed by the parties hereto and each such executed
counterpart shall be, and shall be deemed to be, an original instrument.
23. NO INCONSISTENT AGREEMENTS. The Company will not on or after the date of
this Warrant enter into any agreement with respect to its securities which is
inconsistent with the rights granted to the Holders of this Warrant or otherwise
conflicts with the provisions hereof. The rights granted to the Holders
hereunder do not in any way conflict with and are not inconsistent with the
rights granted to holders of the Company's securities under any other
agreements, except rights that have been waived.
24. SATURDAYS, SUNDAYS AND HOLIDAYS. If the Expiration Date falls on a Saturday,
Sunday or legal holiday, the Expiration Date shall automatically be extended
until 5:00 p.m. the next business day.
25. CONFIDENTIALITY. The Company agrees that, except with the prior written
permission of Holder or as required by law, it shall at all times keep
confidential and not divulge, furnish or make accessible to anyone any
confidential information, knowledge or data concerning or relating to the
business or financial affairs of the other parties to which such party has been
or shall become privy by reason of this Warrant, discussions or negotiations
relating to this Warrant, the performance of its obligations hereunder or the
ownership of Warrant Stock purchased hereunder. The provisions of this Section
25 shall be in addition to, and not in substitution for, the provisions of any
separate nondisclosure agreement executed by the parties hereto with respect to
the transactions contemplated hereby. Notwithstanding the foregoing, Holder may
disclose the terms of and ownership of the Warrant to third parties or to the
public at its discretion, and the Company shall have the right to disclose to
third parties any such information disclosed by Holder in a press release or
public announcement.
26. PUBLIC ANNOUNCEMENTS. The Company shall not use Holder's name or refer
to Holder directly or indirectly in connection with this Warrant in any
advertisement, news release or professional or trade publication, or in any
other manner, unless otherwise required by law or with Holder's prior written
consent, which consent will generally not be granted. The parties agree that
there will be no press release or other public statement issued by either
party relating to this Warrant or the transactions contemplated hereby unless
required by law or mutually agreed to, and further agree to keep the terms and
conditions of this Warrant in strictest confidence, it being understood that
this restriction shall not prohibit disclosure to the parties counsel,
accountants and professional advisors. If the Company determines that it is
required by law to disclose the terms and conditions of this Warrant, or to file
this Warrant with the SEC, it shall, a reasonable time before making any such
disclosure or filing, consult with Holder regarding such filing and seek
confidential treatment for such portions of those agreements as may be requested
by Holder. Notwithstanding the above, the Company may disclose the existence of
this Warrant to bonafide potential investors who are under obligations of
nondisclosure, similar to those contained herein and which the Company believes
in good faith are seriously considering investing in the Company.
27. DISPUTE RESOLUTION. The parties agree to negotiate in good faith to resolve
any dispute between them regarding this Warrant. If the negotiations do not
resolve the dispute to the reasonable satisfaction of both parties, then each
party shall nominate one senior officer of the rank of Vice President or higher
as its representative. These representatives shall, within thirty(30) days of a
written request by either party to call such a meeting,meet in person and alone
(exceptfor one assistant for each party) and shall attempt in good faith to
resolve the dispute. If the disputes cannot be resolved by such senior managers
in such meeting, the parties agree that they shall, if requested in writing by
either party, meet within thirty (30) days after such written notification for
one day with an impartial mediator and consider dispute resolution alternatives
other than litigation. If an alternative method of dispute resolution is not
agreed upon within thirty (30) days after the one day mediation, either party
may begin litigation proceedings. This procedure shall be a prerequisite before
taking any additional action hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the
Effective Date.
INTEL CORPORATION ModaCAD, Inc.
- ---------------------------------- ------------------------------------------
By By
- ---------------------------------- ------------------------------------------
Printed Name Printed Name
- ---------------------------------- ------------------------------------------
Title Title
EXHIBIT 1
NOTICE OF EXERCISE
(To be executed upon exercise of Warrant)
ModaCAD, Inc.
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant Certificate for, and to purchase thereunder,
the securities of ModaCAD, Inc., as provided for therein, and (check the
applicable box):
tenders herewith payment of the exercise price in full in the form of cash or a
certified or official bank check in same-day funds in the amount of
$____________ for _________ such securities. Elects the [Net Issue
Exercise][Easy Sale Exercise] option pursuant to Section 3.2 or 3.3 of the
Warrant, and accordingly requests delivery of a net of ______________ of such
securities. Please issue a certificate or certificates for such securities in
the name of, and pay any cash for any fractional share to (please print name,
address and social security number):
Name:
- -------------------------------------------------------------
Address:
- -------------------------------------------------------------
Signature:
- -------------------------------------------------------------
Note: The above signature should correspond exactly with the name on the first
page of this Warrant Certificate or with the name of the assignee appearing in
the assignment form below.
If said number of shares shall not be all the shares purchasable under the
within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said undersigned for the balance remaining of the shares purchasable
thereunder rounded up to the next higher whole number of shares.
EXHIBIT 2
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificate)
For value received, hereby sells, assigns and transfers unto
____________________________ the within Warrant Certificate, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint ____________________________ attorney, to transfer said Warrant
Certificate on the books of the within-named Company with respect to the number
of Warrants set forth below, with full power of substitution in the premises:
- --------------------------------------- -------------------------------------
Name(s) of Assignee(s) Address # of Warrants
- ---------------------- ----------------------------- ------------------
- ---------------------- ----------------------------- ------------------
- ---------------------- ----------------------------- ------------------
- ---------------------- ----------------------------- ------------------
And if said number of Warrants shall not be all the Warrants represented by the
Warrant Certificate, a new Warrant Certificate is to be issued in the name of
said undersigned for the balance remaining of the Warrants registered by said
Warrant Certificate.
- --------------------------------------------------------------------------------
Dated:
-------------------------------------------------------------------------
Signature:
----------------------------------------------------------------------
Notice: The signature to the foregoing Assignment must correspond to the name as
written upon the face of this security in every particular, without alteration
or any change whatsoever; signature(s) must be guaranteed by an eligible
guarantor institution (banks, stock brokers, savings and loan associations and
credit unions with membership in an approved signature guarantee medallion
program) pursuant to Securities and Exchange Commission Rule 17Ad-15.
EXHIBIT 3
1. REGISTRATION RIGHTS.
1.1 Definitions. For purposes of this Section 1:
(a) Registration. The terms "register," "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933, as amended, (the "Securities Act"),
and the declaration or ordering of effectiveness of such registration statement
(b) Registrable Securities. The term "Registrable Securities" means: (1) any
Common Stock of the Company issued or to be issued upon exercise of the Warrant
and (2) any shares of Common Stock of the Company issued as (or issuable upon
the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange
for or in replacement of, any shares of Common Stock described in clause (1)
of this subsection (b). Notwithstanding the foregoing, "Registrable Securities"
shall exclude any Registrable Securities sold by a person in a transaction in
which rights under this Section 1 are not assigned in accordance with this
Agreement or any Registrable Securities sold in a public offering, whether
sold pursuant to Rule 144 promulgated under the Securities Act, or in a
registered offering, or otherwise.
(c) Registrable Securities Then Outstanding. The number of shares of
"Registrable Securities then Outstanding" shall mean the number of shares of
Common Stock of the Company that are Registrable Securities and (l) are then
issued and outstanding or (2) are then issuable pursuant to an exercise of the
Warrant or pursuant to conversion of securities issuable pursuant to an exercise
of the Warrant.
(d) Holder. For purposes of this Section 1, the term "Holder" means any person
owning of record Registrable Securities that have not been sold to the public or
pursuant to Rule 144 promulgated under the Securities Act or any permitted
assignee of record of such Registrable Securities to whom rights under this
Section 1 have been duly assigned in accordance with this Agreement.
(e) Form S-3. The term "Form S-3" means such form under the Securities Act as is
in effect on the date hereof or any successor registration form under the
Securities Act subsequently adopted by the SEC which permits inclusion or
incorporation of substantial information by reference to other documents filed
by the Company with the SEC.
(f) SEC. The term "SEC" or "Commission" means the U.S. Securities and Exchange
Commission.
1.2 [Intentionally Omitted].
1.3 Piggyback Registrations. The Company shall notify all Holders of Registrable
Securities in writing at least thirty (30) days prior to filing any registration
statement under the Securities Act for purposes of effecting a public offering
of securities of the Company (including, but not limited to, registration
statements relating to secondary offerings of securities of the Company, but
excluding registration statements relating to any registration under Section 1.4
of this Agreement or to any employee benefit plan or a corporate reorganization)
and will afford each such Holder an opportunity to include in such registration
statement all or any part of the Registrable Securities then held by such
Holder. Each Holder desiring to include in any such registration statement all
or any part of the Registrable Securities held by such Holder shall within
twenty (20) days after receipt of the above-described notice from the Company,
so notify the Company in writing, and in such notice shall inform the Company of
the number of Registrable Securities such Holder wishes to include in such
registration statement. If a Holder decides not to include all of its
Registrable Securities in any registration statement thereafter filed by the
Company, such Holder shall nevertheless continue to have the right to include
any Registrable Securities in any subsequent registration statement or
registration statements as may be filed by the Company with respect to offerings
of its securities, all upon the terms and conditions set forth herein.
(a) Underwriting. If a registration statement under which the Company gives
notice under this Section 1.3 isfor an underwritten offering, then the Company
shall so advise the Holders of Registrable Securities. In such event, the
right of any such Holder's Registrable Securities to be included in a
registration pursuant to this Section 1.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the managing underwriter or underwriters selected for such underwriting
(including a market stand-off agreement of up to 180 days if required by such
underwriters). Notwithstanding any other provision of this Agreement, if the
managing underwriter(s) determine(s) in good faith that marketing factors
require a limitation of the number of shares to be underwritten, then the
Company shall include in such offering (i) first, all the securities the Company
proposes to register for its own account, and (ii) second, Holder's Registrable
Securities and other shares of Common Stock of the Company requested to be
included by other investors having written registration rights agreements with
the Company respecting such shares ("Other Registrable Securities"), with Holder
and each such investor proposing to sell such shares participating in such
registration on a pro rata basis, such participation to be based upon the number
of shares of Registrable Securities and Other Registrable Securities then held
by Holder and each such investor, respectively; provided, however, that the
right of the underwriters to exclude shares from the registration and
underwriting as described above shall be restricted so that (i) all shares that
are not Registrable Securities or Other Registrable Securities and are held by
any other person, including, without limitation, any person who is an
employee, officer or director of the Company (or any subsidiary of the
Company) shall first be excluded from such registration and underwriting before
any Registrable Securities and Other Registrable Securities are so excluded. If
any Holder disapproves of the terms of any such underwriting, such Holder may
elect to withdraw therefrom by written notice to the Company and the
underwriter(s), delivered at least ten (10) business days prior to the effective
date of the registration statement. Any Registrable Securities excluded or
withdrawn from such underwriting shall be excluded and withdrawn from the
registration. For any Holder that is a partnership, the Holder and the partners
and retired partners of such Holder, or the estates and family members of any
such partners and retired partners and any trusts for the benefit of any of the
foregoing persons, and for any Holder that is a corporation, the Holder and all
corporations that are affiliates of such Holder, shall = be deemed to be a
single "Holder," and any pro rata reduction with respect to such "Holder" shall
be based upon the aggregate amount of shares carrying registration rights owned
by all entities and individuals included in such "Holder," as defined in this
sentence.
(b) Expenses. All expenses incurred in connection with a registration pursuant
to this Section 1.3 (excluding underwriters' and brokers' discounts and
commissions relating to shares sold by the Holders and legal fees of counsel for
the Holders), including, without limitation all federal and "blue sky"
registration, filing and qualification fees, printers' and accounting fees, and
fees and disbursements of counsel for the Company, shall be borne by the
Company.
(c) No Limit on Registrations. Except as otherwise provided herein, there shall
be no limit on the number of times the Holders may request registration of
Registrable Securities under this Section 1.3.
1.4 Form S-3 Registration. In case the Company shall at any time after the first
anniversary of the date hereof receive from any Holder or Holders of a majority
of all Registrable Securities then outstanding a written request or requests
that the Company effect a registration on Form S-3 and any related qualification
or compliance with respect to all or a part of the Registrable Securities owned
by such Holder or Holders, then the Company will:
(a) Notice. Promptly give written notice of the proposed registration and the
Holder's or Holders' request therefor, and any related qualification or
compliance, to all other Holders of Registrable Securities; and
(b) Registration. As soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holders or
Holders' Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given within
twenty (20) days after the Company provides the notice contemplated by Section
1.4(a); provided, however, that the Company shall not be obligated to effect any
such registration, qualification or compliance pursuant to this Section 1.4:
(1) if Form S-3 is not available for such offering by the Holders:
(2) if the Holders, together with the holders of any other securities of the
Company entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) at an aggregate price to the
public of less than $1,000,000;
(3) if the Company has, within the six (6) month period preceding the date of
such request, already effected a registration under the Securities Act other
than a registration from which the Registrable Securities of Holders have been
excluded (with respect to all or any portion of the Registrable Securities the
Holders requested be included in such registration) pursuant to the provisions
of Section 1.3(a); or
(4) in any particular jurisdiction in which the Company would be required to
qualify to do business or to execute a general consent to service of process in
effecting such registration, qualification or compliance.
(c) Expenses. The Company shall pay all expenses incurred in connection with
each registration requested pursuant to this Section 1.4, (excluding
underwriters' or brokers' discounts and commissions relating to shares sold by
the Holders and legal fees of counsel for the Holders), including without
limitation federal and "blue sky" registration, filing and qualification fees,
printers' and accounting fees, and fees and disbursements of counsel.
(d) Deferral. Notwithstanding the foregoing, if the Company shall furnish to
Holders requesting the filing of a registration statement pursuant to this
Section 1.4, a certificate signed by the President or Chief Executive Officer of
the Company stating that in the good faith judgment of the Board, it would be
materially detrimental to the Company and its stockholders for such registration
statement to be filed, then the Company shall have the right to defer such
filing for a period of not more than ninety (90) days after receipt of the
request of the initiating Holders; provided, however, that the Company may not
utilize this right more than once in any twelve (12) month period.
(e) No Limit on Registrations. Except as otherwise provided herein, the Holder
shall be limited to one request for registration of Registrable Securities under
this Section 1.4.
1.5 Obligations of the Company. Whenever required to effect the registration of
any Registrable Securities under this Agreement the Company shall, as
expeditiously as reasonably possible:
(a) Registration Statement. Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective, provided, however,
that the Company shall not be required to keep any such registration statement
effective for more than ninety (90) days.
(b) Amendments and Supplements. Prepare and file with the SEC such amendments
and supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement, provided, however, that the
Company shall not be required to keep any such amended registration statement
effective for more than ninety (90) days.
(c) Prospectuses. Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of the Registrable Securities owned by them that
are included in such registration.
(d) Blue Sky. Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) Underwriting. In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement in usual and
customary form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notification. Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Opinion and Comfort Letter. Furnish, at the reasonable request of any Holder
requesting registration of Registrable Securities, on the date that such
Registrable Securities are delivered to the underwriters for sale, if such
securities are being sold through underwriters, or, if such securities are
not being sold through underwriters, on the date that the registration
statement with respect to such securities becomes effective, an opinion,
dated as of such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is reasonably
satisfactory to a majority in interest of the Holders requesting registration,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities.
1.6 Furnish Information. It shall be a condition precedent to the obligations of
the Company to take any action pursuant to Sections 1.3 or 1.4 that the selling
Holders shall furnish to the Company such information regarding themselves, the
Registrable Securities held by them, and the intended method of disposition of
such securities as shall be required to timely effect the Registration of their
Registrable Securities.
1.7 Indemnification. In the event any Registrable Securities are included in a
registration statement under Sections 1.3 or 1.4:
(a) By the Company. To the extent permitted by law; the Company will indemnify
and hold harmless each Holder, the partners, officers and directors of
each Holder, any underwriter (as determined in the Securities Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Securities Act or the Securities Exchange Act of 1934, as
amended, (the "1934 Act"), against any losses, claims, damages, or Liabilities
(joint or several) to which they may become subject under the Securities
Act, the 1934 Act or other federal or state law, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereof) arise out of
or are based upon any of the following statements, omissions or
violations (collectively a "Violation"):
(i) any untrue statement or alleged untrue statement of a material fact
contained in such registration statement, including any preliminary prospectus
or final prospectus contained therein or any amendments or supplements thereto;
(ii) the omission or alleged omission to state therein a material fact required
to be stated therein, or necessary to make the statements therein not
misleading, or
(iii) any violation or alleged violation by the Company of the Securities Act,
the 1934 Act, any federal or state securities law or any rule or regulation
promulgated under the Securities Act, the 1934 Act or any federal or state
securities law in connection with the offering covered by such registration
statement;vand the Company will reimburse each such Holder, partner, officer or
director, underwriter or controlling person for any legal or other expenses
reasonably incurred by them, as incurred, in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement contained in this subsection 1.7(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the Company be liable in
any such case for any such loss, claim, damage, liability or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by such Holder, partner, officer,
director, underwriter or controlling person of such Holder.
(b) By Selling Holders. To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities Act, any underwriter
and any other Holder selling securities under such registration statement or any
of such other Holder's partners, directors or officers or any person who
controls such Holder within the meaning of the Securities Act or the 1934 Act,
against any losses, claims, damages or liabilities (joint or several) to which
the Company or any such director, officer, controlling person, underwriter or
other such Holder, partner or director, officer or controlling person of such
other Holder may become subject under the Securities Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer, controlling person, underwriter or other
Holder, partner, officer, director or controlling person of such other Holder in
connection with investigating or defending any such loss, claim, damage,
liability or action: provided, however, that the indemnity agreement contained
in this subsection 1.7(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Holder, which consent shall not be unreasonably
withheld; and provided, further, that the total amounts payable in indemnity by
a Holder under this Section 1.7(b) in respect of any Violation shall not exceed
the net proceeds received by such Holder in the registered offering out of which
such Violation arises.
(c) Notice. Promptly after receipt by an indemnified party under this Section
1.7 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.7, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be
paid by the indemnifying party, if representation of such indemnified
party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential conflict of interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action shall relieve
such indemnifying party of liability to the indemnified party under this Section
1.7 to the extent the indemnifying party is prejudiced as a result thereof, but
the omission so to deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any indemnified party otherwise
than under this Section 1.7.
(d) Defect Eliminated in Final Prospectus. The foregoing indemnity agreements of
the Company and Holders are subject to the condition that, insofar as they
relate to any Violation made in a preliminary prospectus but eliminated or
remedied in the amended prospectus on file with the SEC at the time the
registration statement in question becomes effective or the amended prospectus
filed with the SEC pursuant to SEC Rule 424(b) (the "Final Prospectus"), such
indemnity agreement shall not inure to the benefit of any person if a copy of
the Final Prospectus was timely furnished to the indemnified party and was not
furnished to the person asserting the loss, liability, claim or damage at or
prior to the time such action is required by the Securities Act.
(e) Contribution. In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which either (i)
any Holder exercising rights under this Agreement, or any controlling person of
any such Holder, makes a claim for indemnification pursuant to this Section
1.7 but it is judicially determined (by the entry of a final judgment or decree
by a court of competent jurisdiction and the expiration of time to appeal orthe
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 1.7 provides
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any such selling Holder or any such controlling
person in circumstances for which indemnification is provided under this Section
1.7; then, and in each such case, the Company and such Holder will contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportion so that such Holder
is responsible for the portion represented by the percentage that the public
offering price of its Registrable Securities offered by and sold under the
registration statement bears to the public offering price of all securities
offered by and sold under such registration statement, and the Company and other
selling Holders are responsible for the remaining portion; provided, however,
that, in any such case: (A) no such Holder will be required to contribute any
amount in excess of the public offering price of all such Registrable Securities
offered and sold by such Holder pursuant to such registration statement; and (B)
no person or entity guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) will be entitled to contribution from
any person or entity who was not guilty of such fraudulent misrepresentation.
(f) Survival. The obligations of the Company and Holders under this Section 1.7
shall survive until the third anniversary of the completion of any offering of
Registrable Securities in a registration statement, regardless of the expiration
of any statutes of limitation or extensions of such statutes.
1.8 Termination of the Company's Obligations. The Company shall have no
obligations pursuant to Sections 1.3 and 1.4 with respect to any Registrable
Securities proposed to be sold by a Holder in a registration pursuant to Section
1.3 or 1.4 more than seven (7) years after the date of this Agreement, or, if,
in the opinion of counsel to the Company, all such Registrable Securities
proposed to be sold by a Holder may then be sold under Rule 144 in one
transaction without exceeding the volume limitations thereunder.
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL COMMERCIAL SINGLE-TENANT LEASE - GROSS
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only
November 6, 1197, is made by and between Sepulveda Group, LLC ("Lessor")
and ModaCAD, Inc., a California Corporation ("Lessee")(collectively the
"Parties", or individually a "Party").
1.2 Premises: That certain real property, including all improvements therein or
to be provided by Lessor under the terms of this Lease, and commonly known as
3861 Sepulveda Boulevard, Culver City, CA 90230 located in the County of Los
Angeles, State of California and generally described as (describe briefly the
nature of the property and, if applicable, the "Project", if the property is
located within a Project) Consisting of 23,321 square feet. (*) See Addendum #50
("Premises"). (See also Paragraph 2) (*) 1.3 Term: Eight (8) years and Two
months ("Original Term") commencing Januay 1, 1998 ("Commencement Date") and
ending February 28, 2006 ("Expiration Date"). (See also Paragraph 3)
1.4 Early Possession: N/A ("Early Possession Date"). (See also Paragraphs 3.2
and 3.3)
(**)1.5 Base Rent: $28,485.20 per month ("Base Rent"), payable on the first
day of each month commencing January 1, 1998 (**) See Addendum #51 (See also
Paragraph 4) If this box is checked, there are provisions in this Lease for
the Base Rent to be adjusted and/or for common area maintenance charges.
1.6 Base Rent Paid Upon Execution: $28,485.20 as Base Rent for the period
January 1998.
1.7 Security Deposit: $56,970.40 See Addendum #52 ("Security Deposit:").
(See also Paragraph 5)
1.8 Agreed Use: General Office
1.9 Insuring Party: Lessor is the "Insuring Party". The annual "Base Premium"
is the $________. (See also Paragraph 6)
1.10 Real Estate Brokers: (See also Paragraph 15)
(a) Representation: The following real estate brokers (collectively, the
"Brokers") and brokerage relationships exist in this transaction (check
applicable boxes):
_________________________________represents Lessor exclusively ("Lessor's
Broker") _____________________________represents Lessee exclusively
("Lessee's Broker") Altemus, Warner & Co. represents both Lessor and Lessee
("Dual Agency").
(b) Payment to Brokers: Upon Execution and delivery of this Lease by both
Parties, Lessor shall pay to the Broker the fee agreed to in their separate
written agreement. 1.11 Guarantor: The obligations of the Lessee under this
Lease are to be guaranteed by N/A. 1.12 Addenda and Exhibits: Attached
hereto is an Addendum or Addenda consisting of Paragraphs 50 through 72 and
Exhibits "A", all of which constitute a part of this Lease. 2. Premises. 2.1
Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor,
the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of size set forth in this Lease, or that may have been
used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 Condition. Lessor shall deliver the Premises with work per Addendum
paragraph 53 completed, broom clean and free the debris on the Commencement
Date or the Early Possession Date, whichever first occurs ("Start Date"), and
warrants that the existing electrical, plumbing, fire sprinkler, lighting,
heating, ventilating and air conditioning systems ("HVAC"), loading doors, if
any, and all other such elements of the building, in the Premises, other than
those constructed by Lessee, shall be in good operating condition on said date
and that the surface and structural elements of the roof, bearing walls and
foundation of any buildings on the Premises ("the Building") shall be free of
material defects. If a non-compliance with said warranty exists as of the Start
Date, Lessor shall, except as otherwise provided in this Lease, promptly after
receipt of written notice from Lessee setting forth with specificity the nature
and extent of such non-compliance, rectify same at Lessor's expense. If, after
the Start Date, Lessee does not give Lessor written notice of any
non-compliance with this warranty within (i) six (6) months as to the HVAC
systems or (ii) sixty (60) days as to the remaining systems and other elements
of the Building, correction of such non-compliance shall be the obligation of
Lessee at Lessee's sole cost and expense, except for the roof, foundations,
and bearing walls which are handled ad provided in paragraph 7. 2.3 Compliance.
Lessor warrants that the improvements on the Premises comply with all
applicable laws, covenants or restrictions of record, building codes,
regulations and ordinances ("Applicable Requirements") in effect on the Start
Date. Said warranty does not apply to the use to which Lessee will put the
Premises or to any Alterations or Utility Installations (as defined in
Paragraph 7.3 (a)) made or to be made by Lessee. NOTE: Lessee is responsible
for determining whether or not the zoning is appropriate for Lessee's intended
use, and acknowledges that past uses of the Premises may no longer be allowed.
If the Premises do not comply with said warranty, Lessor shall, except as
otherwise provided, promptly after receipt of written notice from Lessee
setting forth with specificity the nature and extent of such non-compliance,
rectify the same at Lessor's expense. If Lessee does not give Lessor written
notice of a non-compliance with this warranty within six (6)months following
the Start Date, correction of that non-compliance shall be the obligation of
Lessee at Lessee's sole cost and expense. If the Applicable Requirements are
hereafter changed (as opposed to being in existence at the Start Date, which
is addressed in Paragraph 6.2 (e) below) so as to require during the term of
this Lease the construction of an addition to or an alteration of the
Building, the remediation of any Hazardous substance, or the reinforcement or
other physical modification of the Building ("Capital Expenditure"), Lessor
and Lessee shall allocate the cost of such work as follows:
(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are
required as a result of the specific and unique use of the Premises by Lessee
as compared with uses by tenants in general, Lessee shall be fully responsible
for the cost thereof, provide, however that if such Capital Expenditure is
required during the last two (2) years of this Lease and the cost thereof
exceeds six (6) months' Base Rent, Lessee may instead terminate this Lease
unless Lessor notifies Lessee, in writing, within ten (10) days after receipt
of Lessee's termination notice that Lessor has elected to pay the difference
between the actual cost thereof and the amount equal to six (6) months' Base
Rent. If Lessee elects termination, Lessee shall immediately cease the use of
the Premises which requires such Capital Expenditure and deliver to Lessor
written notice specifying a termination date at least ninety (90) days
thereafter. Such termination date shall, however, in no event be earlier than
the last day that Lessee could legally utilize the Premises without commencing
such Capital Expenditure. (b) If such Capital Expenditure is not the result of
the specific and unique use of the Premises by Lessee (such as, governmentally
mandated seismic modifications), then See Paragraph 57 provided, however, that
if such Capital Expenditure is required during the last two years of this
Lease, Lessor shall have the option to terminate this Lease upon ninety (90)
days prior written notice to Lessee unless Lessee notifies Lessor, in writing,
within ten (10) days after receipt of Lessor's termination notice that Lessee
will pay such funds and deduct same, with Interest, from Rent until Lessor's
share of such costs have been fully paid. If Lessee is unable to finance
Lessor's share, or if the balance of the Rent due and payable for the
remainder of this Lease is not sufficient to fully reimburse Lessee on an
offset basis, Lessee shall have the right to terminate this Lease upon thirty
(30) days written notice to Lessor. (c) Notwithstanding the above, the
provisions concerning Capital Expenditure are intended to apply only to
non-voluntary, unexpected, and new Applicable Requirements. If the Capital
Expenditures are instead triggered by Lessee as a result of an actual or
proposed change in use, change in intensity of use, or modification to the
Premises then, and in that event, Lessee shall be fully responsible for the
cost thereof, and Lessee shall not have any right to terminate this Lease.
2.4 Acknowledgements. Lessee acknowledges that: (a) it has been advised by
Lessor and/or Brokers to satisfy itself with respect to the condition
of the Premises (including but not limited to the electrical, HVAC and
fire sprinkler systems, security, environmental aspects, and compliance with
Applicable Requirements), and their suitability for Lessee's intended use;
(b) Lessee has made such investigation as it deems necessary with reference to
such matters and assumes all responsibility therefor as the same relate to its
occupancy of the Premises; and (c) neither Lessor, Lessor's agents, nor any
Broker has made any oral or written representations or warranties with respect
to said matters other than as set forth in this Lease. In addition, Lessor
acknowledges that: (a) Broker has made no representations, promises or
warranties concerning Lessee's ability to honor the Lease or suitability to
occupy the Premises; and (b) it is Lessor's sole responsibility to investigate
the financial capability and/or suitability of all proposed tenants.
2.5 Lesse as Prior Owner/Occupant. The warranties made by Lessor in Paragraph 2
shall be no force or effect if immediately prior to the Start Date Lessee was
the owner or occupant of the Premises. In such event, Lessee shall be
responsible for any necessary corrective work.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be
abated for the period of such early possession. All other terms of this Lease
shall, however, be in effect during such period. Any such early possession
shall not affect the Expiration Date. 3.3 Delay In Possession. Lessor agrees
to use its best commercially reasonable efforts to deliver possession of the
Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor
is unable to deliver possession as agreed, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease.
Lessee shall not, however, be obligated to pay Rent or perform its other
obligations until it receives possession of the Premises. If possession is not
delivered within sixty (60) days after the Commencement Date, Lessee may, at
its option, by notice in writing within ten (10) days after the end of such
sixty (60) day period, cancel this Lease, in which event the Parties shall be
discharged from all obligations hereunder. If such written notice is not
received by Lessor within said ten (10) day period, Lessee's right to cancel
shall terminate. Except as otherwise provided, if possession is not tendered
to Lessee by the Start Date and Lessee does not terminate this Lease, as
aforesaid, any period if rent abatement that Lessee would otherwise have
enjoyed shall run from the date of delivery of possession and continue for a
period equal to what Lessee would otherwise have enjoyed under the terms
hereof, but minus any days of delay caused by the acts or omissions of Lessee.
If possession of the Premises is not delivered within four (4) months after
the Commencement Date, this Lease shall terminate unless other agreements are
reached between Lessor and Lessee, in writing. 3.4 Lessee Compliance. Lessor
shall not be required to tender possession of the Premises to Lessee until
Lessee complies with its obligation to provide evidence of insurance
(Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required
to perform all of its obligations under this Lease from and after the Start
Date, including the payment of Rent, notwithstanding Lessor's election to
withhold possession pending receipt of such evidence of insurance. Further, if
Lessee is required to perform any other conditions prior to or concurrent with
the Start Date, the Start Date shall occur but Lessor may elect to withhold
possession until such conditions are satisfied. 4. Rent. 4.1 Rent Defined. All
monetary obligations to Lessee or Lessor under the terms of this Lease (except
for the Security Deposit) are deemed to be rent ("Rent").
4.2 Payment. Lessee shall cause payment of Rent to be received by Lessor in
lawful money of the United States, without offset or deduction (except as
specifically permitted in this Lease), on or before the day on which it is due.
Rent for any period during the term hereof which is for less than one (1) full
calendar month shall be prorated based upon the actual number of day of said
month. Payment of Rent shall be made to Lessor at its address stated herein or
to such other persons or lace as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver to Lessor's rights to the balance of such Rent, regardless of
Lessor's endorsement. of any check so stating.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the
Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise
Defaults under this Lease, Lessor may use, apply or retain all or any portion
of said Security Deposit for the payment of any amount due Lessor or to
reimburse or compensate Lessor for any liability, expense, loss or damage
which Lessor may suffer or incur by reason thereof. If Lessor uses or applies
all or any portion of said Security Deposit, Lessee shall within ten (10) days
after written request hereof deposit moneys with Lessor sufficient to restore
said Security Deposit to the full amount required by this Lease. If the Base
Rent increases during the term of this Lease, Lessee shall, upon written
request from Lessor, deposit additional moneys with Lessor so that the total
amount of the Security Deposit shall at all times bear the same proportion to
the increased Base Rent as the intial Security Deposit bore to the initial
base rent. Should the Agreed Use be amended to accmomodate a material change
in the business of Lessee or to accommondate a sublessee or assignee, Lessor
shall have the right to increase the Security Deposit to the extent necessary,
uin Lessor's reasonable judgment, to account for any increased wear and tear
that the Premises may suffer as a result thereof. If a change in control of
Lessee occurs during this Lease and following such change the finincial
conjdition of Lessee is, in Lessor's reasonable judgement, significantly
reduced, Lessee shall deposit such additional monies with Lessor asd shall be
sufficietn to casue the Security Deposit to be at a commerically reasonable
level based on said change in financial condition. Lessor shall not be
required to keep the Security Deposit separate from its general accounts.
Within fourteen (14) days after the expiration or termination of this Lease,
if Lessor elects to apply the Security Deposit only to unpaid Rent, and
otherwise within thirty (30) days after the Premises have been vacated
pursuant to Paragraph 7.4 (C) below, Lessor shall retun that portion of the
Security Deposit not used or applied by Lessor. No part of the Security
Deposit shall be considered to be held in trust, to bear interest or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the Agreed Use,
or any other legal use which is reasonably comparable thereto, and for no other
purpose. Lessee shall not use or permit the use of the Premises in a manner
that is unlawful, creates damage, waste or a nuisance, or that disturbs owners
and/or occupants of, or causes damage to neighboring properties. Lessor shall
not unreasonably withhold or delay its consent to any written request for a
modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein. or is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which
notice shall include an explanation of Lessor's objections to the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in
this Lease shall mean any product, substance, or waste whose presence, use,
manufacture, disposal, transportation, or release, either by itself or in
combination with other materials expected to be on the Premises, is either:
(i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, and/or crude oil or any products,
by-products or fractions thereof. Lessee shall not engage in any activity in
or on the Premises which constitutes a Reportable Use of Hazardous Substances
without the express prior written consent of Lessor and timely compliance
(at Lessee's expense) with all Applicable Requirements. "Reportable Use" shall
mean (i) the installation or use of any above or below ground storage tank,
(ii) the generation, possession, storage, use, transportation, or disposal of
a Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with,
any governmental authority, and/or (iii) the presence at the Premises of a
Hazardous Substance with respect to which any Applicable Requirements requires
that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may use any
ordinary and customary materials reasonably required to be used in the normal
course of the Agreed Use, so long as such use is in compliance with all
Applicable Requirements, is not a Reportable Use, and does not expose the
Premises or neighboring property to any meaningful risk of contamination or
damage or expose Lessor to any liability therefor. In addition, Lessor may
condition its consent to any Reportable Use upon receiving such additional
assurances as Lessor reasonably deems necessary to protect itself, the public,
the Premises and/or the environment against damage, contamination, injury
and/or liability, including, but not limited to, the installation (and removal
on or before Lease expiration or termination) of protective modifications
(such as concrete encasements) and/or increasing the Security Deposit.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe,
that a Hazardous Substance has come to be located in, on, under or about the
Premises, other than as previously consented to by Lessor, Lessee shall
immediately give written notice of such fact to Lessor, and provide Lessor with
a copy of any report, notice, claim or other documentation which it has
concerning the presence of such Hazardous Substance.
(c) Lessee Remediation. Lessee shall not cause or permit any Hazardous
Substance to be spilled or released in, on, under, or about the Premises
(including through the plumbing or sanitary sewer system) and shall promptly,
at Lessee's expense, take all investigatory and/or remedial action reasonably
recommended, whether or not formally ordered or required, for the cleanup of
any contamination of, and for the maintenance, security and/or monitoring of
the Premises or neighboring properties, that was caused or materially
contributed to by Lessee, or pertaining to or involving any Hazardous
Substance brought onto the Premises during the term of this Lease, by or for
Lessee, or any third party.
(d) Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor,
its agents, employees, lenders and ground lessor, if any, harmless from and
against any and all loss of rents and/or damages, liabilities, judgments,
claims, expenses, penalties, and attorneys' and consultants' fees arising out
of or involving any Hazardous Substance brought onto the Premises by or for
Lessee, or any third party (provided, however, that Lessee shall have no
liability under this Lease with respect to underground migration of any
Hazardous Substance under the Premises from adjacent properties). Lessee's
obligations shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation, removal, remediation,
restoration and/or abatement, and shall survive the expiration or termination
of this Lease. No termination, cancellation or release agreement entered
into by Lessor and Lessee shall release Lessee from its obligations under this
Lease with respect to Hazardous Substances, unless specifically so agreed by
Lessor in writing at the time of such agreement.
(e) Lessor Indemnification. Lessor and its successors and assigns shall
indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages, including the
cost of remediation, which existed as a result of Hazardous Substances on the
Premises prior to the Start Date or which are caused by the gross negligence
or willful misconduct of Lessor, its agents or employees. Lessor's obligations,
as and when required by the Applicable Requirements, shall include, but not be
limited to, the cost of investigation, removal, remediation, restoration
and/or abatement, and shall survive the expiration or termination of
this Lease.
(f) Investigations and Remediations. Lessor shall retain the responsibility
and pay for any investigations or remediation measures required by
governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date, unless such
remediation measure is required as a result of Lessee's use (including
alterations) of the Premises, in which event Lessee shall be responsible for
such payment. Lessee shall cooperate fully in any such activities at the
request of Lessor, including allowing Lessor and Lessor's agents to have
reasonable access to the Premises at reasonable times in order to carry out
Lessor's investigative and remedial responsibilities.
(g) Lessor Termination Option. If a Hazardous Substance Condition occurs
during the term of this Lease, unless Lessee is legally responsible therefor
(in which case Lessee shall make the investigation and remediation thereof
required by the Applicable Requirements and this Lease shall continue in full
force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and
Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and
remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to remediate
such condition exceeds twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater, give written notice to Lessee, within thirty
(30) days after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition, of Lessor's desire to terminate this
Lease as of the date sixty (60) days following the date of such notice.
In the event Lessor elects to give a termination notice, Lessee may, within
ten (10) days thereafter, give written notice to Lessor of Lessee's commitment
to pay the amount by which the cost of the remediation of such Hazardous
Substance Condition exceeds an amount equal to twelve (12) times the then
monthly Base Rent or $100,000, whichever is greater. Lessee shall provide
Lessor with said funds or satisfactory assurance thereof within thirty (30)
days following such commitment. In such event, this Lease shall continue in
full force and effect, and Lessor shall proceed to make such remediation as
soon as reasonably possible after the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance
thereof within the time provided, this Lease shall terminate as of the date
specified in Lessor's notice of termination.
6.3 Lessee's Compliance with Applicable Requirements. Except as otherwise
provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or
consultants which relate in any manner to the Premises, without regard to
whether said requirements are now in effect or become effective after the
Start Date. Lessee shall, within ten (10) days after receipt of Lessor's
written request, provide Lessor with copies of all permits and other
documents, and other information evidencing Lessee's compliance with any
Applicable Requirements specified by Lessor, and shall immediately upon
receipt, notify Lessor in writing (with copies of any documents involved) of
any threatened or actual claim, notice, citation, warning, complaint or report
pertaining to or involving the failure of Lessee or the Premises to comply
with any Applicable Requirements.
6.4 Inspection; Compliance. Lessor and Lessor's "Lender'(as defined in
Paragraph 30 below) and consultants shall have the right to enter into
Premises at any time, in the case of an emergency, and otherwise at reasonable
times, for the purpose of inspecting the condition of the Premises and for
verifying compliance by Lessee with this Lease. The cost of any such
inspections shall be paid by Lessor, unless a violation of Applicable
Requirements, or a contamination is found to exist or be imminent, or the
inspection is requested or ordered by a governmental authority. In such case,
Lessee shall upon request reimburse Lessor for the cost of such inspections,
so long as such inspection is reasonably related to the violation or
contamination.
7. Maintenance; Repairs, Utility Installations; Trade Fixtures and Alterations.
See Paragraph 58
Lessee's Obligations.
(a) In General. Subject to the provisions of Paragraph 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 6.3 (Lessee's
Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9
(Damage and Destruction), and 14 (Condemnation), Lessee shall, at Lessee's
sole expense, keep the Premises, Utility Installations, and Alterations in
good order, condition and repair (whether or not the portion of the Premises
requiring repairs, or the means of repairing the same, are reasonably or
readily accessible to Lessee, and whether or not the need for such repairs
occurs as a result of Lessee's use, any prior use, the elements or the age of
such portion of the Premises), including, but not limited to, all equipment or
facilities, such as plumbing, heating, ventilating, air-conditioning,
electrical, lighting facilities, boilers, pressure vessels, fire protection
system, fixtures, walls (interior and exterior), ceilings, floors, windows,
doors, skylights, landscaping, driveways, parking lots, fences, signs,
sidewalks and parkways located in, on, or adjacent to the Premises. Lessee is
also responsible for keeping the roof and roof drainage clean and free of
debris. Lessor shall keep the surface and structural elements of the roof,
foundations, and bearing walls in good repair (see paragraph 7.2). Lessee, in
keeping the Premises in good order, condition and repair, shall exercise and
perform good maintenance practices. Lessee's obligations shall include
restorations, replacements or renewals when necessary to keep the Premises and
all improvements thereon or a part thereof in good order, condition and state
of repair. Lessee shall, during the term of this Lease, keep the exterior
appearance of the Building in a first-class condition (including, e.g.,
graffiti removal) consistent with the exterior appearance of other similar
facilities of comparable age and size in the vicinity, including, when
necessary, the exterior repainting of the Building.
(b) Service Contracts. Lessee shall, at Lessee's sole expense, procure and
maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements ("Basic Elements"), if
any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler,
and pressure vessels, (iii) fire extinguishing systems, including fire alarm
and/or smoke detection, (iv) landscaping and irrigation systems, (v )driveways
and parking lots, (vi) clarifiers, (vii) basic utility feed to the perimeter
of the Building, and (viii) any other equipment, if reasonably required by
Lessor.
(c) Replacement. Subject to Lessee's indemnification of Lessor as set forth in
Paragraph 8.7 below, and without relieving Lessee of liability resulting from
Lessee's failure to exercise and perform good maintenance practices, if the
Basic Elements described in Paragraph 7.1(b) cannot be repaired other than at
a cost which is in excess of 50% of the cost of replacing such Basic Elements,
then such Basic Elements shall be replaced by Lessor, and the cost thereof
shall be prorated between the Parties and Lessee shall only be obligated to
pay, each month during the remainder of the term of this Lease, on the date on
which Base Rent is due, an amount equal to the product of multiplying the cost
of such replacement by a fraction, the numerator of which is one, and the
denominator of which is the number of months of the useful life of such
replacement as such useful life is specified pursuant to Federal income
tax regulations or guidelines for depreciation thereof (including interest on
the unamortized balance as is then commercially reasonable in the judgment of
Lessors accountants), with Lessee reserving the right to prepay its obligation
at any time.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 9
(Damage or Destruction) and 14 (Condemnation), it is intended by the Parties
hereto that Lessor have no obligation, in any manner whatsoever, to repair and
maintain the Premises, or the equipment therein, all of which obligations are
intended to be that of the Lessee, except for the surface and structural
elements of the roof, foundations and bearing walls, the repair of which shall
be the responsibility of Lessor upon receipt of written notice that such a
repair is necessary. It is the intention of the Parties that the terms of this
Lease govern the respective obligations of the Parties as to maintenance and
repair of the Premises, and they expressly waive the benefit of any statute now
or hereafter in effect to the extent it is inconsistent with the terms of this
Lease.
7.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility Installations"
refers to all floor and window coverings, air lines, power panels, electrical
distribution, security and fire protection systems and signs, communication
systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the
Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment
that can be removed without doing material damage to the Premises. The term
"Alterations" shall mean any modification of the improvements, other than
Utility Installations or Trade Fixtures, whether by addition or deletion.
"Lessee Owned Alterations and/or Utility Installations" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations
or Utility Installations to the Premises without Lessors prior written consent.
Lessee may, however, make non-structural Utility Installations to the interior
of the Premises (excluding the roof) without such consent but upon notice to
Lessor, as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during this Lease as extended does not exceed $50,000
in the aggregate or $1 0,000 in any one year.
(b) Consent. Any Alterations or Utility Installations that Lessee shall
desire to make and which require the consent of the Lessor shall be presented
to Lessor in written form with detailed plans. Consent shaft be deemed
conditioned upon Lessee's: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent,
or $10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.
(c) Indemnification. Lessee shall pay, when due, all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanic's
or materialmen's lien against the Premises or any interest therein. Lessee
shall give Lessor not less than ten (10) days'notice prior to the commencement
of any work in, on or about the Premises, and Lessor shall have the right to
post notices of non-responsibility. If Lessee shall contest the validity of
any such lien, claim or demand, then Lessee shall, at its sole expense defend
and protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof. If Lessor shall require, Lessee shall furnish a surety
bond in an amount equal to one and one-half times the amount of such contested
lien, claim or demand, indemnifying Lessor against liability for the same. If
Lessor elects to participate in any such action, Lessee shall pay Lessors
attorneys' fees and costs.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessors right to require removal or elect
ownership as hereinafter provided, all Alterations and Utility Installations
made by Lessee shall be the property of Lessee, but considered a part of the
Premises. Lessor may, at any time, elect in writing to be the owner of all or
any specified part of the Lessee Owned Alterations and Utility Installations.
Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned
Alterations and Utility Installations shall, at the expiration or termination
of this Lease, become the property of Lessor and be surrendered by Lessee with
the Premises.
(b) Removal. By delivery to Lessee of written notice from Lessor not earlier
than ninety (90) and not later than thirty (30) days prior to the end of
the term of this Lease, Lessor may require that any or all Lessee Owned
Alterations or Utility Installations be removed by the expiration or
termination of this Lease. Lessor may require the removal at any time of all
or any part of any Lessee Owned Alterations or Utility Installations made
without the required consent.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
Expiration Date or any earlier termination date, with all of the improvements,
parts and surfaces thereof broom clean and free of debris, and in good
operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear' shall not include any damage or
deterioration that would have been prevented by good maintenance practice.
Lessee shall repair any damage occasioned by the installation, maintenance or
removal of Trade Fixtures, Lessee Owned Alterations and/or Utility
Installations, furnishings, and equipment as well as the removal of any
storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or groundwater contaminated by Lessee. Trade
Fixtures shall remain the property of Lessee and shall be removed by Lessee.
The failure by Lessee to timely vacate the Premises pursuant to this
Paragraph 7.4(c) without the express written consent of Lessor shall
constitute a holdover under the provisions of Paragraph 26 below.
8. Insurance; Indemnity.
8.1 Payment of Premium Increases.
(a) Lessee shall pay to Lessor any insurance cost increase
("Insurance Cost Increase") occurring during the term of this Lease. "Insurance
Cost Increase" is defined as any increase in the actual cost of the insurance
required under Paragraph 8.2(b), 8.3(a) and 8.3(b) ("Required Insurance"), over
and above the Base Premium as hereinafter defined calculated on an annual basis.
'Insurance Cost Increase" shall include but not be limited to increases
resulting from the nature of Lessee's occupancy, any act or omission of Lessee,
requirements of the holder of mortgage or deed of trust covering the Premises,
increased valuation of the Premises and/or a premium rate increase. The parties
are encouraged to fill in the Base Premium in Paragraph 1.9 with a reasonable
premium for the Required Insurance based on the Agreed Use of the Premises. If
the parties fail to insert a dollar amount in Paragraph 1.9, then the Base
Premium shall be the lowest annual premium reasonably obtainable for the
Required Insurance as of the commencement of the Original Term for the Agreed
Use of the Premises. In no event, however, shall Lessee be responsible for any
portion of the increase in the premium cost attributable to liability insurance
carried by Lessor under Paragraph 8. 1 (b) in excess of $2,000,000 per
occurrence.
(b) Lessee shall pay any such Insurance Cost Increase to Lessor
within thirty (30) days after receipt by Lessee of a copy of the premium
statement or other reasonable evidence of the amount due. It the insurance
policies maintained hereunder cover other property besides the Premises, Lessor
shall also deliver to Lessee a statement of the amount of such Insurance Cost
Increase attributable only to the Premises showing in reasonable detail the
manner in which such amount was computed. Premiums for policy periods
commencing prior to, or extending beyond the term of this Lease, shall be
prorated to correspond to the term of this Lease.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based
upon or arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be on an
occurrence basis providing single limit coverage in an amount not less than
$2,000,000 per occurrence with an "Additional Insured-Managers or Lessors of
Premises Endorsement" and contain the "Amendment of the Pollution Exclusion
Endorsement" for damage caused by heat, smoke or fumes from a hostile fire.
The Policy shall not contain any intra-insured exclusions as between insured
persons or organizations, but shall include coverage for liability assumed
under this Lease as an "insured contract" for the performance of Lessee's
indemnity obligations under this Lease. The limits of said insurance shall not,
however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance
shall be considered excess insurance only.
(b) Carried by Lessor. Lessor shall maintain liability insurance as
described in Paragraph 8.2(a), in addition to, and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 Property Insurance - Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain and
keep in force a policy or policies in the name of Lessor, with loss payable to
Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by any Lenders, but in no event more than the commercially reasonable
and available insurable value thereof. If Lessor is the Insuring Party,
however, Lessee Owned Alterations and Utility Installations, Trade Fixtures,
and Lessee's personal property shall be insured by Lessee under Paragraph 8.4
rather than by Lessor. If the coverage is available and commercially
appropriate, such policy or policies shall insure against all risks of direct
physical loss or damage (except the perils of flood and/or earthquake unless
required by a Lender or included in the Base Premium), including coverage for
debris removal and the enforcement of any Applicable Requirements requiring
the upgrading, demolition, reconstruction or replacement of any portion of the
Premises as the result of a covered loss. Said policy or policies shall also
contain an agreed valuation provision in lieu of any coinsurance clause,
waiver of subrogation, and inflation guard protection causing an increase in
the annual property insurance coverage amount by a factor of not less than the
adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers
for the city nearest to where the Premises are located.
(b) Rental Value. The Insuring Party shall obtain and keep in force a
policy or policies in the name of Lessor, with loss payable to Lessor and any
Lender, insuring the loss of the full Rent for one (1) year. Said insurance
shall provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide
for one full year's loss of Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurance clause,
and the amount of coverage shall be adjusted annually to reflect the projected
Rent otherwise payable by Lessee, for the next twelve (12) month period.
(c) Adjacent Premises. If the Premises are part of a larger building,
or of a group of buildings owned by Lessor which are adjacent to the Premises,
the Lessee shall pay for any increase in the premiums for the property
insurance of such building or buildings if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
8.4 Lessee's Property/Business Interruption Insurance.
(a) Property Damage. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixture and Lessee Owned
Alterations and Utility Installations. The proceeds from any such insurance
shall be used by Lessee for the replacement of personal property, Trade
Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall
provide Lessor with written evidence that such insurance is in force.
(c) No Representation of Adequate Coverage. Lessor makes no representation that
the limits or forms of coverage of insurance specified herein are adequate to
cover Lessee's property, business operations or obligations under this Lease.
8.5 Insurance Policies. Insurance required herein shall be by companies duly
licensed or admitted to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender.
Lessee shall not do or permit to be done anything which invalidates the
required insurance policies. Lessee shall, prior to the Start Date, deliver to
Lessor certified copies of policies of such insurance or certificates
evidencing the existence and amounts of the required insurance. No such policy
shall be cancelable or subject to modification except after thirty (30) days
prior written notice to Lessor. Lessee shall, at least thirty (30) days prior
to the expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand. Such policies shall be for a term of
at least one year, or the length of the remaining term of this Lease,
whichever is less. If either Party shall fail to procure and maintain the
insurance required to be carried by it, the other Party may, but shall not be
required to, procure and maintain the same.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages against the other, for loss of or damage to
its property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage insurance
carriers waive any right to subrogation that such companies may have against
Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.
8.7 Indemnity. Except for Lessor's gross negligence or willful misconduct,
Lessee shall indemnity, protect, defend and hold harmless the Premises, Lessor
and its agents, Lessor's master or ground lessor, partners and Lenders, from
and against any and all claims, loss of rents and/or damages, liens, judgments,
penalties, attorneys'and consultants' fees, expenses and/or liabilities arising
out of, involving, or in connection with, the use and/or occupancy of the
Premises by Lessee. If any action or proceeding is brought against Lessor by
reason of any of the foregoing matters, Lessee shall upon notice defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and
Lessor shall See cooperate with Lessee in such defense. Lessor need not have
first paid any such claim in order to be defended or indemnified.
See Paragraph 60 8.8 Exemption of Lessor from Liability. Lessor shall not be
liable for injury or damage to the person or goods, wares, merchandise or
other property of Lessee, Lessee's employees, contractors, invitees, customers,
or any other person in or about the Premises, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or
from the breakage, leakage, obstruction or other defects of pipes, fire
sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from
any other cause, whether the said injury or damage results from conditions
arising upon the Premises or upon other portions of the Building of which the
Premises are a part, or from other sources or places. Lessor shall not be
liable for any damages arising from any act or neglect of any other tenant of
Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor
shall under no circumstances be liable for injury to Lessee's business or for
any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations, Utility
Installations and Trade Fixtures, which can reasonably be repaired in six (6)
months or less from the date of the damage or destruction. Lessor shall notify
Lessee in writing within thirty (30) days from the date of the damage or
destruction as to whether or not the damage is Partial or Total.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations and
Trade Fixtures, which cannot reasonably be repaired in six (6) months or less
from the date of the damage or destruction. Lessor shall notify Lessee in
writing within thirty (30) days from the date of the damage or destruction as
to whether or not the damage is Partial or Total.
(c) "Insured Loss" shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility Installations
and Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible amounts
or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of Applicable Requirements, and without
deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an
Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage
(but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this
Lease shall continue in full force and effect; provided, however, that Lessee
shall, at Lessor's election, make the repair of any damage or destruction the
total cost to repair of which is $10,000 or less, and, in such event, Lessor
shall make any applicable insurance proceeds available to Lessee on a
reasonable basis for that purpose. Notwithstanding the foregoing, it the
required insurance was not in force or the insurance proceeds are not
sufficient to effect such repair, the Insuring Party shall promptly contribute
the shortage in proceeds as and when required to complete said repairs. In the
event, however, such shortage was due to the fact that, by reason of the
unique nature of the improvements, full replacement cost insurance coverage
was not commercially reasonable and available, Lessor shall have no obligation
to pay for the shortage in insurance proceeds or to fully restore the unique
aspects of the Premises unless Lessee provides Lessor with the funds to cover
same, or adequate assurance thereof, within ten (10) days following receipt of
written notice of such shortage and request therefor. If Lessor receives said
funds or adequate assurance thereof within said ten (10) day period, the party
responsible for making the repairs shall complete them as soon as reasonably
possible and this Lease shall remain in full force and effect. If such funds
or assurance are not received, Lessor may nevertheless elect by written notice
to Lessee within ten (10) days thereafter to: (i) make such restoration and
repair as is commercially reasonable with Lessor paying any shortage in
proceeds, in which case this Lease shall remain in full force and effect; or
(ii) have this Lease terminate thirty (30) days thereafter. Lessee shall not
be entitled to reimbursement of any funds contributed by Lessee to repair any
such damage or destruction. Premises Partial Damage due to flood or earthquake
shall be subject to Paragraph 9.3, notwithstanding that there may be some
insurance coverage, but the net proceeds of any such insurance shall be made
available for the repairs if made by either Party.
9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee
shall have the right within ten (1 0) days after receipt of the termination
notice to give written notice to Lessor of Lessee's commitment to pay for the
repair of such damage without reimbursement from Lessor. Lessee shall provide
Lessor with said funds or satisfactory assurance thereof within thirty (30)
days after making such commitment. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such repairs as soon
as reasonably possible after the required funds are available. If Lessee does
not make the required commitment, this Lease shall terminate as of the date
specified in the termination notice.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate sixty (60) days
following such Destruction. If the damage or destruction was caused by the
gross negligence or willful misconduct of Lessee, Lessor shall have the right
to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last six (6) months
of this Lease there is damage for which the cost to repair exceeds one (1)
month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option
and (b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date upon
which such option expires. If Lessee duly exercises such option during such
period and provides Lessor with funds (or adequate assurance thereof) to cover
any shortage in insurance proceeds, Lessor shall, at Lessor's commercially
reasonable expense, repair such damage as soon as reasonably possible and this
Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such period, then this
Lease shall terminate on the date specified in the termination notice and
Lessee's option shall be extinguished.
9.6 Abatement of Rent; Lessee's Remedies.
(a) Abatement. In the event of Premises Partial Damage or Premises
Total Destruction or a Hazardous Substance Condition for which Lessee is not
responsible under this Lease, the Rent payable by Lessee for the period required
for the repair, remediation or restoration. of such damage shall be abated in
proportion to the degree to which Lessee's use of the Premises is impaired, but
not to exceed the proceeds received from the Rental Value insurance. All other
obligations of Lessee hereunder shall be performed by Lessee and Lessor shall
have no liability for any such damage, destruction, remediation, repair or
restoration except as provided herein. See Paragraph 61
(b) Remedies. If Lessor shall be obligated to repair or restore the Premises
and does not commence, in a substantial and meaningful way, such repair or
restoration within forty-five (45) days after such obligation shall accrue,
Lessee may, at any time prior to the commencement of such repair or
restoration, give written notice to Lessor and to any Lenders of which Lessee
has actual notice, of Lessee's election to terminate this Lease on a date not
less than sixty (60) days following the giving of such notice. If Lessee gives
such notice and such repair or restoration is not commenced within thirty (30)
days thereafter, this Lease shall terminate as of the date specified in said
notice. If the repair or restoration is commenced within said thirty (30)
days, this Lease shall continue in full force and effect. "Commence" shall
mean either the unconditional authorization of the preparation of the required
plans, or the beginning of the actual work on the Premises, whichever first
occurs.
9.7 Termination-Advance Payments. Upon termination of this Lease pursuant
to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by Lessee to
Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security
Deposit as has not been, or is not then required to be, used by Lessor.
9.8 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall
govern the effect of any damage to or destruction of the Premises with respect
to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 Definition of "Real Property Taxes:' As used herein, the term "Real
Property Taxes" shall include any form of assessment; real estate, general,
special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond-and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor
in the Premises, Lessor's right to other income therefrom, and/or Lessor's
business of leasing, by any authority having the direct or indirect power to
tax and where the funds are generated with reference to the Building address
and where the proceeds so generated are to be applied by the city, county or
other local taxing authority of a jurisdiction within which the Premises are
located. The term "Real Property Taxes" shall also include any tax,
fee, levy, assessment or charge, or any increase therein, imposed by reason of
events occurring during the term of this Lease, including but not limited to, a
change in the ownership of the Premises.
10.2 See Paragraph 62
(a) Payment of Taxes. Lessor shall pay the Real Property Taxes
applicable to the Premises provided, however, that Lessee shall pay to Lessor
the amount, it any, by which Real Property Taxes applicable to the Premises
increase over the fiscal tax year during which the Commencement Date occurs
("Tax Increase"). Subject to Paragraph 10.2(b), payment of any such Tax Increase
shall be made by Lessee to Lessor within thirty (30) days after receipt of
Lessor's written statement setting forth the amount due and the computation
thereof. If any such taxes shall cover any period of time prior to or after the
expiration or termination of this Lease, Lessee's share of such taxes shall be
prorated to cover only that portion of the tax bill applicable to the period
that this Lease is in effect.
(b) Advance Payment. In the event Lessee incurs a late charge on any
Rent payment, Lessor may, at Lessor's option, estimate the current Real Property
Taxes, and require that the Tax Increase be paid in advance to Lessor by Lessee,
either: (i) in a lump sum amount equal to the amount due, at least twenty (20)
days prior to the applicable delinquency date; or (ii) monthly in advance with
the payment of the Base Rent. If Lessor elects to require payment monthly in
advance, the monthly payment shall be an amount equal to the amount of the
estimated installment of the Tax Increase divided by the number of months
remaining before the month in which said installment becomes delinquent. When
the actual amount of the applicable Tax Increase is known, the amount of such
equal monthly advance payments shall be adjusted as required to provide the
funds needed to pay the applicable Tax Increase. If the amount collected by
Lessor is insufficient to pay the Tax Increase when due, Lessee shall pay
Lessor, upon demand, such additional sums as are necessary to pay such
obligations. All moneys paid to Lessor under this Paragraph may be intermingled
with other moneys of Lessor and shall not bear interest. In the event of a
Breach by Lessee in the performance of its obligations under this Lease, then
any balance of funds paid to Lessor under the provisions of this Paragraph may
at the option of Lessor, be treated as an additional Security Deposit.
(c) Additional Improvements. Notwithstanding anything to the contrary
in this Paragraph 10.2, Lessee shall pay to Lessor upon demand therefor the
entirety of any increase in Real Property Taxes assessed by reason of
Alterations or Utility Installations placed upon the Premises by Lessee or at
Lessee's request.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Tax Increase for all
of the land and improvements included within the tax parcel assessed, such
proportion to be conclusively determined by Lessor front the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.
10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency, all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement. 11. Utilities. Lessee shall pay for all
water, gas, heat, light, power, telephone, trash disposal and other utilities
and services supplied to the Premises, together with any taxes thereon. If any
such services are not separately metered to Lessee, Lessee shall pay a
reasonable proportion, to be determined by Lessor, of all charges jointly
metered.
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "assign or assignment") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.
(c) The involvement of Lessee or its assets in any transaction, or series of
transactions (by way of merger, sale, acquisition, financing, transfer,
leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee by an amount greater than
twenty-five percent (25%) of such Net Worth as it was represented at the time of
the execution of this Lease or at the time of the most recent assignment to
which Lessor has consented, or as it exists immediately prior to said
transaction or transactions constituting such reduction, whichever was or is
greater, shall be considered an assignment of this Lease to which Lessor may
withhold its consent. "Net Worth of Lessee" shall mean the net worth of Lessee
(excluding any guarantors) established under generally accepted accounting
principles.
(d) An assignment or subletting without consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1 (c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a noncurable
Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30)
days written notice, increase the monthly Base Rent to one hundred ten percent
(I 10%) of the Base Rent then in effect. Further, in the event of such Breach
and rental adjustment, (i) the purchase price of any option to purchase the
Premises held by Lessee shall be subject to similar adjustment to one hundred
ten percent (1 1 0%) of the price previously in effect, and (ii) all fixed and
non-fixed rental adjustments scheduled during the remainder of the Lease term
shall be increased to One Hundred Ten Percent (1 1 0%) of the scheduled adjusted
rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive
relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting shall not:
(i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease; (ii) release Lessee
of any obligations hereunder; or (iii) alter the primary liability of Lessee
for the payment of Rent or for the performance of any other obligations to be
performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or
subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may proceed
directly against Lessee, any Guarantors or anyone else responsible for the
performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefore to Lessor, or any security held by
Lessor.
(e) Each request for consent to an assignment or subletting shall be in
writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a fee of
$500.00 as consideration for Lessor's considering and processing said request.
Lessee agrees to provide Lessor with such other or additional information
and/or documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed to have
assumed and agreed to conform and comply with each and every term, covenant,
condition and obligation herein to be observed or performed by Lessee during the
term of said assignment or sublease, other than such obligations as are contrary
to or inconsistent with provisions of an assignment or sublease to which Lessor
has specifically consented to in writing.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all Rent payable on any sublease, and Lessor may collect such Rent
and apply same toward Lessee's obligations under this Lease; provided, however,
that until a Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or
any assignment of such sublease, nor by reason of the collection of Rent, be
deemed liable to the sublessee for any failure of Lessee to perform and comply
with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written notice from
Lessor stating that a Breach exists in the performance of Lessee's obligations
under this Lease, to pay to Lessor all Rent due and to become due under the
sublease. Sublessee shall rely upon any such notice from Lessor and shall pay
all Rents to Lessor without any obligation or right to inquire as to whether
such Breach exists, notwithstanding any claim from Lessee to the contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its option,
require sublessee to attorn to Lessor, in which event Lessor shall undertake the
obligations of the sublessor under such sublease from the time of the exercise
of said option to the expiration of such sublease; provided, however, Lessor
shall not be liable for any prepaid rents or security deposit paid by such
sublessee to such sublessor or for any prior Defaults or Breaches of such
sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right
to cure the Default of Lessee within the grace period, if any, specified in such
notice. The sublessee shall have a right of reimbursement and offset from and
against Lessee for any such Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. A "Default" is defined as a failure by the Lessee to
comply with or perform any of the terms, covenants, conditions or rules under
this Lease. A "Breach" is defined as the occurrence of one or more of the
following Defaults, and the failure of Lessee to cure such Default within any
applicable grace period:
(a) The abandonment of the Premises; or the vacating of the Premises
without providing a commercially reasonable level of security, and/or Security
Deposit or where the coverage of the property insurance described in Paragraph
8.3 is jeopardized as a result thereof, or without providing reasonable
assurances to minimize potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any Security
Deposit required to be made by Lessee hereunder, whether to Lessor or to a third
party, when due, to provide reasonable evidence of insurance or surety bond, or
to fulfill any obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of three (3) business days
following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written evidence
of compliance with Applicable Requirements, (ii) the service contracts, (iii)
the rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42 (easements),
or (viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1 (a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making of
any general arrangement or assignment for the benefit of creditors; (ii)
becoming a "debtor" as defined in 1 1 U.S.C. ss. 101 or any successor statute
thereto (unless, in the case of a petition filed against Lessee, the same is
dismissed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.
(f) The discovery that any financial statement of Lessee or of any Guarantor
given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this Lease
is guaranteed: (i) the death of a Guarantor; (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty; (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing; (iv) a Guarantor's refusal to honor the
guaranty; or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within sixty (60) days following
written notice of any such event, to provide written alternative assurance or
security, which, when coupled with the then existing resources of Lessee, equals
or exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease.
13.2 Remedies. It Lessee fails to perform any of its affirmative duties or
obligations, within ten (1 0) days after written notice (or in case of an
emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the (*). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this
Lease shall not waive Lessor's right to recover damages under Paragraph 12. If
termination of this Lease is obtained through the provisional remedy of unlawful
detainer, Lessor shall have the right to recover in such proceeding any unpaid
Rent and damages as are recoverable therein, or Lessor may reserve the right to
recover all or any part thereof in a separate suit. If a notice and grace period
required under Paragraph 13.1 was not previously given, a notice to pay rent or
quit, or to perform or quit given to Lessee under the unlawful detainer statute
shall also constitute the notice required by Paragraph 13.1. In such case, the
applicable grace period required by Paragraph 13.1 and the unlawful detainer
statute shall run concurrently, and the failure of Lessee to cure the Default
within the greater of the two such grace periods shall constitute both an
unlawful detainer and a Breach of this Lease entitling Lessor to the remedies
provided for in this Lease and/or by said statute.
(b) Continue this Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee
may sublet or assign, subject only to reasonable
limitations. Acts of maintenance, efforts to relet, and/or
the appointment of a receiver to protect the Lessor's
interests, shall not constitute a termination of the
Lessee's right to possession.
(*) See Paragraph 65
(c) Pursue any other remedy now or hereafter available under the laws
or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture. Any agreement for free or abated rent or other
charges, or for the giving or paying by Lessor to or for Lessee of any cash or
other bonus, inducement or consideration for Lessee's entering into this Lease,
all of which concessions are hereinafter referred to as "Inducement Provisions,"
shall be deemed conditioned upon Lessee's full and faithful performance of all
of the terms, covenants and conditions of this Lease. Upon Breach of this Lease
by Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other charge,
bonus, inducement or consideration theretofore abated, given or paid by Lessor
under such an Inducement Provision shall be immediately due and payable by
Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee.
The acceptance by Lessor of rent or the cure of the Breach which initiated the
operation of this paragraph shall not be deemed a waiver by Lessor of the
provisions of this paragraph unless specifically so stated in writing by Lessor
at the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
of Rent will cause Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within ten (10) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to $1,000.00 of each such overdue amount.
The parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of such late payment.
Acceptance of such late charge by Lessor shall in no event constitute a waiver
of Lessee's Default or Breach with respect to such overdue amount, nor prevent
the exercise of any of the other rights and remedies granted hereunder. In the
event that a late charge is payable hereunder, whether or not collected, for
three (3) consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 Interest. Any monetary payment due Lessor hereunder, other than late
charges, not received by Lessor, when due as to scheduled payments (such as Base
Rent) or within thirty (30) days following the date on which it was due for
non-scheduled payment, shall bear interest from the date when due, as to
scheduled payments, or the thirty-first (31st) day after it was due as to
non-scheduled payments. The interest ("Interest") charged shall be equal to the
prime rate reported in the Wall Street Journal as published closest prior to the
date when due plus 4%, but shall not exceed the maximum rate allowed by law.
Interest is payable in addition to the potential late charge provided for in
Paragraph 13.4.
13.6 Breach by Lessor.
(a) Notice of Breach. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and any Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are reasonably
required for its performance, then Lessor shall not be in breach if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.
(b) Performance by Lessee on Behalf of Lessor. In the event that
neither Lessor nor Lender cures said breach within thirty (30)
days after receipt of said written notice, or if having
commenced said cure they do not diligently pursue it to
completion, then Lessee may elect to cure said breach at
Lessee's expense and offset from Rent an amount equal to the
greater of two (2) month's Base Rent or the Security Deposit,
and to pay an excess of such expense under protest, reserving
Lessee's right to reimbursement from Lessor. Lessee document
the cost of said cure and supply said documentation to Lessor.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "Condemnation"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building portion of the
premises, or more than twentyfive percent (25%) of the land area portion of the
premises not occupied by any building, is taken by Condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (i 0) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in proportion
to the reduction in utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that this Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. Brokers' Fee.
15.3 Representations and Indemnities of Broker Relationships. Lessee and
Lessor each represent and warrant to the other that it has had no dealings with
any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.
16. Estoppel Certificates.
(a) Each Party (as "Responding Party") shall within ten (10) days
after written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Estoppel Certificate" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
(b) If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such ten day period, the
Requesting Party may execute an Estoppel Certificate stating that: (i) the
Lease is in full force and effect without modification except as may be
represented by the Requesting Party; (ii) there are no uncured defaults in the
Requesting Party's performance; and (iii) it Lessor is the Requesting Party,
not more than one month's rent has been paid in advance. Prospective
purchasers and encumbrancers may rely upon the Requesting Party's Estoppel
Certificate, and the Responding Party shall be estopped from denying the truth
of the facts contained in said Certificate.
(c) If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. Definition of Lessor. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the tee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, and subject to the provisions of Paragraph
20 below, the original Lessor under this Lease, and all subsequent holders of
the Lessor's interest in this Lease shall remain liable and responsible with
regard to the potential duties and liabilities of Lessor pertaining to Hazardous
Substances as outlined in Paragraph 6 above.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Days. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. Limitation on Liability. Subject to the provisions of Paragraph 17 above,
the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against the individual partners of Lessor, or its or their individual partners,
directors, officers or shareholders, or any of their personal assets for such
satisfaction. See Paragraph 67
21. Time of Essence. Time is of the essence with respect to the performance
of all obligations to be performed or odserved by the Parties under
this Lease.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains
all agreements between the Parties with respect to any matter
mentioned herein, and no other prior or contemporaneous agreement or
understanding shall be effective. Lessor and Lessee each represents and warrants
to the Brokers that it has made, and is relying solely upon, its own
investigation as to the nature, quality, character and financial responsibility
of the other Party to this Lease and as to the nature, quality and character of
the Premises. Brokers have no responsibility with respect thereto or with
respect to any default or breach hereof by either Party. The liability
(including court costs and Attorneys' fees), of any Broker with respect to
negotiation, execution, delivery or performance by either Lessor or Lessee under
this Lease or any amendment or modification hereto shall be limited to an amount
up to the fee received by such Broker pursuant to this Lease; provided, however,
that the foregoing limitation on each Broker's liability shall not be applicable
to any gross negligence or willful misconduct of such Broker.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by courier) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 Date of Notice. Any notice sent by registered or certified mail, return
receipt requested, shall be deemed given on the date of delivery shown on the
receipt card, or if no delivery date is shown, the postmark thereon. If sent by
regular mail the notice shall be deemed given forty-eight (48) hours after the
same is addressed as required herein and mailed with postage prepaid. Notices
delivered by United States Express Mail or overnight courier that guarantee
next day delivery shall be deemed given twenty-four (24) hours after delivery
of the same to the Postal Service or courier. Notices transmitted by facsimile
transmission or similar means shall be deemed delivered upon telephone
confirmation of receipt, provided a copy is also delivered via delivery or
mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be
deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or
similar act by Lessee, or be construed as the basis of an estoppel to enforce
the provision or provisions of this Lease requiring such consent. The
acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by
Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys
or damages due Lessor, notwithstanding any qualifying statements or conditions
made by Lessee in connection therewith, which such statements and/or
conditions shall be of no force or effect whatsoever unless specifically
agreed to in writing by Lessor at or before the time of deposit of such
payment. (**) See Paragraph 68
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum
of this Lease for recording purposes. The Party requesting recordation
shall be responsible for payment of any fees applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (1 50%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or efection hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
28. Covenants and Conditions; Construction of Agreement. All provisions of
this Lease to be observed or performed by Lessee are both
covenants and conditions. In construing this Lease, all headings and titles are
for the convenience of the parties only and shall not be considered a part of
this Lease. Whenever required by the context, the singular shall include the
plural and vice versa. This Lease shall not be construed as if prepared by one
of the parties, but rather according to its fair meaning as a whole, as if both
parties had prepared it.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lessor's Lendee') shall have no liability or obligation to
perform any of the obligations of Lessor under this Lease. Any Lender may elect
to have this Lease and/or any Option granted hereby superior to the lien of its
Security Device by giving written notice thereof to Lessee whereupon this Lease
and such Options shall be deemed prior to such Security Device, notwithstanding
the relative dates of the documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3,
Lessee agrees to attorn to a Lender or any other party who acquires ownership of
the Premises by reason of a foreclosure of a Security Device.
30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor
after the execution of this Lease, Lessee's subordination of this Lease shall be
subject to receiving a commercially reasonable non-disturbance agreement (a
"Non-Disturbance Agreement") from the Lender which Non-Disturbance Agreement
provides that Lessee's possession of the Premises, and this Lease, including any
options to extend the term hereof, will not be disturbed so long as Lessee is
not in Breach hereof and attorns to the record owner of the Premises. Further,
within sixty (60) days after the execution of this Lease, Lessor shall use its
commercially reasonable efforts to obtain a NonDisturbance Agreement from the
holder of any pre-existing Security Device which is secured by the Premises. In
the event that Lessor is unable to provide the Non-Disturbance Agreement within
said sixty (60) days, then Lessee may, at Lessee's option, essor's lender and
attempt to negotiate for the execution and delivery of a Non-Disturbance
Agreement. * See Paragraph 69.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be
effective without the provided, however, that, upon written request from Lessor
or a Lender in connection with a sale, financing or and Lessor shall execute
such further writings as may be reasonably required to separately document any
subordination, attornment and/or NonDisturbance Agreement provided for herein.
31. Attorneys' Fees. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys'fees. Such
fees may be awarded in the same suit or recovered in a separate suit, whether or
not such action or proceeding is pursued to decision or judgment. The term,
"Prevailing Party" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fees award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises as Lessor may
deem necessary. All such activities shall be without abatement of rent or
liability to Lessee. Lessor may at any time place on the Premises any ordinary
"For Sale" signs and Lessor may during the last six (6) months of the term
hereof place on the Premises any ordinary "For Lease" signs. Lessee may at any
time place or about the Premises any ordinary "For Sublease" sign.
34. Signs. Except for ordinary "For Sublease" signs, Lessee shall not place any
sign upon the Premises consent. All signs must comply with all Applicable
Requirements. Which will not be unreasonably withheld.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this L4as see, the mutual
termination or cancellation hereof, or a termination hereof by Lessor
for Breach by Lessee, shall automatically terminate any sublease or
lesser estate in the Premises; provided, however, that Lessor may elect
to continue any one or all existing subtenancies. Lessor's failure
within ten (1 0) days following any such event to elect to the contrary
by written notice to the holder of any such lesser interest, shall
constitute Lessor's election to have such event constitute the
termination of such interest.
36. Consents. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs
and expenses (including but not limited to architects', attorneys',
engineers'and other consultants'fees) incurred in the consideration of, or
response to, a request by Lessee for any Lessor consent, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and
supporting documentation therefor. Lessor's consent to any act, assignment or
subletting shall not constitute an acknowledgment that no Default or Breach by
Lessee of this Lease exists, nor shall such consent be deemed a waiver of any
then existing Default or Breach, except as may be otherwise specifically stated
in writing by Lessor at the time of such consent. The failure to specify herein
any particular condition to Lessor's consent shall not preclude the imposition
by Lessor at the time of consent of such further or older conditions as are then
reasonable with reference to the particular matter for which consent is being
given. In the event that either Party disagrees with any determination made by
the other hereunder and reasonably requests the reasons for such determination,
the determining p furnish its reasons in writing and in reasonable detail within
ten (10) business days following such request. See Paragraph 70.
38. Quiet Possession. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.
39. Options.
39.1 Definition. "Option" shall mean: (a) the right to extend the term of
or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the r purchase or the right
of first refusal to purchase the Premises or other property of Lessor.
39.2 (*) See Paragraph 71
39.3 Multiple Options. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later Oprion cannot be exercised unless the
prior Options have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option: (i) during the
period commencing with the giving of any notice of Default and continuing until
said Default is cured; (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee); (iii) during the
time Lessee is in Breach of this Lease; or (iv) in the event that Lessee has
been given three (3) or more notices of separate Default, whether or not the
Defaults are cured, during the twelve (12) month period immediately preceding
the exercise of the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or effect,
notwithstanding Lessee's due and timely exercise of the Option, it, after such
exercise and prior to the commencement of the extended term, (i) Lessee fails to
pay Rent for a period of thirty (30) days after such Rent becomes due (without
any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee
three (3) or more notices of separate Default during any twelve (12) month
period, whether or not the Defaults are cured, or (iii) if Lessee commits a
Breach of this Lease.
40. Multiple Buildings. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including the care and cleanliness of the
grounds and including the parking, loading and unloading of vehicles, and that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such ea rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to documents reasonably requested by Lessor to effectuate
any such easement rights, dedication, map or restrictions. (*) See Para
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to under the provisions hereof,
the Party against whom the obligation to pay the money is asserted shall have
the right to make payme protest" and such payment shall not be regarded as a
voluntary payment and there shall survive the right on the part of said Party to
institute suit for recovery of such sum. If it shall be adjudged that there was
no legal obligation on the part of said Party to pay such sum or any part
thereof, said Party shall be entitled to recover such sum or so much hereof as
it was not legally required to pay.
44. Authority. If either Party hereto is a corporation, trust, limited liability
company, partnership, or similar entity, each individual executing this Lease on
behalf of such entity represents and warrants that he or she is duly authorized
to execute and deliver this Lease on its behalf. Each party shall, within ten
(10) days after request, deliver to the other party satisfactory evidence of
such authority.
45. Conflict. Any conflict betwee the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. Offer. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to
lease to the other Party. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. Multiple Parties. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. Mediation and Arbitration of Disputes. An Addendum requiring the
Mediation and/or the Arbitration of all disputes between the Parties
and/or Brokers arising out of this Lease [:] is Eitis not attached to
this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGEDTO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE
PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE
PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL
INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY
OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING* IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Los Angeles, CA
By LESSOR: Sepulveda Group, LLC
Address: 2236 Barrington Avenue
Los Angeles, CA 90064
(310) 473-1527
(310) 268-8298
By LESSEE: ModaCAD, Inc., a California Corporation
Lee Freedman, CFO
ADDENDUM TO
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - GROSS
NOVEMBER 6,1997
PROPERTY: 3861 SEPULVEDA BOULEVARD
BY AND BETWEEN: (LESSOR) SEPULVEDA GROUP, LLC
(LESSEE) MODACAD, INC.
50. TERM COMMENCEMENT DATE: The Term Commencement Date shall be upon
substantial completion of Tenant Improvements that are Lessor's
obligation to complete, to the extent that Lessee can occupy the
Premises and be fully operational, and that final approval from the
City is received for any work where permits are required by code,
pertaining to the Tenant Improvements which are Lessor's obligation to
complete.
51. BASE RENT: The Base Monthly Rental Rate of $28,485.20 includes a Tenant
Improvement Allowance of $200,000.00. The Base Rent for months two (2)
and three (3) of the lease term shall be abated.
52. SECURITY DEPOSIT: Lessee's Security Deposit shall be an amount equal to
two (2) months' full rent. If the Lessee has not been in default of any
of the terms of the Lease by the end of the 14th month then $28,485.20
of the Security Deposit shall be applied to the rent due for the 15 Ih
month of the lease term.
53. CONSTRUCTION OF TENANT IMPROVEMENTS: Promptly upon execution and delivery
of this Lease, Lessor shall cause to have prepared a set of plans and
specifications for Tenant Improvements to be constructed in the subject
property, according to preliminary space plan approved by Tenant and attached
hereto. Said Plans and Tenant Improvements are subject to the mutual approval
of both parties hereto. The Lessor shall spend a maximum of $200,000.00 to
construct said Tenant Improvements. Any costs for said Tenant Improvements in
excess of $200,000.00 shall be paid for by Lessee. Upon execution of Leases,
Lessee shall pay to Lessor $50,000.00 toward Lessee's Tenant Improvements. In
the event Lessee's Tenant Improvements are less than $250,000.00, Lessor shall
return any excess monies to Lessee upon completion of Lessee's Tenant
Improvements.
The Tenant Improvement Allowance shall include all costs associated with the
construction of Tenant Improvements including but not limited to the cost of.
creation of plans and working drawings, permitting fees, contractor /
subcontractor fees, construction materials, supplies and clean up of the
Premises.
The improvements will be constructed in accordance with the plans and
specifications mutually approved by Lessee and Lessor. Said plans and
specifications shall be attached to this Lease (See EXHIBIT A "Plans And
Specifications"). All work is to comply with applicable building codes, and
building permits are required.
54. RENT ADJUSTMENTS: SEE ATTACHED.
55. OPTION TO EXTEND: SEE ATTACHED.
56. PLANS AND SPECIFICATIONS: SEE ATTACHED ("EXHIBIT N')
57. 2.3 (b) - The following words are hereby added where marked *- "Lessor shall
make such Capital Expenditures".
58. 7.1 (a), (b) (c) and 7.2. - The following sentences are hereby added to
the end of Paragraph 7. Where marked *: "Notwithstanding any provisions
contained herein to the contrary Lessee shall be responsible for the
maintenance and repairs of the HVAC, Elevator and Boiler except that
any cost of replacement of such equipment or any parts thereof shall be
the responsibility of the Lessor. For purposes of this provision cost
of replacement is defined as any single cost over $1,500.00. In such
event Lessee shall provide detailed cost to Lessor for its approval,
except in the case of emergency."
59. Omitted Intentionally.
60. 8.8 - The following sentence is hereby added to the end of this
paragraph where marked *: "This paragraph shall not apply to Lessor's
willful misconduct."
61. 9.6 (b) - Notwithstanding anything to the contrary in this paragraph
9.6 (b), said repair or restoration referred to therein must commence
within 45 days of Lessor being informed of the damage which Lessor is
responsible to repair or restore. After commencement, repairs or
restoration is to be completed within 120 days.
62. 10.2 (a) - The following wording is hereby added where marked *:
Notwithstanding anything to the contrary in this section, Lessee shall
not be responsible for any increase in real property taxes due to sale
or transfer of the demised premises.
63. (a) Lessor's share of profit on Assignment of Sublease shall be fifty
(50%) percent of the Profit (the Lessor's Share). If the Lessee assigns
or subleases during the initial lease term or the Option Period the
following shall also apply: Lessee shall pay to Lessor as Additional
Rent under the Lease the Lessor's Share of the Profit (defined below) on
such transaction as and when received by Lessee.
The "Profit" means (A) all amounts paid to Lessee for such assignment or
sublease, including "key" money, monthly rent in excess of the monthly rent
payable under the Lease, and all fees and other consideration paid for the
assignment or sublease, including fees under any collateral agreements, less (B)
costs and expenses directly incurred by Lessee in connection with the execution
and performance of such assignment or sublease for real estate broker's
commissions and costs or renovation or construction of tenant improvements
required under such assignment or sublease. Lessee is entitled to recover such
costs and expenses before Lessee is obligated to pay the Lessor's Share to
Lessor. The Profit in the case of a sublease of less than all the Property is
the rent allocable to the subleased space as a percentage on a square footage
basis.
Lessee shall provide Lessor a written statement certifying all amounts to be
paid from any assignment or sublease of the Property within thirty (30) days
after the transaction documentation is signed. On written request, Lessee shall
promptly furnish to Lessor copies of all the transaction documentation, for the
duration of the transaction, all of which shall be certified by Lessee to be
complete, true and correct. Lessor's receipt of Lessor's Share shall not be a
consent to any further assignment or subletting. The breach of Lessee's
obligation under this Paragraph shall be a material default of the Lease.
63. (b) Notwithstanding the provisions of paragraph 63 (a) herein above, Lessee
shall have the right to sublease up to a maximum of five thousand (5,000 sf) of
the leased Premises according to all sublease provisions herein and does not
have to pay Lessor any share of any potential Profit.
64. Omitted Intentionally.
65. 13.2 (a) - The following words are hereby added under paragraph 13.3
(a) where marked .*: which is the same rate used in section 13.5, that being
prime rate reported in the Wall Street Journal plus 4%."
66. Omitted Intentionally.
67. 20. - The same limitation of liability for Lessor in this paragraph is
granted to Lessee.
69. 24. - The Waiver rights of Lessor under this paragraph are made reciprocal
to Lessee.
69. 30.3 The following wording is hereby added to paragraph 30.0 where marked *
: "Notwithstanding anything to the contrary contained herein, as a condition
for executing this Lease, Lessee is to be provided with a Non-Disturbance
Agreement by Lessor from its current lender. Modacad, Inc. must have a secure
Lease as against any new owners or lenders."
70. 36. - The following wording is added where marked *: Any costs anticipated
to be charged to Lessee by Lessor for expenses in response to a request by
Lessee for any service to be provided by Lessor shall first receive prior
written approval of Lessee."
71. 39.2 - The following wording is added where marked *: In the event there
is a Sublessee, the Sublessee shall have the same rights as the Lessee under
this lease including the renewal option.
72. 42. - The following wording is hereby added where marked *:
Notwithstanding anything to the contrary contained herein, easement rights and
I dedications are limited to governmental agencies only.
RENT ADJUSTMENT(S)
ADDENDUM TO
STANDARD LEASE
Dated November 6, 1997
By and Between (Lessor) Sepulveda Group, LLC
(Lessee) ModaCAD, Inc., a California Corporation
Property Address: 3861 Sepulveda Boulevard, Culver Citv, CA 9 0230
Paragraph - 54.
A. RENT ADJUSTMENTS:
The monthly rent for each month of the adjustment period(s) specified below
shall be increased using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
X I. Cost of Living Adjustment(s) (COL)
a On (Fill in COL Adjustment Date(s): - January 1. 1999 and every twelve (12)
months thereafter the monthly rent payable under paragraph 1.5 ("Base Rent") of
the attached Lease shall be adjusted by the change, if any, from the Base Month
specified below, in the Consumer Price Index of the Bureau of Labor Statistics
of the U.S. Department of Labor for (select one): CPIW (Urban Wage Earners and
Clerical Workers) or CPI U (All Urban Consumers), for (Fill in Urban Area): Los
Angeles-Anaheim-Riverside, All Items (1982-1984 = 100), herein referred to as
"C.Pl." Said increases shall be a minimum of three (3%) percent per per annum
and in no event exceed five (5%) percent per annum.
(b) The monthly rent payable in accordance with paragraph AI(a) of this
addendum shall be calculated as follows: the Base Rent set forth in paragraph
1.5 of the attached Lease, shall be multiplied by a fraction the numerator of
which shall be the C. P 1. of the calendar month 2 (two) months prior to the
month(s) specified in paragraph AI(a) above during which the adjustment is to
take effect, and the denominator of which shall be the C.P.I. of the calendar
month which is two (2) months prior to (select one): X the first month of the
term of this Lease as set forth in paragraph 1.3 ("Base Month") or 0 (Fill in
Other "Base Month"): The sum so calculated shall constitute the new monthly rent
hereunder, but in no event, shall any such new monthly rent be less than the
rent payable for the month immediately preceding the date for rent adjustment.
(c) In the event the compilation and/or publication of the C.Pl. shall
be transferred to any other governmental department or bureau or agency or shall
be discontinued, then the index most nearly the same as the C.P. 1. shall be
used to make such calculation. In the event that Lessor and Lessee cannot agree
on such alternative index, then the matter shall be submitted for decision to
the American Arbitration Association in accordance with the then rules of said
association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
Initials:
Initials:
OPTION(S) TO EXTEND
ADDENDUM TO
STANDARD LEASE
Dated November 6, 1997
By and Between (Lessor) Sepulveda Group, LLC
(Lessee) ModaCAD, Inc., a California Corporation
Property Address: 3861 Sepulveda Boulevard, Culver City, CA 90230
Paragraph - 55.
A. OPTION(S) TO EXTEND:
Lessor hereby grants to Lessee the option to extend the term of this Lease for 1
additional -12-0 month period(s) commencing when the prior term expires upon
each and all of the following terms and conditions:
(i) Lessee gives to Lessor, and Lessor actually receives on a date which
is prior to the date that the option period would commence (if
exercised) by at least 6 andnotmorethan 12 months, a written notice
of the exercise of the option(s) to extend this Lease for said
additional term(s), time being of essence. If said notification of
the exercise of said option(s) is (are) not so given and received,
the option(s) shall automatically expire; said option(s) may (if more
than one) only be exercised consecutively;
(ii) The provisions of paragraph 39 as amended including the provision
relating to default of Lessee set forth in paragraph 39.4 of this Lease are
conditions of this Option;
(iii) All of the terms and conditions of this Lease except where specifically
modified by this option shall apply;
(iv) The monthly rent for each month of the option period shall be
calculated as follows, using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
X I. Cost of Living Adjustment(s) (COL)
(a) On (Fill in COL Adjustment Date(s): March 1, 2006 and every
twelve (12) months thereafter the monthly rent payable under paragraph 1.5
("Base Rent") of the attached Lease shall be adjusted by the change, if any,
from the Base Month specified below, in the Consumer Price Index of the Bureau
of Labor Statistics of the U.S. Department of Labor for (select one) CPIW (Urban
Wage Earners and Clerical Workers) CPI U (All Urban Consumers), for (Fill in
Urban Area): Los Angeles-Anaheim-Riverside, All Items (1982-1984 = 100), herein
referred to as "CPI". Said increases shall be a minimun of three (3% )percent
per annum and in no event exceed five (5%) percent per annum.
(b) The monthly rent payable in accordance with paragraph AI(a) of this
Addendum shall be calculated as follows: the Base Rent set forth in paragraph
1.5 of the attached Lease, shall be multiplied by a fraction the numerator of
which shall be the C. RI. of the calendar month 2 (two) months prior to the
month(s) specified in paragraph AI(a) above during which the adjustment is to
take effect, and the denominator of which shall be the C.P.I. of the calendar
month which is two (2) months prior to (select one): [E the first month of the
term of this Lease as set forth in paragraph 1.3 ("Base Month") or El (Fill in
Other "Base Month"): The sum so calculated shall constitute the new monthly
rent hereunder, but in no event, shall any such new monthly rent be less than
the rent payable for the month immediately preceding the date for rent
adjustment.
(c) In the event the compilation and/or publication of the C.P.I. shall be
transferred to any other governmental department or bureau or agency or shall be
discontinued, then the index most nearly the same as the C.P.I. shall be used to
make such calculation. In the event that Lessor and Lessee cannot agree on such
alternative index, then the matter shall be submitted for decision to the
American Arbitration Association in accordance with the then rules of said
association and the decision ot the arbitrators shall be binding upon the
parties. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
Development Agreement
This Agreement ("Agreement") is entered into as of November 12, 1997 ("Effective
Date") by and between ModaCAD, a California corporation, having an office at
1954 Cotner Avenue, Los Angeles, CA 90025 ("ModaCAD") and Intel Corporation, a
Delaware corporation, having an office at 2200 Mission College Blvd., Santa
Clara, California 95052, U.S.A. ("Intel").
Recitals
A. ModaCAD plans to develop and distribute an interactive fashion product line
that will, initially, consist of t a CD-ROM ** This product line,
entitled "New York," will enable users to have a rich visual and interactive
experience by allowing users to interact with the digital fashion objects,
connect to the Internet to receive updates, visit other sites, and communicate
electronically with other users.
B. Intel is interested in a long term strategic relationship with ModaCAD in
the area of fashion e-commerce, and as such, is interested in participating in
the New York project, and seeing the product optimized to run on Intel's
Pentium(R) II processor-based PC platform.
Agreement
Intel and ModaCAD agree as follows:
1. Definitions.
1.1. "New York" means the content manager fashion product line, including local
PC content, push content, and e-commerce technologies, and all derivatives
thereof, and future members of the product line whether or not derivatives of
this product, all as described in more detail in Exhibit A.
1.2. "Content" means text, graphics, data, audio, video, photographs, still
images, sound, and any other information contained on New York.
1.3. "Intel Technology" means the contributions, in written form only, of
Intel personnel to the development of New York.
1.4. "Push" means downloads from the Internet that are initiated not by user
request, but by the user's computer (at predetermined times or in the
background during Internet usage) or by the Content server.
2. ModaCAD's Development Efforts.
2.1. Product Specification and Implementation Plan. ModaCAD will write a
detailed technical product specification and implementation plan
("Specification") for New York that will include, at a minimum, a software
requirements document, product build plan, and an end-user support plan. ModaCAD
and Intel will meet at least twice to review drafts of the Specification.
2.1.1. If ModaCAD does not deliver the Specification to
Intel by December 31, 1997, Intel will have the
option to terminate this Agreement.
2.1.2. Within ten days of receiving the Specification, Intel will provide
written acceptance or rejection of the Specification to ModaCAD. If Intel
rejects the Specification Intel may, at its option, terminate this Agreement or
provide ModaCAD with a list of changes that would make the Specification
acceptable. ModaCAD would then have an additional ten days to deliver a
re-written Specification to Intel. Within ten days of receiving a re-written
Specification, Intel will again provide written acceptance or rejection. If
Intel rejects the re-written Specification Intel may, at it's option, terminate
this Agreement.
2.1.3. Failure by Intel to provide a written response within ten days will be
deemed acceptance by Intel.
2.2. Development. ModaCAD will employ no less than ** people to work on the
New York project full time in the following areas:
Digital Content creation
Software development
Web Development
User interface design
2.3. Testing Material. ModaCAD will develop stimuli for end-user testing
including but not limited to screen captures, story boards, mock-ups,
interactive demos and prototypes.
2.4. Timing.
2.4.1. ModaCAD will produce a gold master of the CDROM portion of New York no
later than **
2.4.2. ModaCAD will coordinate ongoing product review sessions with Intel
throughout the development process no less frequently than once a month.
2.4.3. ModaCAD will set up a test Internet server for New York no later than **.
2.4.4. ModaCAD will set up fully functional Internet server for New York no
later than **
2.5. Content. ModaCAD will be responsible for, and will pay all costs and
clearances or permissions for the Content for New York, including but not
limited to rights to use and demo music videos, digital representations of
clothing and other fashion items.
3. Support and Operation.
3.1. ModaCAD or its suppliers will provide customary end user support for the
New York CD-ROM, including but not limited to: o Development and production of
an end user's guide (to be included in the distribution and packaging of the
CD-ROM), which will be updated to accompany new versions of the New York CD-ROM.
o Online customer support with basic help functionality, the ability to access
an online user guide and an e-mail customer support center with no more than a
forty-eight hour reply time.
o Access to technical support representatives, for installation, trouble
shooting and general end-user assistance.
3.2. ModaCAD will provide timely ** Push of current fashion news, information
from online magazine publishers, and branded Content from leading designers and
fashion retailers to New York users for the term of this agreement. To do this,
ModaCAD will employ at least ** dedicated site manager with day-to-day
responsibility for refreshing editorial and graphical Content and one
graphics/design specialist to update images.
4. Intel's Contributions.
4.1. Cash. Intel will pay ModaCAD a non-refundable production fee for New York
which will be deemed earned upon receipt according to the following schedule:
4.1.1. Upon Intel's approval of the Specification for New York, Intel will pay
ModaCAD **.
4.1.2. Upon receipt of written verification (i.e. signed Advertiser contracts)
that ModaCAD will receive at least ** New York during the first twelve
months following its launch, Intel will pay **
4.1.3. It is expressly understood that these sums are not contingent upon any
events other than those listed in Sections 4.1.1 and 4.1.2.
4.1.4. ModaCAD agrees to only use the money it receives from Intel under
this Agreement on expenses related to the development and launch of New York.
4.2. Product Engineering Resources (valued at approximately **).
Upon approval of the Specification for New York, Intel will make available the
equivalent of ** Intel software engineers and ** project manager to work
full time assisting with the development and integration of New York. Intel
will advise ModaCAD on technologies, tools and components for New York
integration consideration.
4.3. Testing and Integration Engineering Resources (valued at approximately **).
In the event an OEM bundling program is accepted, Intel would provide its test
and integration capability, and would manage any and all necessary OEM platform
testing.
4.4. Usability Testing. Intel will, in its discretion, make its usability
testing facilities/resources available to ModaCAD during the development period
for the purpose of testing the effectiveness of New York among end users.
This may include end-user screening/recruiting, videotaping, results analysis
and report generation, development of interview guides and hardware supply.
It does not include the development of test stimuli including mock-ups,
demos and prototypes. Intel will not be responsible for any end-user focus
group testing, concept testing, or in-market testing.
4.5. AS IS. All Intel Technology provided to ModaCAD pursuant to the Agreement
will be solely owned by Intel, and is provided to ModaCAD "AS IS" with no
warranties.
5. Licenses.
5.1. Grant. Intel grants to ModaCAD, for the term of this Agreement, a
nonexclusive, nontransferable, worldwide, royalty-free, license ** to copy,
have copied, sublicense, prepare derivatives works of, and distribute the Intel
Technology **.
5.2. No Other Licenses. Except for the licenses expressly provided herein, no
licenses are granted by either party, either expressly or by implication, to any
intellectual property of the other. Except for the Intel Technology, ModaCAD
owns all rights, title, and interest in an to the New York Software and related
technology developed by ModaCAD in connection with New York.
6. Sales, Distribution and Marketing.
6.1. Publicity. Neither party will reveal the existence or contents of this
Agreement without the consent of the other, except as provided below or as
required by law (in which case the other party will be first given notice and
an opportunity to object). However, Intel approves of, and ModaCAD may disclose
by November 15, 1997, the announcement of this Agreement
attached as "Exhibit B."
6.2. Intel's Efforts.
6.2.1. Intel is currently planning a program to help get software titles that
demonstrate the capabilities of high-end Intel processors bundled for
distribution by OEMs. Intel will work with ModaCAD to facilitate the
evaluation of New York for consideration and possible inclusion in this
bundling program. Intel cannot and does not, however, guarantee ultimate
acceptance of New York by OEMs for their distribution.
6.2.2. Intel will introduce ModaCAD executives to PC OEMs.
6.2.3. Intel will include New York in appropriate Intel marketing activities.
6.3. ModaCAD's Efforts
6.3.1. ModaCAD will: Write a business plan ** explaining the potential for
retail distribution of New York Distribute the New York CD-ROM in high-traffic
retail outlets in the United States, and in fashion magazines. Sell ad space on
New York to designers. At a minimum, ModaCAD will employ ** full-time sales
persons in connection with this effort. Create and promote a free, time-limited
version of New York for market development purposes.
6.3.2. New York will prominently display Intel branding, but only in compliance
with Intel's trademark usage guidelines and only after receiving Intel's written
approval of each design and intended use. Examples of implementation could be:
dedicated onscreen real estate continuously displaying Intel name or brand
full or partial screen credit to Intel
animation with audio at startup and shut down
Implementation may also occur on CD-ROM and application packaging
6.4. Joint Marketing. Intel may invite and ModaCAD may elect to participate in
industry marketing activities to provide testimony about the value of Intel
Architecture PCs in new business models. In turn, if ModaCAD requests, Intel may
elect to participate in ModaCAD's marketing activities.
6.5. Demonstration and Marketing Rights. Intel will have the following worldwide
rights and licenses to New York :
6.5.1. Intel may use and display the Content publicly and privately in
displays, performances, and broadcasts for promotional purposes, including at
trade shows, in customer visits, in advertisements, and by means of video or
other electronic transmission of sounds, text and images. Intel may license
other parties to exercise such rights in connection with the promotion and
marketing of Intel products, but will not license or distribute copies of the
Content for end-user distribution except as expressly permitted in writing.
6.5.2. Intel may include copies of the Content in Intel's printed and digital
publications for promotional purposes. This includes use in annual reports,
corporate web site, advertising, point-of-sale displays and the like, all of
which may be reproduced and distributed.
6.5.3. Intel may copy or have copied the Content as reasonably necessary to
exercise the rights granted hereunder, provided that any copies of the Demo
provided to third parties permitted hereunder will be under customary
"shrink-wrap" or similar license terms which prohibit copying and
distribution not authorized in advance by ModaCAD.
7. Royalties.
7.1. Revenue Definitions
7.1.1. "New York Revenues" means all cash receipts related to revenues
generated through all activities related to New York, including but not
limited to, advertising and subscription revenue.
7.1.2. "New York Net Income" means New York Revenues less all actual direct
costs and expenses (limited to Direct sales/marketing expenses, OEM/Retailer
Distribution commissions, Content creation costs, application end user support
costs, ISP cost and CD duplication (both labor and materials), and product
development) incurred through activities related to New York. Additions or
exceptions to these line items require joint approval by ModaCad and Intel.
7.1.3. "Gross Revenue" means all ModaCAD revenue.
7.2. Intel Royalties
7.2.1. Until Intel has received under this Section **
7.3. Revenue Reports, Payments. Within sixty days after the end of each calendar
quarter during the term of this Agreement ModaCAD will pay any amounts due and
will deliver to Intel at the addresses set out in this Agreement a statement
which sets out:
7.3.1. The period covered in the report;
7.3.2. ModaCAD's Gross Revenue for the quarter;
7.3.3. New York Revenue for the quarter; and
7.3.4. A detailed calculation of New York Net Income.
7.4. Payments to Intel will be by wire transfer **.
7.5. Audits ModaCAD will maintain complete and accurate records of the
activities performed under this Agreement (including records of advertising and
subscription revenue) for a period of five (5) years after the completion
thereof. Records relating to the performance of this Agreement will be made
available in confidence to Intel's independent certified public accountants (or
equivalent for non-U.S. jurisdictions) upon reasonable notice, which records may
be used for the sole purpose of auditing a party's compliance with the
Agreement. In the event that a shortfall greater than 10% is discovered in
portions of New York Net Income paid by ModaCAD, such audit will be at the
ModaCAD's expense, and ModaCAD will promptly make up the difference.
8. Warrants.
8.1. As partial consideration for Intel's obligations under this Agreement,
ModCAD has granted to Intel a Warrant, attached hereto as Exhibit C.
9. Process For Expanding The New York Product Line.
9.1. Intel and ModaCAD will meet at least semi-annually to discuss future plans
for the New York. Among other things, the parties will discuss the possibility
of contributing additional money and resources, on terms to be negotiated, to
create a new version(s) of the product or add new members to the product
line, to reflect and take advantage of changes in the fashion market and in
computer and communications technology.
10. Termination.
10.1. Term. This Agreement's term commences as of the Effective Date **.
10.2. Termination for Breach. Either party may terminate this Agreement if the
other party breaches with respect to any of its obligations under this
Agreement: (1) if such breach is capable of cure and remains uncured twenty days
following written notice of the breach; or (ii) immediately on written notice of
a breach that is not capable of cure.
10.3. Survival. Sections 5.2, 6.1, and 11 will survive any termination of this
Agreement.
11. General Provisions.
11.1. Freedom of Action. This Agreement does not preclude Intel from evaluating
and/or marketing similar products.
11.2. Confidential Terms. Confidential information will be held in confidence
pursuant to the terms of the Corporate Non-Disclosure Agreement in place
between the parties **. ModaCAD will not disclose any information or
methods to Intel that Intel will be foreclosed by confidentiality obligations
from incorporating into its own products, except that this will not give Intel
a right to ModaCAD's source code.
11.3. Relationship of Parties. The parties are not partners or joint venturers,
or liable for the obligations, acts, or activities of the other.
11.4. Amendments and Assignments. Any change, modification or waiver to this
Agreement must be in writing and signed by an authorized representative of each
party. Neither party may assign this Agreement or any portion of this Agreement
to any other party without the other's prior written consent.
11.5. Merger and Waiver. Except for those certain agreements pertaining to
confidentiality, and equity investments, this Agreement is the entire agreement
between the parties with respect to the development and distribution of New
York, and it supersedes any prior or contemporaneous agreements and negotiations
relating thereto. No waiver of any breach or default will constitute a waiver of
any subsequent breach or default.
11.6. Rights. ModaCAD warrants and represents that it has or will obtain all
rights necessary to undertake the activities described in this Agreement and to
grant the licenses described herein. ModaCAD will promptly notify Intel of any
charge or claim of infringement of any third party's right relating to
development, distribution, or display of New York.
11.7. Suits based on New York. ModaCAD will defend, indemnify, and hold Intel
harmless from and against any suit or proceeding brought against Intel or its
subsidiaries based upon the development, distribution or display of New York,
including any claim that New York infringes any third-party intellectual
property right or that New York is in any way related to or a cause of liability
for harm to a human being (a "Claim"). ModaCAD will reimburse Intel for all
damages and costs awarded, including attorneys' fees, and settlement costs,
provided that Intel will not settle any claim without ModaCAD's consent.
11.7.1. Intel will promptly notify ModaCAD of any Claim and will provide
information, assistance, and cooperation in defending against it (at ModaCAD's
expense).
11.7.2. Intel will have the right to participate in the defense of any Claim, at
its own expense.
11.7.3. This indemnity will not apply to Intel Technology.
11.8. NO WARRANTY. EXCEPT AS EXPRESSLY PROVIDED HEREIN, MATERIALS CONTRIBUTED BY
EACH PARTY HEREUNDER ARE PROVIDED AS IS. THE PARTIES MAKE NO WARRANTIES WITH
RESPECT TO SUCH MATERIALS, EITHER EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED
WARRANTIES OF MERCHANTABILITY, NONINFRINGEMENT OR FITNESS FOR A PARTICULAR
PURPOSE.
11.9. Limited Liability. Neither party will be liable to the other for lost
profits, expected revenues, or development or support costs arising from any
termination of this Agreement. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE
OTHER FOR LOSS OF PROFITS, DATA, OR USE OR ANY SPECIAL, CONSEQUENTIAL OR
INCIDENTAL DAMAGES, HOWEVER CAUSED, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH
DAMAGE. THE PARTIES ACKNOWLEDGE THAT THESE LIMITATIONS ON POTENTIAL LIABILITIES
WERE AN ESSENTIAL ELEMENT IN SETTING CONSIDERATION UNDER THIS AGREEMENT.
11.10. Compliance with Law. Neither party will export, distribute, or sell New
York or the Intel Technology in violation of US or other applicable law.
11.11. Notices and Requests. All notices and requests required or made under
this Agreement must be in writing and personally delivered, or if mailed,
postage prepaid, certified or registered mail, or overnight courier to the
addresses listed below:
- --------------------------------------------------------------------------------
To Intel To ModaCAD
Intel Corporation, ModaCAD, Inc.
2200 Mission College Blvd.,
Santa Clara, California 95052
Attn.: General Counsel Attn.: General Counsel
Direct Royalty Statements to:
Post Contract Management, SC4-210,
Intel Corporation,
2200 Mission College Blvd.,
Santa Clara, California 95052
- -------------------------------------------------------- -----------------------
11.12. Choice of Law. Any claim based on this Agreement will be
governed by the laws of Delaware, and will be subject to the
exclusive jurisdiction of the state and federal courts located
there.
In witness of their agreement, the parties have caused the Agreement to be
executed below by their authorized representatives.
Intel Corporation ModaCAD, Inc.
By: By:
---------------------------------- -------------------------------------
Name Name
Title Title
**
ModaCAD, Inc.
1954 Cotner Avenue
Los Angeles, California 90025
Tel: (310) 312-9826 Fax: (310) 444-9577
Internet: http://www.modacad.com
For Additional Information Contact:
Alison Barney, Director of Corporate Communications
(310) 312-9826 Ext. 108
email: [email protected]
Linda Freedman, VP Marketing
email: [email protected]
News Release
FOR IMMEDIATE RELEASE
MODACAD ANNOUNCES RELATIONSHIP WITH INTEL
ModaCAD and Intel Agree to Co-Develop Solution
For E-Business Initiatives And Mass Market Use
LOS ANGELES, CALIFORNIA, November 14, 1997.....ModaCAD, Inc. (NASDAQ: MODA)
today announced that it has signed an agreement with Intel Corporation to
co-develop a breakthrough e-business solution for fashion retailers and
manufacturers that maximizes the power of the visually connected PC.
Although specific product details have not yet been disclosed, the two companies
have agreed to work together to develop and deliver rich, visual, and
interactive content, that is optimized for Pentium(R) II processor based PCs.
Using advanced Internet push technology and multimedia enhancements, the
co-developed solution will enable a rich and personalized end-user shopping
experience.
According to Joyce Freedman, president of ModaCAD, "Working with Intel to
develop e-business solutions and explore new methods by which to distribute
consumer software is one of the most profound events in ModaCAD's operating
history. Our ultimate goal is to develop a complete product line of fashion
products and other focused applications that are intended to service the broader
e-business market segment."
Maurizio Vecchione, ModaCAD's executive vice president added, "Our goal is not
to directly manage retail transactions, but rather to be the conduit by which
manufacturers and retailers can begin to conduct daily retail business
electronically with their customers."
Ron Whittier, senior vice president of Intel's Content Group said,
"Relationships with trendsetting companies, like ModaCad, are an important part
of our strategy to broadly enable business solutions on Intel architecture
computers. We expect this to have an immediate benefit in the rapidly growing
e-business marketplace."
ModaCAD's core rendering technology enables computers to create photo-realistic
synthetic 3D images on a computer screen from computer generated data, in
real-time. ModaCAD develops, markets, and licenses 3D rendering, modeling and
virtual reality software for a broad variety of applications to the commercial,
consumer and OEM marketplaces. ModaCAD holds two patents on its proprietary
rendering technology and distributes its products to over 33 countries
worldwide.
Exhibit C
Warrant Agreement
Warrant agreement is filed separately under Exhibit 4.1.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 2, 1998 accompanying the financial
statements included in the Annual report of ModaCAD, Inc. on Form 10-KSB for
the year ended December 31, 1997. We hereby consent to the incorporation by
reference of said report in the Registration Statements of ModaCAD, Inc. on
Forms S-8 (#333-35987, dated September 19, 1997), S-3 (#333-26349, dated
June 18, 1997). S-3 (#333-26691, dated June 18, 1997) and S-8 (#333-21775,
dated February 14, 1997).
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 18, 1998
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