<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________
COMMISSION FILE NUMBER 0-21123
SRS LABS, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 33-0714264
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2909 Daimler Street, Santa Ana, California 92705
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(Address of principal executive offices)
(714) 442-1070
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(Issuer's telephone number)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: as of July 31, 1997, 9,580,867
shares of the issuer's common stock, par value $.001 per share, were
outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(CHECK ONE):
Yes [ ] No [X]
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SRS LABS, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
ITEM 1. Financial Statements
Balance Sheets as of June 30, 1997 (unaudited) and
December 31, 1996 ............................................. 3
Statements of Income for the three month and six month periods
ended June 30, 1997 and 1996 (unaudited)........................ 4
Statements of Cash Flows for the six month periods
ended June 30, 1997 and 1996 (unaudited)........................ 5
Notes to the Interim Unaudited Financial Statements............. 6
ITEM 2. Management's Discussion and Analysis or Plan of Operation....... 8
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.............13
ITEM 5. Other Information...............................................13
ITEM 6. Exhibits and Reports on Form 8-K................................14
SIGNATURES.................................................................15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SRS LABS, INC
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -----------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,527,472 $ 3,455,997
Royalty receivable 1,990,534 702,966
Interest receivable 331,776 325,822
Other receivables 18,500 20,030
Prepaid expenses 139,306 105,919
Deferred income taxes 218,936 218,936
----------- -----------
Total current assets 6,226,524 4,829,670
INVESTMENTS AVAILABLE FOR SALE 21,487,774 20,969,785
FURNITURE, FIXTURES & EQUIPMENT - net 247,360 281,189
PATENTS - net 165,718 126,827
GOODWILL - net 220,137 280,052
DEFERRED INCOME TAXES 186,576 186,576
----------- -----------
TOTAL ASSETS $28,534,089 $26,674,099
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 160,286 $ 275,554
Accrued liabilities 341,912 566,139
Income taxes payable 974,976 433,021
Current portion of consideration due on asset purchase 180,000 180,000
----------- -----------
Total current liabilities 1,657,174 1,454,714
CONSIDERATION DUE ON ASSET PURCHASE, net of
current portion 4,085 68,635
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value 2,000,000 shares authorized; no
shares issued and outstanding
Common stock - $.001 par value 56,000,000 shares authorized; 9,581 9,469
9,580,867 (at June 30, 1997) and 9,468,548
(at December 31, 1996) shares issued and outstanding
Additional paid-in capital 24,819,391 24,678,961
Deferred stock option compensation 197,482 154,386
Unrealized gain on investments available for sale 83,099 87,688
Retained earnings 1,763,277 220,246
----------- -----------
Total Stockholders' equity 26,872,830 25,150,750
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $28,534,089 $26,674,099
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
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SRS LABS, INC
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Royalty revenues $ 2,015,799 $ 1,064,812 $ 3,817,899 $ 2,099,374
Other revenues 100,000 - 510,000 180
----------- ----------- ----------- -----------
Total revenues 2,115,799 1,064,812 4,327,899 2,099,554
COST OF SALES 75,885 17,363 115,079 22,304
----------- ----------- ----------- -----------
GROSS MARGIN 2,039,914 1,047,449 4,212,820 2,077,250
SALES AND MARKETING 361,232 206,955 789,894 490,672
RESEARCH AND DEVELOPMENT 114,787 114,911 298,379 222,648
GENERAL AND ADMINISTRATIVE 490,373 334,736 1,205,533 672,520
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 1,073,522 390,847 1,919,014 691,410
INTEREST INCOME/(EXPENSE), net 272,597 803 530,241 (1,227)
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 1,346,119 391,650 2,449,255 690,183
PROVISION FOR INCOME TAXES 498,064 102,021 906,225 182,935
----------- ----------- ----------- -----------
NET INCOME $ 848,055 $ 289,629 $ 1,543,030 $ 507,248
=========== =========== =========== ===========
NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE $ 0.08 $ 0.04 $ 0.14 $ 0.07
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
USED IN THE CALCULATION OF NET
INCOME PER COMMON AND
COMMON EQUIVALENT SHARE 10,740,610 7,398,488 10,744,356 7,368,316
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
4
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SRS LABS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,543,030 $ 507,248
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 163,459 131,464
Amortization of premium on investments available
for sale 54,602 -
Accretion of consideration due on asset purchase 5,961 19,032
Increase in deferred compensation 43,096 76,862
Ascribed value of services contributed - 29,000
Changes in operating assets and liabilities:
Increase in royalty receivable (1,287,568) (174,478)
Increase in accounts receivable - (18,506)
Increase in interest receivable (5,954) -
Decrease (increase) in other current and long term assets (31,857) 215,736
Increase (decrease) in accounts payable (115,268) 243,748
Increase (decrease) in other accrued liabilities (224,227) 57,383
Increase in income taxes payable 545,031 104,569
----------- -----------
Net cash provided by operations 690,305 1,192,058
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment (15,373) (63,854)
Expenditures related to patents (51,439) -
Purchases of investments available for sale (580,256) -
----------- -----------
Net cash used in investing activities (647,068) (63,854)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of consideration due on asset purchase (112,305) (111,180)
Issuance of common stock - 100,000
Exercise of stock options 140,543 -
----------- -----------
Net cash provided by (used in) financing activities 28,238 (11,180)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 71,475 1,117,024
CASH AND CASH EQUIVALENTS, beginning of period 3,455,997 384,087
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,527,472 $ 1,501,111
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - - Cash paid
during the period for:
Income Taxes $ - $ 78,366
=========== ===========
SUPPLEMENTAL DISCLOSURES ON NON-CASH
TRANSACTIONS
Additional consideration accrued for asset purchase $ 41,794 $ 26,636
Unrealized loss on investments, net $ 7,665 $ -
</TABLE>
See accompanying notes to financial statements.
5
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SRS LABS, INC.
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS
1. GENERAL/BASIS OF PRESENTATION
SRS Labs, Inc. (the "Company") develops, markets and licenses patented audio
technologies for use in five worldwide markets: consumer home audio, computer
multimedia, car audio, professional sound and video and arcade games.
In August 1996, the Company completed an initial public offering of 3,107,452
shares of common stock for $8.00 per share, netting proceeds to the Company
after underwriting discounts and expenses of approximately $22.1 million.
The accompanying interim unaudited financial statements have been prepared by
the Company in conformity with generally accepted accounting principles for
interim financial information and with the rules and regulations of the U.S.
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such regulations.
In the opinion of management, the financial statements contain all adjustments,
consisting only of normal recurring adjustments, considered necessary for a fair
statement of the balance sheets as of June 30, 1997 and December 31, 1996, the
statements of income for the three and six month periods ended June 30, 1997 and
1996 and the statements of cash flows for the six month periods ended June 30,
1997 and 1996. The results of operations for the six month period ended June 30,
1997 are not necessarily indicative of the results of operations for the entire
fiscal year ending December 31, 1997. The interim financial statements should be
read in conjunction with the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996.
2. INVESTMENTS AVAILABLE FOR SALE
The Company has classified its investments as available-for-sale in accordance
with SFAS No. 115. They are recorded at their fair value. As of June 30, 1997,
the Company's available-for-sale investments had a cost of $21,348,956 and an
estimated fair value of $21,487,774, based on quoted market prices. The
unrealized gains on these investments of $138,818, net of income taxes of
$55,719, have been reported in the Company's balance sheet as an increase in
stockholders' equity.
6
<PAGE> 7
3. COMMITMENTS AND CONTINGENCIES
On June 1, 1997, the Company signed a new lease agreement for its headquarters
facility located at 2909 Daimler Street, Santa Ana, California (the "Lease")
with Daimler Commerce Partners, L.P. (the "Partnership"). The Lease contains
substantially the same terms as the original lease agreement entered into on
June 1, 1994 with the Partnership. The general partner of the Partnership is
Conifer Investments, Inc. ("Conifer"). The sole stockholder of Conifer is the
Thomas Yuen Family Trust and the executive officers of Conifer include Mr. and
Mrs. Thomas C.K. Yuen. Mr. Yuen is an executive officer and a director of the
Company and the Trust is a principal stockholder of the Company. The
headquarters facility consists of 23,400 square feet of office and warehouse
space. The Lease term commenced on June 1, 1997 and will expire May 31, 2000.
The rent for the term of the Lease is $13,806 per month, plus common area
expenses, real property taxes, utilities, insurance premiums, and maintenance.
The Lease grants the Company an option to renew the Lease for an additional two
years at $15,210 per month, plus common area expenses, real property taxes,
utilities, insurance premiums, and maintenance.
4. NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting No. 128, "Earnings per Share" (FAS 128) which is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. FAS 128 requires the Company to disclose a basic and diluted
earnings per share (EPS). The Company will adopt the provisions of FAS 128
within the 1997 year-end financial statements. Basic and diluted EPS, as
computed under FAS 128, would have been $.09 and $.08 per share, respectively,
for the three months ended June 30, 1997 and $.16 and $.14 per share,
respectively, for the six months ended June 30, 1997.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW/FORWARD-LOOKING STATEMENTS
SRS Labs, Inc. (the "Company") develops, markets and licenses patented
audio technologies for use in five worldwide markets: consumer home audio,
computer multimedia, car audio, professional sound and video and arcade games.
The Company licenses its flagship technology, SRS (o)(R), the Sound Retrieval
System(R) ("SRS") to leading original equipment manufacturers.
Included in this Item 2. Management's Discussion and Analysis or Plan
of Operation and in Part II. Item 5. Other Information, of this Report are
certain forward-looking statements reflecting management's current expectations.
Although the Company believes that its expectations are based upon reasonable
assumptions, there can be no assurances that the Company's financial goals will
be realized. Numerous factors may affect the Company's actual results and may
cause results to differ materially from those expressed in forward-looking
statements made by or on behalf of the Company. The Company's operating results
have historically been, and will continue to be, subject to quarterly and other
fluctuations due to a variety of factors, including the extent to which the
Company's licensees incorporate SRS or the Company's other technologies into
products, the gain or loss of significant customers, competitive pressures on
selling prices, the acceptance of new or enhanced versions of the Company's
technologies, the rate the Company's semiconductor licensees manufacture and
distribute chips to OEMs, seasonal customer demand, the Company's ability to
continue to effectively compete with others in the field of audio enhancement
technologies processes and products and general business economic conditions,
particularly those effecting the consumer electronics market.
As a result of existing and new competitors into the 3D audio
market, the Company has recently experienced, and anticipates that it will
continue to experience, increased pricing pressures due to aggressive pricing
from certain of the Company's competitors. Due to competitive price pressures,
the Company may from time to time reduce the average unit revenue. In order to
offset declines in average unit selling prices, the Company depends upon
increased usage of its technologies by existing customers and expansion into new
market segments. The degree to which the Company can expand usage of its
technology by both new and existing customers will depend on a number of factors
including semiconductor development and delivery schedules, the ability of the
Company to manage expansion in international marketing and sales and the timely
introduction of new technologies such as Focus and TruSurround. There is no
assurance that the Company will achieve the desired volume growth to offset the
effect to revenue caused by the reduction in average unit price.
As the Company transitions the delivery of its technologies to
OEMs from a discrete solution to a semiconductor-based solution, the Company
improves its ability to deliver cost-effective, reliable solutions to its
customers. The existence of semiconductor-based technology solutions, however,
increases the dependence of the Company's operating results on the ability of
semiconductor manufacturers to timely deliver such solutions to the marketplace.
The Company's reliance on outside semiconductor manufacturers reduces the
Company's ability to control the supply of products to the marketplace. The
occurrence of any supply problems to OEMs of semiconductor products
incorporating the Company's technologies, as well as lack of semiconductor
manufacturers' sales to OEMs of chips which incorporate the Company's
technologies, may have an adverse effect on the Company's operating results.
8
<PAGE> 9
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE
30, 1996
Revenues
Revenues for the three months ended June 30, 1997 were
$2,115,799 compared to $1,064,812 for the three months ended June 30, 1996, an
increase of 98.7%. This increase resulted primarily from the growth of the
licensee base and increased shipments of products incorporating SRS on which
royalties are paid by licensees. Of the $2,115,799 in revenues for the three
months ended June 30, 1997, $100,000 related to one time license fees and
$2,015,799 related to on-going royalties.
Cost of Sales
Cost of sales consists primarily of fees paid to third party
representatives for sales administration and support. Cost of sales for the
three months ended June 30, 1997 were $75,885 compared to $17,363 for the three
months ended June 30, 1996, an increase of 337.1%. Cost of sales were 3.6% of
total revenues for the three months ended June 30, 1997 compared to 1.6% for the
three months ended June 30, 1996. This increase resulted, in part, from the
increase in license revenue on which the Company pays fees to third party
representatives. The largest component of the increase was related to the
payment of a non-recurring commission totaling $36,811, paid by the Company in
the second quarter of 1997 on selected accounts in accordance with an existing
sales representative agreement.
Sales and Marketing
Sales and marketing expenses consist of contracted services
and salaries of marketing personnel (including sales commissions), customer
service activities, and advertising, promotional, marketing and trade show
costs. Sales and marketing expenses for the three months ended June 30, 1997
were $361,232 compared to $206,955 for the three months ended June 30, 1996, an
increase of 74.5%. The increase from the three months ended June 30, 1996 to the
three months ended June 30, 1997 was primarily attributable to increased
staffing to promote new technologies, increased travel costs to support the
Company's global presence and an increase in marketing and promotional
activities aimed at establishing SRS as an international standard. However, as
a percentage of total revenues, sales and marketing expenses decreased to 17.1%
in the three months ended June 30, 1997 from 19.4% in the three months ended
June 30, 1996 as the Company leveraged its expenses on higher sales volumes.
Research and Development
Research and development expenses consist primarily of
salaries paid to personnel engaged in research, development and engineering
activities, amounts paid to consultants and the cost of materials used in the
development of audio technologies. Research and development expenses remained
relatively constant in the comparable second quarters. As a percentage of total
revenues, research and development expenses decreased to 5.4% in the three
months ended June 30, 1997 from 10.8% in the three months ended June 30, 1996 as
the Company leveraged its expenses on higher sales volumes.
9
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General and Administrative
General and administrative expenses consist primarily of
salaries and facility costs for administrative, and executive personnel, as well
as certain consulting expenses, insurance costs, professional fees and other
costs. General and administrative expenses for the three months ended June 30,
1997 were $490,373 compared to $334,736 for the three months ended June 30,
1996, an increase of 46.5%. This increase from the three months ended June 30,
1996 to the three months ended June 30, 1997 was primarily attributable to
increased staffing, increases in professional fees associated with maintaining
patent and trademark rights in the U.S. and foreign countries and increased
expenses associated with the Company's status as a publicly-traded company. As a
percentage of total revenues, general and administrative expenses decreased to
23.2% in the three months ended June 30, 1997 from 31.4% in the three months
ended June 30, 1996 as the Company leveraged its expenses on higher sales
volumes.
Interest Income (expense)
Interest income was $272,597 for the three months ended June
30, 1997 compared to interest income of $803 for the three months ended June 30,
1996. This increase is due to interest earned on investing the proceeds from the
initial public offering which took place on August 8, 1996.
Provision for Income Taxes
Income tax expenses for the three months ended June 30, 1997
were $498,064 compared to $102,021 for the three months ended June 30, 1996, an
increase of 388.2%. The effective tax rate for the three months ended June 30,
1997, which is based on current estimates of the annual effective income tax
rate, was 37% compared to 26% for the three months ended June 30, 1996.
Estimated higher pre-tax earnings for 1997 and the full utilization of the net
operating loss carryforwards in 1996 were responsible for the increase in the
estimated effective rate.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1996
Revenues
Revenues for the six months ended June 30, 1997 were
$4,327,899 compared to $2,099,554 for the six months ended June 30, 1996, an
increase of 106.1%. This increase resulted primarily from the growth of the
licensee base and increased shipments of products incorporating SRS on which
royalties are paid by licensees. Of the $4,327,899 in revenues for the six
months ended June 30, 1997, $510,000 related to one time license fees and
$3,817,899 related to on-going royalties.
10
<PAGE> 11
Cost of Sales
Cost of sales for the six months ended June 30, 1997 were
$115,079 compared to $22,304 for the six months ended June 30, 1996, an increase
of 416.0%. Cost of sales were 2.7% of total revenues for the six months ended
June 30, 1997 compared to 1.1% for the six months ended June 30, 1996. This
increase resulted, in part, from the increase in license revenue on which the
Company pays fees to third party representatives. The largest component of the
increase was related to the payment of a non-recurring commission totaling
$36,811, paid by the Company in the second quarter of 1997 on selected accounts
in accordance with an existing sales representative agreement.
Sales and Marketing
Sales and marketing expenses for the six months ended June 30,
1997 were $789,894 compared to $490,672 for the six months ended June 30, 1996,
an increase of 61.0%. The increase from the six months ended June 30, 1996 to
the six months ended June 30, 1997 was primarily attributable to increased
staffing to promote new technologies, increased travel costs to support our
global presence and an increase in marketing and promotional activities aimed at
establishing SRS as an international standard. However, as a percentage of total
revenues, sales and marketing expenses decreased to 18.3% in the six months
ended June 30, 1997 from 23.4% in the six months ended June 30, 1996 as the
Company leveraged its expenses on higher sales volumes.
Research and Development
Research and development expenses for the six months ended
June 30, 1997 were $298,379 compared to $222,648 for the six months ended June
30, 1996, an increase of 34.0%. The increase from the six months ended June 30,
1996 to the six months ended June 30, 1997 was primarily attributable to
increased staffing and an increase in expenses associated with the internal
development of new and existing technologies. As a percentage of total revenues,
research and development expenses decreased to 6.9% in the six months ended June
30, 1997 from 10.6% in the six months ended June 30, 1996 as the Company
leveraged its expenses on higher sales volumes.
General and Administrative
General and administrative expenses for the six months ended
June 30, 1997 were $1,205,533 compared to $672,520 for the six months ended June
30, 1996, an increase of 79.3%. This increase from the six months ended June 30,
1996 to the six months ended June 30, 1997 was primarily attributable to
increased staffing, increases in professional fees associated with maintaining
patent and trademark rights in the U.S. and foreign countries and increased
expenses associated with the Company's status as a publicly-traded company. As a
percentage of total revenues, general and administrative expenses decreased to
27.9% in the six months ended June 30, 1997 from 32.0% in the six months ended
June 30, 1996 as the Company leveraged its expenses on higher sales volumes.
11
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Interest Income (expense)
Interest income was $530,241 for the six months ended June 30,
1997 compared to interest expense of $1,227 for the six months ended June 30,
1996. This increase is due to interest earned on investing the proceeds from the
initial public offering which took place on August 8, 1996.
Provision for Income Taxes
Income tax expenses for the six months ended June 30, 1997
were $906,225 compared to $182,935 for the six months ended June 30, 1996, an
increase of 395.4%. The effective tax rate for the six months ended June 30,
1997, which is based on current estimates of the annual effective income tax
rate, was 37% compared to 26.5% for the six months ended June 30, 1996.
Estimated higher pre-tax earnings for 1997 and the full utilization of the net
operating loss carryforwards in 1996 were responsible for the increase in the
estimated effective rate.
LIQUIDITY AND CAPITAL RESOURCES
From inception through August 1996, the Company financed its
operations primarily through the private placement of equity securities. In
August 1996, the Company completed an initial public offering of 3,107,452
shares of common stock at $8.00 per share, from which net proceeds to the
Company were $22.1 million.
The Company's principal source of liquidity at June 30, 1997
consisted of cash and cash equivalents of $3.5 million and long-term investments
of approximately $21.5 million.
The Company finances its operations primarily through the cash
provided by its operations. The Company's operating activities provided $690,305
in cash for the six months ended June 30, 1997 and $1,192,058 for the six months
ended June 30, 1996. The $501,753 decrease in cash provided by operations was
due to the increase in royalties receivable, partially offset by net income and
the increase in income taxes payable. The Company experienced an increase in
royalties receivable due to the slow payment of royalties by certain of its
licensees. The Company does not believe that future slow payments will have a
negative impact on the Company's ability to finance its operations. The Company
has no significant commitments for capital expenditures.
Of the $690,305 cash flow generated from operations during the
six months ended June 30, 1997, the Company invested $580,256 in long-term
investments. The Company has adopted investment guidelines which restrict the
types and quality of investments the Company is authorized to enter into. The
Company's long-term investments consist primarily of municipal bonds rated a
minimum of A1.
The Company currently does not have commitments for credit
facilities, such as revolving credit agreements or lines of credit that could
provide additional working capital. The Company believes that the current cash
balances and cash flow from operations will be sufficient to meet the Company's
operating and capital requirements for the foreseeable future.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of SRS Labs, Inc. was held
on June 11, 1997 for the purpose of electing one Class I director to the Board
of Directors and voting on a proposal to approve the SRS Labs, Inc. Amended and
Restated 1996 Long-Term Incentive Plan (the "Long-Term Incentive Plan").
Jeffrey I. Scheinrock was elected to serve as the Class I
Director of the Company for a three-year term expiring at the 2000 Annual
Meeting of Stockholders. John AuYeung and John Tu continued in office as Class
II Directors, and Stephen V. Sedmak and Thomas C.K. Yuen continued in office as
Class III Directors of the Company. The tabulation of the votes cast for the
election of Mr. Scheinrock was as follows:
Votes Votes
For Withheld
8,379,827 49,409
The Long-Term Incentive Plan was approved. The tabulation of
the votes was as follows:
Votes Votes Broker
For Against Abstentions Non-Votes
6,510,756 902,652 4,354 1,011,474
ITEM 5. OTHER INFORMATION
In January 1997, NEC Technologies, Inc. ("NEC") merged with
and into Packard Bell Electronics, Inc. ("Packard Bell"). Both Packard Bell and
NEC were licensees of the Company. As a result of the merger, only the existing
license agreement with Packard Bell remains, but will be applicable to all
SRS-equipped products manufactured by the new combined company, Packard
Bell/NEC. Pursuant to recent discussions with Packard Bell/NEC, management
expects that royalty revenue attributable to the Packard Bell/NEC license
agreement will be equivalent to royalties paid under the prior license agreement
with Packard Bell prior to the merger. For the fiscal year ended December 31,
1996 ("Fiscal 1996"), Packard Bell and NEC accounted for 28% and 10%,
respectively, of the Company's revenues. For the third quarter of Fiscal 1996,
Packard Bell and NEC accounted for 26% and 9%, respectively, of the Company's
revenues, and for the fourth quarter of Fiscal 1996, Packard Bell and NEC
accounted for 20% and 14%, respectively, of the Company's revenues. For the
first six months of the fiscal year ending December 31, 1997, Packard Bell and
NEC accounted for 17% and 3%, respectively, of the Company's revenues.
As with any licensee, the Company can make no assurances or
predictions (i) that any licensee, including Packard Bell/NEC, will remain a
licensee, (ii) regarding use, or the extent of use, of such license by the
licensee or (iii) whether the licensee will utilize the Company's new
technologies.
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<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits listed below are filed herewith as part
of this Report.
Exhibit No.
10.1 Industrial Real Estate Lease dated May 30, 1997 between
Daimler Commerce Partners, L.P. and SRS Labs, Inc.
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the Company's second
quarter ended June 30, 1997.
14
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
SRS LABS, INC.,
a Delaware Corporation
Date: August 12, 1997 By: /s/ JANET M. BISKI
---------------------------------
Janet M. Biski
Vice President, Chief
Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
15
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Industrial Real Estate Lease dated May 30, 1997 between
Daimler Commerce Partners, L.P. and SRS Labs, Inc.
27 Financial Data Schedule.
16
<PAGE> 1
EXHIBIT 10.1
DAIMLER COMMERCE PARTNERS, L.P.
INDUSTRIAL REAL ESTATE LEASE
This lease is entered into by DAIMLER COMMERCE PARTNERS, L.P., a
California Limited Partnership by its General Partner, CONIFER INVESTMENTS,
INC. (LANDLORD) and SRS LABS, INC., a California Corporation (TENANT) on the
following terms and conditions:
RECITALS
A. LANDLORD is a California Limited Partnership which owns the
industrial building located at 2905 to 2917 Daimler Street, Santa Ana,
California. The General Partner of the LANDLORD is Conifer Investments, Inc., a
California Corporation. The principal place of business of the LANDLORD is
located at 2905 South Daimler Street, Santa Ana, California 92705-5810.
B. TENANT is a California Corporation with its principal place of
business located at 2909 South Daimler Street, Santa Ana, California 92705-5810.
C. On June 1, 1994, LANDLORD and TENANT entered into a three year
written lease for the premises located at 2909 South Daimler Street, Santa Ana,
California consisting of approximately 11,700 square feet. The lease commenced
on June 1, 1994 and terminates on May 31, 1997. The June 1, 1994 Lease was
entitled DAIMLER COMMERCE PARTNERS, L.P. INDUSTRIAL REAL ESTATE LEASE and
consisted of thirteen (13) pages and two exhibit pages and was a Multi-Tenant
Net Form from the Southern California Chapter of the Society of Industrial and
Office Realtors.
D. LANDLORD and TENANT are desirous of entering into a new lease
for the premises located at 2909 South Daimler Street, Santa Ana, California
with the lease premises to consist of approximately 23,400 square feet, with the
lease to be for three years commencing on June 1, 1997 and terminating on May
31, 2000, with an option to renew the lease for two years after May 31, 2000.
DAIMLER COMMERCE PARTNERS, L.P.
INDUSTRIAL REAL ESTATE LEASE
LANDLORD and TENANT enter into a lease of for the premises located at
2909 South Daimler Street, Santa Ana, California 92705-5810, consisting of
approximately 23,400 square feet on the following terms and conditions:
1
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ARTICLE 1: TERMS OF LEASE
The LANDLORD and TENANT hereby agree that the terms and conditions of
this lease shall be the same terms and conditions as the DAIMLER COMMERCE
PARTNERS, L.P. INDUSTRIAL REAL ESTATE LEASE dated June 1, 1994 that was entered
into by the LANDLORD and TENANT for the leased premises located at 2909 South
Daimler Street, Santa Ana, California 92705-5810 with the following
modifications to the June 1, 1994 Lease.
SECTION 1.01: DATE OF LEASE: June 1, 1997
SECTION 1.04: PROPERTY: The Property is approximately 23,400 square
feet located at 2909 South Daimler Street, Santa Ana, California 92705-5810.
SECTION 1.05: LEASE TERM: Three (3) years and zero (0) months beginning
June 1, 1997 and terminating on May 31, 2000.
SECTION 1.12a: BASE RENT: At the base rental rate of $.59 per square
feet per month. The base rent for the three years shall be $13,806.00 per month.
SECTION 1.12b: OTHER PERIODIC PAYMENTS: The Lease is a Triple Net (NNN)
lease with TENANT's pro rata share of common area expenses being 50% of the
total building size of 46,800 square feet (Section 4.05). Other Tenant expenses
include Real Property Taxes (Section 4.02); Utilities (See Section 4.03);
Insurance Premiums (Section 4.04); and Maintenance, Repairs and Alterations
(Article Six).
SECTION 1.14a: TENANT IMPROVEMENT ALLOWANCE: This section from the June
1, 1994 lease is deleted from this lease.
SECTION 1.14b: LEASE CANCELLATION: This section from the June 1, 1994
lease is deleted from this lease.
SECTION 1.15: OTHER TERMS OF LEASE: The other terms and conditions of
the June 1, 1994 Lease that are not modified by the above referenced sections
are incorporated into this lease by the LANDLORD and TENANT as if set forth in
detail herein. A copy of the June 1, 1994 Lease is attached hereto as Exhibit 1
and is incorporated herein by reference and is made a part of this lease.
ARTICLE 16 OPTION TO RENEW LEASE
SECTION 16.01: OPTION TO RENEW LEASE: The TENANT is granted an option
to renew the lease for two (2) additional years commencing on June 1, 2000 and
terminating on May 31, 2002. In order to exercise the option to renew the lease
the TENANT must be in full compliance with all of the terms and conditions of
the lease on the date of the exercise of
2
<PAGE> 3
the option of the lease and on the termination date of the original term of this
lease. In order to exercise the option to renew the TENANT shall notify the
LANDLORD in writing of the exercise of the option to renew the lease at least
six (6) months prior to the termination date of the original term of this lease
which is May 31, 2000.
SECTION 16.02: BASE RENTAL RATE: In the event the TENANT renews the
lease for the two (2) year period of time, the lease shall be renewed on the
same terms and conditions as this lease with the exception that the base rental
rate shall be $.65 per square foot per month Triple Net (NNN) with the new
rental rate commencing on June 1, 2000 and continuing through May 31, 2002. The
base monthly rental rate will be the amount of $15,210.00 per month.
LANDLORD
DAIMLER COMMERCE PARTNERS
L.P., a CALIFORNIA LIMITED
PARTNERSHIP
Dated: May 30, 1997 /s/ MISAKO YUEN
-----------------------------
By: Misako Yuen, President of
Conifer Investments Inc., its
General Partner
Dated: May 30, 1997 TENANT
SRS LABS, INC.
/s/ STEPHEN V. SEDMAK
----------------------------
By: Stephen V. Sedmak,
its President
3
<PAGE> 4
DAIMLER COMMERCE PARTNERS, L.P.
INDUSTRIAL REAL ESTATE LEASE
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this lease between the Landlord
and Tenant named below. Other Sections explain and define the Basic Terms and
are to be read in conjunction with the Basic Terms.
1.01 DATE OF LEASE: June 1, 1994
1.02 LANDLORD: Daimler Commerce Partners, L.P.,
a California Limited Partnership
2905 S. Daimler Street, Santa Ana, California 92705-5810
1.03 TENANT: SRS Labs, Inc.
2909 S. Daimler Street, Santa Ana, California 92705-5810
1.04 PROPERTY: The Property is part of Landlord's multi-tenant real
property known as Daimler Commerce Centre and described or depicted in Exhibit
"A." The Project includes the land, the buildings and all other improvements
located on the land, and the common areas described in Paragraph 4.05a. The
Property is approximately 11,700 sq. ft. located at 2909 S. Daimler Street,
Santa Ana, California 92705.
1.05 LEASE TERM: Three (3) years and zero (0) months beginning on June
1, 1994, and ending on May 31, 1997.
1.06 PERMITTED USES: Engineering, office, sales, service, and assembly.
1.07 TENANT'S GUARANTOR: None
1.08 BROKERS: None
1.09 COMMISSIONS PAID TO LANDLORD'S BROKERS: None
1.10 INITIAL SECURITY DEPOSIT: None
1.11 VEHICLE PARKING SPACES ALLOCATED TO TENANT: Parking shall be free
and in common at a ratio of 3.8 to 1,000 square feet leased.
1.12a BASE RENT: At a rate of $.45 sq. ft. per month NNN, the initial
monthly rate, as provided in Article Three, will be $5,265.00, Five Thousand Two
Hundred Sixty-Five and 00/100ths Dollars. The rent will be increased by four
percent (4%) on June 1, 1995 and on June 1, 1996. The base rent on June 1, 1995
will be $5,475.60, and on June 1, 1996 will be $5,694.62.
1.12b OTHER PERIODIC PAYMENTS: Lease is a NNN lease; tenant's initial pro
rata share of common area expenses is 25% of the total building's size of 46,800
square feet (See Section 4.05). Other Tenant expenses include Real Property
Taxes (See Section 4.02); Utilities (See Section 4.03); Insurance Premiums (See
Section 4.04); and Maintenance, Repairs and Alterations (See Article Six).
1.13 LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: 100%
1.14a TENANT IMPROVEMENT ALLOWANCE: Tenant shall receive an allowance of
$3.00 per square foot leased ($35,100.00) as an allowance to improve the
property. Landlord will reimburse Tenant for the allowance upon presentation of
copies of receipts for property improvement.
1.14b LEASE CANCELLATION: The lease may be terminated prior to the lease
expiration after receiving a six (6) month written notice from the Tenant, and
the payment of a cancellation penalty as follows:
Cancellation during first year of lease: $4.00 per square foot
Cancellation during second year of lease: $3.00 per square foot
Cancellation during third year of lease: $2.00 per square foot
The cancellation penalty will be due upon tendering of the cancellation notice.
Initials /s/ SVS
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ARTICLE TWO: LEASE TERM
Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and shall
begin and end on the dates specified in Section 1.05 above, unless the
beginning or end of the Lease Term is changed under any provision of this
Lease. The "Commencement Date" shall be the date specified in Section 1.05
above for the beginning of the Lease Term, unless advanced or delayed under any
provision of this Lease.
Section 2.02. Deleted /s/ SVS /s/ MY
Section 2.03. Deleted /s/ SVS /s/ MY
Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse
Landlord for and indemnify Landlord against all damages which Landlord incurs
from Tenant's delay in vacating the Property. If Tenant does not vacate the
Property upon the expiration or earlier termination of the Lease and Landlord
thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall
be a "month-to-month" tenancy, subject to all of the terms of this Lease
applicable to a month-to-month tenancy, except that the Base Rent then in
effect shall be increased by twenty-five percent (25%).
ARTICLE THREE: BASE RENT
Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this
Lease, Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior demand.
The Base Rent shall be payable at Landlord's address or at such other place as
Landlord may designate in writing.
Section 3.02. Deleted /s/ SVS /s/ MY
Section 3.03. SECURITY DEPOSIT; INCREASES.
(a) Upon the execution of this Lease, Tenant shall deposit with
Landlord a cash Security Deposit in the amount set forth in Section 1.10 above.
Landlord may apply all or part of the Security Deposit to any unpaid rent or
other charges due from Tenant or to cure any other defaults of Tenant. If
Landlord uses any part of the Security Deposit, Tenant shall restore the
Security Deposit to its full amount within ten (10) days after Landlord's
written request. Tenant's failure to do so shall be a material default under
this Lease. No interest shall be paid on the Security Deposit. Landlord shall
not be required to keep the Security Deposit separate from its other accounts
and no trust relationship is created with respect to the Security Deposit.
(b) Each Time the Base Rent is increased, Tenant shall deposit
additional funds with Landlord sufficient to increase the Security Deposit to
an amount which bears the same relationship to the adjusted Base Rent as the
initial Security Deposit bore to the initial Base Rent.
Initials /s/ SVS
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/s/ MY
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of the Society of Industrial SIOR(TM)
and Office Realtors,(R) Inc.
(Multi-Tenant Net Form)
<PAGE> 6
Section 3.04. TERMINATION; ADVANCE PAYMENTS. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight
(Condemnation) or any other termination not resulting from Tenant's default,
and after Tenant has vacated the Property in the manner required by this
Lease, Landlord shall refund or credit to Tenant (or Tenant's successor) the
unused portion of the Security Deposit, any advance rent or other advance
payments made by Tenant to Landlord, and any amounts paid for real property
taxes and other reserves which apply to any time periods after termination of
the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. ADDITIONAL RENT. All charges payable by Tenant other
than Base Rent are called "Additional Rent." Unless this Lease provides
otherwise, Tenant shall pay all Additional Rent then due with the next monthly
installment of Base Rent. The term "rent" shall mean Base Rent and Additional
Rent.
Section 4.02. PROPERTY TAXES.
(a) REAL PROPERTY TAXES. Tenant shall pay all real property taxes on
the Property (including any fees, taxes or assessments against, or as a result
of, any tenant improvements installed on the Property by or for the benefit of
Tenant) during the Lease Term. Subject to Paragraph 4.02(c) and Section 4.08
below, such payment shall be made at least ten (10) days prior to the
delinquency date of the taxes. Within such ten (10)-day period, Tenant shall
furnish Landlord with satisfactory evidence that the real property taxes have
been paid. Landlord shall reimburse Tenant for any real property taxes paid by
Tenant covering any period of time prior to or after the Lease Term. If Tenant
fails to pay the real property taxes when due, Landlord may pay the taxes and
Tenant shall reimburse Landlord for the amount of such tax payment as
Additional Rent.
(b) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" means: (i)
any fee, license fee, license tax, business license fee, commercial rental tax,
levy, charge, assessment, penalty or tax imposed by any taxing authority
against the Property; (ii) any tax on the Landlord's right to receive, or the
receipt of, rent or income from the Property or against Landlord's business of
leasing the Property; (iii) any tax or charge for fire protection, streets,
sidewalks, road maintenance, refuse or other services provided to the Property
by any governmental agency; (iv) any tax imposed upon this transaction or based
upon a re-assessment of the Property due to a change of ownership, as defined by
applicable law, or other transfer of all or part of Landlord's interest in the
Property; and (v) any charge or fee replacing any tax previously included within
the definition of real property tax. "Real property tax" does not, however,
include Landlord's federal or state income, franchise, inheritance or estate
taxes.
(c) JOINT ASSESSMENT. If the Property is not separately assessed,
Landlord shall reasonably determine Tenant's share of the real property tax
payable by Tenant under Paragraph 4.02(a) from the assessor's worksheets or
other reasonably available information. Tenant shall pay such share to
Landlord within fifteen (15) days after receipt of Landlord's written statement.
(d) PERSONAL PROPERTY TAXES.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to
Tenant. Tenant shall try to have personal property taxed separately from
the Property.
(ii) If any of Tenant's personal property is taxed with the
Property, Tenant shall pay Landlord the taxes for the personal property
within fifteen (15) days after Tenant receives a written statement from
Landlord for such personal property taxes.
Section 4.03. UTILITIES. Tenant shall pay, directly to the
appropriate supplier, the cost of all natural gas, heat, light, power, sewer
service, telephone, water, refuse disposal and other utilities and services
supplied to the Property. However, if any services or utilities are jointly
metered with other property, Landlord shall make a reasonable determination of
Tenant's proportionate share of the cost of such utilities and services and
Tenant shall pay such share to Landlord within fifteen (15) days after receipt
of Landlord's written statement.
Section 4.04. INSURANCE POLICIES.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall
maintain a policy of commercial general liability insurance (sometimes known as
broad form comprehensive general liability insurance) insuring Tenant against
liability for bodily injury, property damage (including loss of use of property)
and personal injury arising out of the operation, use or occupancy of the
Property. Tenant shall name Landlord as an additional insured under such
policy. The initial amount of such insurance shall be One Million Dollars
($1,000,000) per occurrence and shall be subject to periodic increase based
upon inflation, increased liability awards, recommendation of Landlord's
professional insurance advisers and other relevant factors. The liability
insurance obtained by Tenant under this Paragraph 4.04(a) shall (i) be primary
and non-contributing; (ii) contain cross-liability endorsements; and (iii)
insure Landlord against Tenant's performance under Section 5.05, if the matters
giving rise to the indemnity under Section 5.05 result from the negligence of
Tenant. The amount and coverage of such insurance shall not limit Tenant's
liability nor relieve Tenant of any other obligation under this Lease.
Landlord may also obtain comprehensive public liability insurance in an amount
and with coverage determined by Landlord insuring Landlord against liability
arising out of ownership, operation, use or occupancy of the Property. The
policy obtained by Landlord shall not be contributory and shall not provide
primary insurance.
(b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term,
Landlord shall maintain policies of insurance covering loss of or damage to the
Property in the full amount of its replacement value. Such policy shall
contain an Inflation Guard Endorsement and shall provide protection against all
perils included within the classification of fire, extended coverage,
vandalism, malicious mischief, special extended perils (all risk), sprinkler
leakage and any other perils which Landlord deems reasonably necessary.
Landlord shall have the right to obtain flood and earthquake insurance if
required by any lender holding a security interest in the Property. Landlord
shall not obtain insurance for Tenant's fixtures or equipment or building
improvements installed by Tenant on the Property. During the Lease Term,
Landlord shall also maintain a rental income insurance policy, with loss
payable to Landlord, in an amount equal to one year's Base Rent, plus estimated
real property taxes and insurance premiums. Tenant shall be liable for the
payment of any deductible amount under Landlord's or Tenant's insurance
policies maintained pursuant to this Section 4.04, in an amount not to exceed
Ten Thousand Dollars ($10,000). Tenant shall not do or permit anything to be
done which invalidates any such insurance policies.
(c) PAYMENT OF PREMIUMS. Subject to Section 4.08, Tenant shall pay
all premiums for the insurance policies described in Paragraphs 4.04(a) and (b)
(whether obtained by Landlord or Tenant) within fifteen (15) days after Tenant's
receipt of a copy of the premium statement or other evidence of the amount due,
except Landlord shall pay all premiums for non-primary comprehensive public
liability insurance which Landlord elects to obtain as provided in Paragraph
4.04(a). For insurance policies
Initials /s/ SVS
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of the Society of Industrial SIOR(TM)
and Office Realtors,(R) Inc.
(Multi-Tenant Net Form)
<PAGE> 7
maintained by Landlord which cover improvements on the entire Project, Tenant
shall pay Tenant's prorated share of the premiums, in accordance with the
formula in Paragraph 4.05(e) for determining Tenant's share of Common Area
costs. If insurance policies maintained by Landlord cover improvements on real
property other than the Project, Landlord shall deliver to Tenant a statement of
the premium applicable to the Property showing in reasonable detail how Tenant's
share of the premium was computed. If the Lease Term expires before the
expiration of an insurance policy maintained by Landlord, Tenant shall be liable
for Tenant's prorated share of the insurance premiums. Before the Commencement
Date, Tenant shall deliver to Landlord a copy of any policy of insurance which
Tenant is required to maintain under this Section 4.04. At least thirty (30)
days prior to the expiration of any such policy, Tenant shall deliver to
Landlord a renewal of such policy. As an alternative to providing a policy of
insurance, Tenant shall have the right to provide Landlord a certificate of
insurance, executed by an authorized officer of the insurance company, showing
that the insurance which Tenant is required to maintain under this Section 4.04
is in full force and effect and containing such other information which Landlord
reasonably requires.
(d) GENERAL INSURANCE PROVISIONS.
(i) Any insurance which Tenant is required to maintain under
this Lease shall include a provision which requires the insurance
carrier to give Landlord not less than thirty (30) days' written notice
prior to any cancellation or modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or
renewal to Landlord required under this Lease within the prescribed time
period or if any such policy is cancelled or modified during the Lease
Term without Landlord's consent, Landlord may obtain such insurance, in
which case Tenant shall reimburse Landlord for the cost of such
insurance within fifteen (15) days after receipt of a statement that
indicates the cost of such insurance.
(iii) Tenant shall maintain all insurance required under this
Lease with companies holding a "General Policy Rating" of A-12 or
better, as set forth in the most current issue of "Best Key Rating
Guide". Landlord and Tenant acknowledge the insurance markets are
rapidly changing and that insurance in the form and amounts described in
this Section 4.04 may not be available in the future. Tenant
acknowledges that the insurance described in this Section 4.04 is for
the primary benefit of Landlord. If at any time during the Lease Term,
Tenant is unable to maintain the insurance required under the Lease,
Tenant shall nevertheless maintain insurance coverage which is customary
and commercially reasonable in the insurance industry for Tenant's type
of business, as that coverage may change from time to time. Landlord
makes no representation as to the adequacy of such insurance to protect
Landlord's or Tenant's interests. Therefore, Tenant shall obtain any
such additional property or liability insurance which Tenant deems
necessary to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of
recovery against the other, or against the officers, employees, agents
or representatives of the other, for loss of or damage to its property
or the property of others under its control, if such loss or damage is
covered by any insurance policy in force (whether or not described in
this Lease) at the time of such loss or damage. Upon obtaining the
required policies of insurance, Landlord and Tenant shall give notice to
the insurance carriers of this mutual waiver of subrogation.
Section 4.05. COMMON AREAS; USE, MAINTENANCE AND COSTS.
(a) COMMON AREAS. As used in this Lease, "Common Areas" shall mean
all areas within the Project which are available for the common use of tenants
of the Project and which are not leased or held for the exclusive use of Tenant
or other tenants, including, but not limited to, parking areas, driveways,
sidewalks, loading areas, access roads, corridors, landscaping and planted
areas. Landlord, from time to time, may change the size, location, nature and
use of any of the Common Areas, convert Common Areas into leasable areas,
construct additional parking facilities (including parking structures) in the
Common Areas, and increase or decrease Common Area land and/or facilities.
Tenant acknowledges that such activities may result in inconvenience to Tenant.
Such activities and changes are permitted if they do not materially affect
Tenant's use of the Property.
(b) USE OF COMMON AREAS. Tenant shall have the nonexclusive right
(in common with other tenants and all others to whom Landlord has granted or
may grant such rights) to use the Common Areas for the purposes intended,
subject to such reasonable rules and regulations as Landlord may establish from
time to time. Tenant shall abide by such rules and regulations and shall use
its best effort to cause others who use the Common Areas with Tenant's express
or implied permission to abide by Landlord's rules and regulations. At any
time, Landlord may close any Common Areas to perform any acts in the Common
Areas as, in Landlord's judgment, are desirable to improve the Project. Tenant
shall not interfere with the rights of Landlord, other tenants or any other
person entitled to use the Common Areas.
(c) SPECIFIC PROVISION RE: VEHICLE PARKING. Tenant shall be
entitled to use the number of vehicle parking spaces in the Project allocated to
Tenant in Section 1.11 of the Lease without paying any additional rent.
Tenant's parking shall not be reserved and shall be limited to vehicles no
larger than standard size automobiles or pickup utility vehicles. Tenant shall
not cause large trucks or other large vehicles to be parked within the Project
or on the adjacent public streets. Temporary parking of large delivery vehicles
in the Project may be permitted by the rules and regulations established by
Landlord. Vehicles shall be parked only in striped parking spaces and not in
driveways, loading areas or other locations not specifically designated for
parking. Handicapped spaces shall only be used by those legally permitted to
use them. If Tenant parks more vehicles in the parking area than the number
set forth in Section 1.11 of this Lease, such conduct shall be a material
breach of this Lease. In addition to Landlord's other remedies under the Lease,
Tenant shall pay a daily charge determined by Landlord for each such additional
vehicle.
(d) MAINTENANCE OF COMMON AREAS. Landlord shall maintain the Common
Areas in good order, condition and repair and shall operate the Project, in
Landlord's sole discretion, as a first-class industrial/commercial real property
development. Tenant shall pay Tenant's pro rata share (as determined below) of
all costs incurred by Landlord for the operation and maintenance of the Common
Areas. Common Area costs include, but are not limited to, costs and expenses for
the following: gardening and landscaping; utilities, water and sewage charges;
maintenance of signs (other than tenants' signs); premiums for liability,
property damage, fire and other types of casualty insurance on the Common Areas
and worker's compensation insurance; all property taxes and assessments levied
on or attributable to the Common Areas and all Common Area improvements; all
personal property taxes levied on or attributable to personal property used in
connection with the Common Areas; straight-line depreciation on personal
property owned by Landlord which is consumed in the operation or maintenance of
the Common Areas; rental or lease payments paid by Landlord for rented or leased
personal property used in the operation or maintenance
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(Multi-Tenant Net Form)
<PAGE> 8
of the Common Areas; fees for required licenses and permits; repairing,
resurfacing, repaving, maintaining, painting, lighting, cleaning, refuse
removal, security and similar items; reserves for roof replacement and exterior
painting and other appropriate reserves; and a reasonable allowance to Landlord
for Landlord's supervision of the Common Areas (not to exceed five percent (5%)
of the gross rents of the Project for the calendar year). Landlord may cause
any or all of such services to be provided by third parties and the cost of
such services shall be included in Common Area costs. Common Area costs shall
not include depreciation of real property which forms part of the Common Areas.
(e) TENANT'S SHARE AND PAYMENT. Tenant shall pay Tenant's annual pro
rata share of all Common Area costs (prorated for any fractional month) upon
written notice from Landlord that such costs are due and payable, and in any
event prior to delinquency. Tenant's pro rata share shall be calculated by
dividing the square foot area of the Property, as set forth in Section 1.04 of
the Lease, by the aggregate square foot area of the Project which is leased or
held for lease by tenants, as of the date on which the computation is made.
Tenant's initial pro rata share is set out in Paragraph 1.12(b). Any changes in
the Common Area costs and/or the aggregate area of the Project leased or held
for lease during the Lease Term shall be effective on the first day of the
month after such change occurs. Landlord may, at Landlord's election, estimate
in advance and charge to Tenant as Common Area costs, all real property taxes
for which Tenant is liable under Section 4.02 of the Lease, all insurance
premiums for which Tenant is liable under Section 4.04 of the Lease, all
maintenance and repair costs for which Tenant is liable under Section 6.04 of
the Lease, and all other Common Area costs payable by Tenant hereunder. At
Landlord's election, such statements of estimated Common Area costs shall be
delivered monthly, quarterly or at any other periodic intervals to be
designated by Landlord. Landlord may adjust such estimates at any time based
upon Landlord's experience and reasonable anticipation of costs. Such
adjustments shall be effective as of the next rent payment date after notice to
Tenant. Within sixty (60) days after the end of each calendar year of the Lease
Term, Landlord shall deliver to Tenant a statement prepared in accordance with
generally accepted accounting principles setting forth, in reasonable detail,
the Common Area costs paid or incurred by Landlord during the preceding
calendar year and Tenant's pro rata share. Upon receipt of such statement,
there shall be an adjustment between Landlord and Tenant, with payment to or
credit given by Landlord (as the case may be) so that Landlord shall receive
the entire amount of Tenant's share of such costs and expenses for such period.
Section 4.06. LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but
are not limited to, processing and accounting charges and late charges which
may be imposed on Landlord by any ground lease, mortgage or trust deed
encumbering the Property. Therefore, if Landlord does not receive any rent
payment within ten (10) days after it becomes due, Tenant shall pay Landlord a
late charge equal to ten percent (10%) of the overdue amount. The parties agree
that such late charge represents a fair and reasonable estimate of the costs
Landlord will incur by reason of such late payment.
Section 4.07. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by
Tenant to Landlord which is not paid when due shall bear interest at the rate
of fifteen percent (15%) per annum from the due date of such amount. However,
interest shall not be payable on late charges to be paid by Tenant under this
Lease. The payment of interest on such amounts shall not excuse or cure any
default by Tenant under this Lease. If the interest rate specified in this
Lease is higher than the rate permitted by law, the interest rate is hereby
decreased to the maximum legal interest rate permitted by law.
Section 4.08. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY
TAXES. If requested by any ground lessor or lender to whom Landlord has
granted a security interest in the Property, of if Tenant is more than ten (10)
days late in the payment of rent more than once in any consecutive twelve (12)
month period, Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of
the annual real property taxes and insurance premiums payable by Tenant under
this Lease, together with each payment of Base Rent. Landlord shall hold such
payments in a non-interest bearing impound account. If unknown, Landlord shall
reasonably estimate the amount of real property taxes and insurance premiums
when due. Tenant shall pay any deficiency of funds in the impound account to
Landlord upon written request. If Tenant defaults under this Lease, Landlord
may apply any funds in the impound account to any obligation then due under
this Lease.
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. PERMITTED USES. Tenant may use the Property only for
the Permitted Uses set forth in Section 1.06 above.
Section 5.02. MANNER OF USE. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which annoys or interferes with
the rights of tenants of the Project, or which constitutes a nuisance or waste.
Tenant shall obtain and pay for all permits, including a Certificate of
Occupancy, required for Tenant's occupancy of the Property and shall promptly
take all actions necessary to comply with all applicable statutes, ordinances,
rules, regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act.
Section 5.03. HAZARDOUS MATERIALS. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous materials" or "toxic
substances" now or subsequently regulated under any applicable federal, state
or local laws or regulations, including without limitation petroleum-based
products, paints, solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, ammonia compounds and other chemical products, asbestos, PCBs and
similar compounds, and including any different products and materials which are
subsequently found to have adverse effects on the environment or the health and
safety of persons. Tenant shall not cause or permit any Hazardous Material to
be generated, produced, brought upon, used, stored, treated or disposed of in
or about the Property by Tenant, its agents, employees, contractors, sublessees
or invitees without the prior written consent of Landlord. Landlord shall be
entitled to take into account such other factors or facts as Landlord may
reasonably determine to be relevant in determining whether to grant or withhold
consent to Tenant's proposed activity with respect to Hazardous Material. In no
event, however, shall Landlord be required to consent to the installation or
use of any storage tanks on the Property.
Section 5.04. SIGNS AND AUCTIONS. Tenant shall not place any signs on
the Property without Landlord's prior written consent. Tenant shall not conduct
or permit any auctions or sheriff's sales at the Property.
Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising
from: (a) Tenant's use of the Property; (b) the conduct of Tenant's business or
anything else done or
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permitted by Tenant to be done in or about the Property, including any
contamination of the Property or any other property resulting from the presence
or use of Hazardous Material caused or permitted by Tenant; (c) any breach or
default in the performance of Tenant's obligations under this Lease; (d) any
misrepresentation or breach of warranty by Tenant under this Lease; or (e) other
acts or omissions of Tenant. Tenant shall defend Landlord against any such cost,
claim or liability at Tenant's expense with counsel reasonably acceptable to
Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any
legal fees or costs incurred by Landlord in connection with any such claim. As a
material part of the consideration to Landlord, Tenant assumes all risk of
damage to property or injury to persons in or about the Property arising from
any cause, and Tenant hereby waives all claims in respect thereof against
Landlord, except for any claim arising out of Landlord's gross negligence or
willful misconduct. As used in this Section, the term "Tenant" shall include
Tenant's employees, agents, contractors and invitees, if applicable.
Section 5.06. LANDLORD'S ACCESS. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties; to do any other act or to inspect and
conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazardous
Material; or for any other purpose Landlord deems necessary. Landlord shall give
Tenant prior notice of such entry, except in the case of an emergency. Landlord
may place customary "For Sale" or "For Lease" signs on the Property.
Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies
with all other terms of this Lease, Tenant may occupy and enjoy the Property for
the full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01 EXISTING CONDITIONS. Tenant accepts the Property in its
condition as of the execution of the Lease, subject to all recorded matters,
laws, ordinances, and governmental regulations and orders. Except as provided
herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has
made any representation as to the condition of the Property or the suitability
of the Property for Tenant's intended use. Tenant represents and warrants that
Tenant has made its own inspection of and inquiry regarding the condition of the
Property and is not relying on any representations of Landlord or any Broker
with respect thereto. If Landlord or Landlord's Broker has provided a Property
Information Sheet or other Disclosure Statement regarding the Property, a copy
is attached as an exhibit to the Lease.
Section 6.02 EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not
be liable for any damage or injury to the person, business (or any loss of
income therefrom), goods, wares, merchandise or other property of Tenant,
Tenant's employees, invitees, customers or any other person in or about the
Property, whether such damage or injury is caused by or results from: (a) fire,
steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction
or other defects of pipes, sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures or any other cause; (c) conditions arising in
or about the Property or upon other portions of the Project, or from other
sources or places; or (d) any act or omission of any other tenant of the
Project. Landlord shall not be liable for any such damage or injury even though
the cause of or the means of repairing such damage or injury are not accessible
to Tenant. The provisions of this Section 6.02 shall not, however, exempt
Landlord from liability for Landlord's gross negligence or willful misconduct.
Section 6.03. LANDLORD'S OBLIGATIONS.
(a) Except as provided in Article Seven (Damage or Destruction) and
Article Eight (Condemnation), Landlord shall keep the following in good order,
condition and repair: the foundations, exterior walls and roof of the Property
(including painting the exterior surface of the exterior walls of the Property
not more often than once every five (5) years, if necessary) and all components
of electrical, mechanical, plumbing, heating and air conditioning systems and
facilities located in the Property which are concealed or used in common by
tenants of the Project. However, Landlord shall not be obligated to maintain or
repair windows, doors, plate glass or the interior surfaces of exterior walls.
Landlord shall make repairs under this Section 6.03 within a reasonable time
after receipt of written notice from Tenant of the need for such repairs.
(b) Tenant shall pay or reimburse Landlord for all costs Landlord
incurs under Paragraph 6.03(a) above as Common Area costs as provided for in
Section 4.05 of the Lease. Tenant waives the benefit of any statute in effect
now or in the future which might give Tenant the right to make repairs at
Landlord's expense or to terminate this Lease due to Landlord's failure to keep
the Property in good order, condition and repair.
Section 6.04. TENANT'S OBLIGATIONS.
(a) Except as provided in Section 6.03, Article Seven (Damage or
Destruction) and Article Eight (Condemnation), Tenant shall keep all portions of
the Property (including structural, nonstructural, interior, systems and
equipment) in good order, condition and repair (including interior repainting
and refinishing, as needed). If any portion of the Property or any system or
equipment in the Property which Tenant is obligated to repair cannot be fully
repaired or restored, Tenant shall promptly replace such portion of the Property
or system or equipment in the Property, regardless of whether the benefit of
such replacement extends beyond the Lease Term; but if the benefit or useful
life of such replacement extends beyond the Lease Term (as such term may be
extended by exercise of any options), the useful life of such replacement shall
be prorated over the remaining portion of the Lease Term (as extended), and
Tenant shall be liable only for that portion of the cost which is applicable to
the Lease Term (as extended). Tenant shall maintain a preventive maintenance
contract providing for the regular inspection and maintenance of the heating and
air conditioning system by a licensed heating and air conditioning contractor,
unless Landlord maintains such equipment under Section 6.03 above. If any part
of the Property or the Project is damaged by any act or omission of Tenant,
Tenant shall pay Landlord the cost of repairing or replacing such damaged
property, whether or not Landlord would otherwise be obligated to pay the cost
of maintaining or repairing such property. It is the intention of Landlord and
Tenant that at all times Tenant shall maintain the portions of the Property
which Tenant is obligated to maintain in an attractive, first-class and fully
operative condition.
(b) Tenant shall fulfill all of Tenant's obligations under this
Section 6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or
replace the Property as required by this Section 6.04, Landlord may, upon ten
(10) days' prior notice to Tenant (except that no notice shall be required in
the case of an emergency), enter the Property and perform such maintenance or
repair (including replacement, as needed) on behalf of Tenant. In such case,
Tenant shall reimburse Landlord for all costs incurred in performing such
maintenance or repair immediately upon demand.
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Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
(a) Tenant shall not make any alterations, additions, or improvements
to the Property without Landlord's prior written consent, except for
non-structural alterations which do not exceed Ten Thousand Dollars ($10,000)
in cost cumulatively over the Lease Term and which are not visible from the
outside of any building of which the Property is part. Landlord may require
Tenant to provide demolition and/or lien and completion bonds in form and
amount satisfactory to Landlord. Tenant shall promptly remove any alterations,
additions, or improvements constructed in violation of this Paragraph 6.05(a)
upon Landlord's written request. All alterations, additions, and improvements
shall be done in a good and workmanlike manner, in conformity with all
applicable laws and regulations, and by a contractor approved by Landlord. Upon
completion of any such work, Tenant shall provide Landlord with "as built"
plans, copies of all construction contracts, and proof of payment for all
labor and materials.
(b) Tenant shall pay when due all claims for labor and material
furnished to the Property. Tenant shall give Landlord at least twenty (20) days
prior written notice of the commencement of any work on the Property,
regardless of whether Landlord's consent to such work is required. Landlord may
elect to record and post notices of non-responsibility on the Property.
Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required
to repair under Article Seven (Damage or Destruction). In addition, Landlord
may require Tenant to remove any alterations, additions or improvements
(whether or not made with Landlord's consent) prior to the expiration of the
Lease and to restore the Property to its prior condition, all at Tenant's
expense. All alterations, additions and improvements which Landlord has not
required Tenant to remove shall become Landlord's property and shall be
surrendered to Landlord upon the expiration or earlier termination of the
Lease, except that Tenant may remove any of Tenant's machinery or equipment
which can be removed without material damage to the Property. Tenant shall
repair, at Tenant's expense, any damage to the Property caused by the removal
of any such machinery or equipment. In no event, however, shall Tenant remove
any of the following materials or equipment (which shall be deemed Landlord's
property) without Landlord's prior written consent: any power wiring or power
panels; lighting or lighting fixtures; wall coverings; drapes, blinds or other
window coverings; carpets or other floor coverings; heaters, air conditioners
or any other heating or air conditioning equipment; fencing or security gates;
or other similar building operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. PARTIAL DAMAGE TO PROPERTY.
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage to the Property. If the Property is only partially
damaged (i.e., less than fifty percent (50%) of the Property is untenantable as
a result of such damage or less than fifty percent (50%) of Tenant's operations
are materially impaired) and if the proceeds received by Landlord from the
insurance policies described in Paragraph 4.04(b) are sufficient to pay for the
necessary repairs, this Lease shall remain in effect and Landlord shall repair
the damage as soon as reasonably possible. Landlord may elect (but is not
required) to repair any damage to Tenant's fixtures, equipment, or improvements.
(b) If the insurance proceeds received by Landlord are not sufficient
to pay the entire cost of repair, or if the cause of the damage is not covered
by the insurance policies which Landlord maintains under Paragraph 4.04(b),
Landlord may elect either to (i) repair the damage as soon as reasonably
possible, in which case this Lease shall remain in full force and effect, or
(ii) terminate this Lease as of the date the damage occurred. Landlord shall
notify Tenant within thirty (30) days after receipt of notice of the occurrence
of the damage whether Landlord elects to repair the damage or terminate the
Lease. If Landlord elects to repair the damage, Tenant shall pay Landlord the
"deductible amount" (if any) under Landlord's insurance policies and, if the
damage was due to an act or omission of Tenant, or Tenant's employees, agents,
contractors or invitees, the difference between the actual cost of repair and
any insurance proceeds received by Landlord. If Landlord elects to terminate
the Lease, Tenant may elect to continue this Lease in full force and effect, in
which case Tenant shall repair any damage to the Property and any building in
which the Property is located. Tenant shall pay the cost of such repairs,
except that upon satisfactory completion of such repairs, Landlord shall
deliver to Tenant any insurance proceeds received by Landlord for the damage
repaired by Tenant. Tenant shall give Landlord written notice of such election
within ten (10) days after receiving Landlord's termination notice.
(c) If the damage to the Property occurs during the last six (6) months
of the Lease Term and such damage will require more than thirty (30) days to
repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall give written
notification to the other party of such election within thirty (30) days after
Tenant's notice to Landlord of the occurrence of the damage.
Section 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage as described in Section 7.01), and
regardless of whether Landlord receives any insurance proceeds, this Lease
shall terminate as of the date the destruction occurred. Notwithstanding the
preceding sentence, if the Property can be rebuilt within six (6) months after
the date of destruction, Landlord may elect to rebuild the Property at
Landlord's own expense, in which case this Lease shall remain in full force and
effect. Landlord shall notify Tenant of such election within thirty (30) days
after Tenant's notice of the occurrence of total or substantial destruction. If
Landlord so elects, Landlord shall rebuild the Property at Landlord's sole
expense, except that if the destruction was caused by an act or omission of
Tenant, Tenant shall pay Landlord the difference between the actual cost of
rebuilding and any insurance proceeds received by Landlord.
Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant to
the provisions of this Article Seven, any rent payable during the period of
such damage, repair and/or restoration shall be reduced according to the
degree, if any, to which Tenant's use of the Property is impaired. However, the
reduction shall not exceed the sum of one year's payment of Base Rent,
insurance premiums and real property taxes. Except for such possible reduction
in Base Rent, insurance premiums and real property taxes, Tenant shall not be
entitled to any compensation, reduction, or reimbursement from Landlord as a
result of any damage, destruction, repair, or restoration of or to the Property.
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Section 7.04. Waiver. Tenant waives the protection of any statute,
code or judicial decision which grants a tenant the right to terminate a lease
in the event of the substantial or total destruction of the leased property.
Tenant agrees that the provisions of Section 7.02 above shall govern the rights
and obligations of Landlord and Tenant in the event of any substantial or total
destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of
eminent domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs
first. If more than twenty percent (20%) of the floor area of the building in
which the Property is located, or which is located on the Property, is taken,
either Landlord or Tenant may terminate this Lease as of the date the
condemning authority takes title or possession, by delivering written notice to
the other within ten (10) days after receipt of written notice of such taking
(or in the absence of such notice, within ten (10) days after the condemning
authority takes title or possession). If neither Landlord nor Tenant terminates
this Lease, this Lease shall remain in effect as to the portion of the Property
not taken, except that the Base Rent and Additional Rent shall be reduced in
proportion to the reduction in the floor area of the Property. Any Condemnation
award or payment shall be distributed in the following order: (a) first, to any
ground lessor, mortgagee or beneficiary under a deed of trust encumbering the
Property, the amount of its interest in the Property; (b) second, to Tenant,
only the amount of any award specifically designated for loss of or damage to
Tenant's trade fixtures or removable personal property; and (c) third, to
Landlord, the remainder of such award, whether as compensation for reduction in
the value of the leasehold, the taking of the fee, or otherwise. If this Lease
is not terminated, Landlord shall repair any damage to the Property caused by
the Condemnation, except that Landlord shall not be obligated to repair any
damage for which Tenant has been reimbursed by the condemning authority. If the
severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall have the right to either terminate this Lease or make
such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property
or of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.05 below. Any attempted transfer without
consent shall be void and shall constitute a non-curable breach of this Lease.
If Tenant is a partnership, any cumulative transfer of more than twenty percent
(20%) of the partnership interests shall require Landlord's consent. If Tenant
is a corporation, any change in the ownership of a controlling interest of the
voting stock of the corporation shall require Landlord's consent.
Section 9.02 TENANT AFFILIATE. Tenant may assign this Lease or
Sublease the Property, without Landlord's consent, to any corporation which
controls, is controlled by or is under common control with Tenant, or to any
corporation resulting from the merger of or consolidation with Tenant
("Tenant's Affiliate"). In such case, any Tenant's Affiliate shall assume in
writing all of Tenant's obligations under this Lease.
Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this
Article Nine, whether with or without Landlord's consent, shall release Tenant
or change Tenant's primary liability to pay the rent and to perform all other
obligations of Tenant under this Lease. Landlord's acceptance of rent from any
other person is not a waiver of any provision of this Article Nine. Consent to
one transfer is not a consent to any subsequent transfer. If Tenant's
transferee defaults under this Lease, Landlord may proceed directly against
Tenant without pursuing remedies against the transferee. Landlord may consent
to subsequent assignments or modifications of this Lease by Tenant's
transferee, without notifying Tenant or obtaining its consent. Such action
shall not relieve Tenant's liability under this Lease.
Section 9.04. OFFER TO TERMINATE. If Tenant desires to assign the
Lease or sublease the Property, Tenant shall have the right to offer, in
writing, to terminate the Lease as of a date specified in the offer. If
Landlord elects in writing to accept the offer to terminate within twenty (20)
days after notice of the offer, the Lease shall terminate as of the date
specified and all the terms and provisions of the Lease governing termination
shall apply. If Landlord does not so elect, the Lease shall continue in effect
until otherwise terminated and the provisions of Section 9.05 with respect to
any proposed transfer shall continue to apply.
Section 9.05. LANDLORD'S CONSENT.
(a) Tenant's request for consent to any transfer described in Section
9.01 shall set forth in writing the details of the proposed transfer, including
the name, business and financial condition of the prospective transferee,
financial details of the proposed transfer (e.g., the term of and the rent and
security deposit payable under any proposed assignment or sublease), and any
other information Landlord deems relevant. Landlord shall have the right to
withhold consent, if reasonable, or to grant consent, based on the following
factors: (i) the business of the proposed assignee or subtenant and the
proposed use of the Property; (ii) the net worth and financial reputation of
the proposed assignee or subtenant; (iii) Tenant's compliance with all of its
obligations under the Lease; and (iv) such other factors as Landlord may
reasonably deem relevant. If Landlord objects to a proposed assignment solely
because of the net worth and/or financial reputation of the proposed assignee,
Tenant may nonetheless sublease (but not assign), all or a portion of the
Property to the proposed transferee, but only on the other terms of the
proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under the Lease
the Landlord's Share (stated in Section 1.13) of the Profit (defined
below) on such transaction as and when received by Tenant, unless
Landlord gives written notice to Tenant and the assignee or subtenant
that Landlord's Shares shall be paid by the assignee or subtenant to
Landlord directly. The "Profit" means (A) all amounts paid to Tenant 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 Tenant in connection with the execution and performance of
such assignment or sublease for real estate broker's commissions and
costs of renovation or construction of tenant improvements required
under such assignment or sublease. Tenant is entitled to recover such
costs and expenses before Tenant is obligated to pay the Landlord's
Share to Landlord. The Profit in the
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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.
(ii) Tenant shall provide Landlord 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, and Landlord may inspect Tenant's books and records to verify
the accuracy of such statement. On written request, Tenant shall
promptly furnish to Landlord copies of all the transaction
documentation, all of which shall be certified by Tenant to be complete,
true and correct. Landlord's receipt of Landlord's Share shall not be a
consent to any further assignment or subletting. The breach of Tenant's
obligation under this Paragraph 9.05(b) shall be a material default of
the Lease.
Section 9.06. NO MERGER. No merger shall result from Tenant's sublease
of the Property under this Article Nine, Tenant's surrender of this Lease or
the termination of this Lease in any other manner. In any such event, Landlord
may terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each
of Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants
and conditions.
Section 10.02. DEFAULTS. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge when due;
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period of thirty (30) days after written notice from
Landlord; provided that if more than thirty (30) days are required to complete
such performance, Tenant shall not be in default if Tenant commences such
performance within the thirty (30)-day period and thereafter diligently pursues
its completion. However, Landlord shall not be required to give such notice if
Tenant's failure to perform constitutes a non-curable breach of this Lease. The
notice required by this Paragraph is intended to satisfy any and all notice
requirements imposed by law on Landlord and is not in addition to any such
requirement.
(d) (i) If Tenant makes a general assignment or general arrangement for
the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or
for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Property or of Tenant's interest in this Lease and possession is not restored to
Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets
located at the Property or of Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not discharged within
thirty (30) days. If a court of competent jurisdiction determines that any of
the acts described in this subparagraph (d) is not a default under this Lease,
and a trustee is appointed to take possession (or if Tenant remains a debtor in
possession) and such trustee or Tenant transfers Tenant's interest hereunder,
then Landlord shall receive, as Additional Rent, the excess, if any, of the
rent (or any other consideration) paid in connection with such assignment or
sublease over the rent payable by Tenant under this Lease.
(e) If any guarantor of the Lease revokes or otherwise terminates, or
purports to revoke or otherwise terminate, any guaranty of all or any portion
of Tenant's obligations under the Lease. Unless otherwise expressly provided,
no guaranty of the Lease is recoverable.
Section 10.03. REMEDIES. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any
lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Property to Landlord. In such event,
Landlord shall be entitled to recover from Tenant all damages incurred by
Landlord by reason of Tenant's default, including (i) the worth at the time of
the award of the unpaid Base Rent, Additional Rent and other charges which
Landlord had earned at the time of the termination; (ii) the worth at the time
of the award of the amount by which the unpaid Base Rent, Additional Rent and
other charges which Landlord would have earned after termination until the time
of the award exceeds the amount of such rental loss that Tenant proves Landlord
could have reasonably avoided; (iii) the worth at the time of the award of the
amount by which the unpaid Base Rent, Additional Rent and other charges which
Tenant would have paid for the balance of the Lease Term after the time of
award exceeds the amount of such rental loss that Tenant proves Landlord could
have reasonably avoided; and (iv) any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to
perform its obligations under the Lease or which in the ordinary course of
things would be likely to result therefrom, including, but not limited to, any
costs or expenses Landlord incurs in maintaining or preserving the Property
after such default, the cost of recovering possession of the Property, expenses
of reletting, including necessary renovation or alteration of the Property,
Landlord's reasonable attorneys' fees incurred in connection therewith, and any
real estate commission paid or payable. As used in subparts (i) and (ii) above,
the "worth at the time of the award" is computed by allowing interest on unpaid
amounts at the rate of fifteen percent (15%) per annum, or such lesser amount
as may then be the maximum lawful rate. As used in subpart (iii) above, the
"worth at the time of the award" is computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of the
award, plus one percent (1%). If Tenant has abandoned the Property, Landlord
shall have the option of (i) retaking possession of the Property and recovering
from Tenant the amount specified in this Paragraph 10.03(a), or (ii) proceeding
under Paragraph (10.03(b);
(b) Maintain Tenant's right to possession, in which case this Lease
shall continue in effect whether or not Tenant has abandoned the Property. In
such event, Landlord shall be entitled to enforce all of the Landlord's rights
and remedies under this Lease, including the right to recover the rent as it
becomes due;
(c) Pursue any other remedy now or hereafter available to Landlord under
the laws of judicial decisions of the state in which the Property is located.
Section 10.04. REPAYMENT OF "FEE" RENT. If this Lease provides for a
postponement of any monthly rental payments, a period of "free" rent or other
rent concession, such postponed rent or "free" rent is called the "Abated
Rent". Tenant shall
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be credited with having paid all of the Abated Rent on the expiration of the
Lease Term only if Tenant has fully, faithfully, and punctually performed all of
Tenant's obligations hereunder, including the payment of all rent (other than
the Abated Rent) and all other monetary obligations and the surrender of the
Property in the physical condition required by this Lease. Tenant acknowledges
that its right to receive credit for the Abated Rent is absolutely conditioned
upon Tenant's full, faithful and punctual performance of its obligations under
this Lease. If Tenant defaults and does not cure within any applicable grace
period, the Abated Rent shall immediately become due and payable in full and
this Lease shall be enforced as if there were no such rent abatement or other
rent concession. In such case Abated Rent shall be calculated based on the full
initial rent payable under this Lease.
Section 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful detainer
action against Tenant. On such termination, Landlord's damages for default shall
include all costs and fees, including reasonable attorney's fees that Landlord
incurs in connection with the filing, commencement, pursuing and/or defending of
any action in any bankruptcy court or other court with respect to the Lease; the
obtaining of relief from any stay in bankruptcy restraining any action to evict
Tenant; or the pursuing of any action with respect to Landlord's right to
possession of the Property. All such damages suffered (apart from Base Rent and
other rent payable hereunder) shall constitute pecuniary damages which must be
reimbursed to Landlord prior to assumption of the Lease by Tenant or any
successor to Tenant in any bankruptcy or other proceeding.
Section 10.06. CUMULATIVE REMEDIES. Landlord's exercise of any right
or remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. SUBORDINATION. Landlord shall have the right to
subordinate this Lease to any ground lease, deed of trust or mortgage
encumbering the Property, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded. Tenant shall cooperate with Landlord and any lender
which is acquiring a security interest in the Property or the Lease. Tenant
shall execute such further documents and assurances as such lender may require,
provided that Tenant's obligations under this Lease shall not be increased in
any material way (the performance of ministerial acts shall not be deemed
material), and Tenant shall not be deprived of its rights under this Lease.
Tenant's right to quiet possession of the Property during the Lease Term shall
not be disturbed if Tenant pays the rent and performs all of Tenant's
obligations under this Lease and is not otherwise in default. If any ground
lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of
its ground lease, deed of trust or mortgage and gives written notice thereof to
Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or
mortgage whether this Lease is dated prior or subsequent to the date of said
ground lease, deed of trust or mortgage or the date of recording thereof.
Section 11.02. ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property under the transfer
of Landlord's interest.
Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such attornment
or subordination or agreement to do so. If Tenant fails to do so within ten (10)
days after written request, Tenant hereby makes, constitutes and irrevocably
appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
Section 11.04. ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request, Tenant shall execute,
acknowledge and deliver to Landlord a written statement certifying: (i) that
none of the terms or provisions of this Lease have been changed (or if they have
been changed, stating how they have been changed); (ii) that this Lease has not
been cancelled or terminated; (iii) the last date or payment of the Base Rent
and other charges and the time period covered by such payment; (iv) that
Landlord is not in default under this Lease (or, if Landlord is claimed to be in
default, stating why); and (v) such other representations or information with
respect to Tenant or the Lease as Landlord may reasonably request or which any
prospective purchaser or encumbrancer of the Property may require. Tenant shall
deliver such statement to Landlord within ten (10) days after Landlord's
request. Landlord may give any such statement by Tenant to any prospective
purchaser or encumbrancer of the Property. Such purchaser or encumbrancer may
rely conclusively upon such statement as true and correct.
(b) If Tenant does not deliver such statement to Landlord within
such ten (10)-day period, Landlord, and any prospective purchaser or
encumbrancer, may conclusively presume and rely upon the following facts: (i)
that the terms and provisions of this Lease have not been changed except as
otherwise represented by Landlord; (ii) that this Lease has not been cancelled
or terminated except as otherwise represented by Landlord; (iii) that not more
than one month's Base Rent or other charges have been paid in advance; and (iv)
that Landlord is not in default under the Lease. In such event, Tenant shall be
estopped from denying the truth of such facts.
Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) days
after written request from Landlord, Tenant shall deliver to Landlord such
financial statements as Landlord reasonably requires to verify the net worth of
Tenant or any assignee, subtenant, or guarantor of Tenant. In addition, Tenant
shall deliver to any lender designated by Landlord any financial statements
required by such lender to facilitate the financing or refinancing of the
Property. Tenant represents and warrants to Landlord that each such financial
statement is a true and accurate statement as of the date of such statement.
All financial statements shall be confidential and shall be used only for the
purposes set forth in this Lease.
ARTICLE TWELVE: LEGAL COSTS
Section 12.01. LEGAL PROCEEDINGS. If Tenant or Landlord shall be in
breach or default under this Lease, such party (the "Defaulting Party") shall
reimburse the other party (the "Nondefaulting Party") upon demand for any costs
or expenses that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a
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settlement, enforcement of rights or otherwise. Furthermore, if any action for
breach of or to enforce the provisions of this Lease is commenced, the court in
such action shall award to the party in whose favor a judgment is entered, a
reasonable sum as attorneys' fees and costs. The losing party in such action
shall pay such attorneys' fees and costs. Tenant shall also indemnify Landlord
against and hold Landlord harmless from all costs, expenses, demands and
liability Landlord may incur if Landlord becomes or is made a party to any
claim or action (a) instituted by Tenant against any third party, or by any
third party against Tenant, or by or against any person holding any interest
under or using the Property by license of or agreement with Tenant; (b) for
foreclosure of any lien for labor or material furnished to or for Tenant or
such other person; (c) otherwise arising out of or resulting from any act or
transaction of Tenant or such other person; or (d) necessary to protect
Landlord's interest under this Lease in a bankruptcy proceeding, or other
proceeding under Title 11 of the United States Code, as amended. Tenant shall
defend Landlord against any such claim or action at Tenant's expense with
counsel reasonably acceptable to Landlord or, at Landlord's election. Tenant
shall reimburse Landlord for any legal fees or costs Landlord incurs in any
such claim or action.
Section 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's
reasonable attorneys' fees incurred in connection with Tenant's request for
Landlord's consent under Article Nine (Assignment and Subletting), or in
connection with any other act which Tenant proposes to do and which requires
Landlord's consent.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a
condition to the continuance of this Lease, that there will be no
discrimination against, or segregation of, any person or group of persons on the
basis of race, color, sex, creed, national origin or ancestry in the leasing,
subleasing, transferring, occupancy, tenure or use of the Property or any
portion thereof.
Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease, the term "Landlord" means only the current
owners of the fee title to the Property or Project or the leasehold estate
under a ground lease of the Property or Project at the time in question. Each
Landlord is obligated to perform the obligations of Landlord under this Lease
only during the time such Landlord owns such interest or title. Any Landlord
who transfers its title or interest is relieved of all liability with respect
to the obligations of Landlord under this Lease to be performed on or after the
date of transfer. However, each Landlord shall deliver to its transferee all
funds that Tenant previously paid if such funds have not yet been applied under
the terms of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to
perform, any of its obligations under this Lease to Landlord and to any ground
lessor, mortgagee or beneficiary under any deed of trust encumbering the
Property whose name and address have been furnished to Tenant in writing.
Landlord shall not be in default under this Lease unless Landlord (or such
ground lessor, mortgagee or beneficiary) fails to cure such non-performance
within thirty (30) days after receipt of Tenant's notice. However, if such
non-performance reasonably requires more than thirty (30) days to cure,
Landlord shall not be in default if such cure is commenced within such thirty
(30)-day period and thereafter diligently pursued to completion.
(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property and the Project,
and neither the Landlord nor its partners, shareholders, officers or other
principals shall have any personal liability under this Lease.
Section 13.03. SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.04. INTERPRETATION. The captions of the Articles or
Sections of this Lease are to assist the parties in reading this Lease and are
not a part of the terms or provisions of this Lease. Whenever required by the
context of this Lease, the singular shall include the plural and the plural
shall include the singular. The masculine, feminine and neuter genders shall
each include the other, in any provision relating to the conduct, acts or
omissions of Tenant, the term "Tenant" shall include Tenant's agents,
employees, contractors, invitees, successors or others using the Property with
Tenant's expressed or implied permission.
Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This
Lease is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. NOTICES. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by
certified mail, return receipt requested, postage prepaid. Notices to Tenant
shall be delivered to the address specified in Section 1.03 above, except that
upon Tenant's taking possession of the Property, the Property shall be
Tenant's address for notice purposes. Notices to Landlord shall be delivered
to the address specified in Section 1.02 above. All notices shall be effective
upon delivery. Either party may change its notice address upon written notice
to the other party.
Section 13.07. WAIVERS. All waivers must be in writing and signed by
the waiving party. Landlord's failure to enforce any provision of this Lease or
its acceptance of rent shall not be a waiver and shall not prevent Landlord
from enforcing that provision or any other provision of this Lease in the
future. No statement on a payment check from Tenant or in a letter accompanying
a payment check shall be binding on Landlord. Landlord may, with or without
notice to Tenant, negotiate such check without being bound to the conditions
of such statement.
Section 13.08. NO RECORDATION. Tenant shall not record this Lease
without prior written consent from Landlord. However, either Landlord or Tenant
may require that a "Short Form" memorandum of this Lease executed by both
parties be recorded. The party requiring such recording shall pay all transfer
taxes and recording fees.
Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any
party who legally acquires any rights or interest in this Lease from Landlord
or Tenant. However, Landlord shall have no obligation to Tenant's successor
unless the rights or interests of Tenant's successor are acquired in accordance
with the terms of this Lease. The laws of the state in which the Property is
located shall govern this Lease.
Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant
is a corporation, each person signing this Lease on behalf of Tenant represents
and warrants that he has full authority to do so and that this Lease binds
the corporation. Within thirty (30) days after this Lease is signed. Tenant
shall deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person or entity signing this Lease for Tenant represents and warrants that
he or it is a general
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partner of the partnership, that he or it has full authority to sign for the
partnership and that this Lease binds the partnership and all general partners
of the partnership. Tenant shall give written notice to Landlord of any general
partner's withdrawal or addition. Within thirty (30) days after this Lease is
signed, Tenant shall deliver to Landlord a copy of Tenant's recorded statement
of partnership or certificate of limited partnership.
Section 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this
Lease as Tenant shall be jointly and severally liable for all obligations of
Tenant.
Section 13.12. FORCE MAJEURE. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
Section 13.13. EXECUTION OF LEASE. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. SURVIVAL. All representations and warranties of Landlord
and Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: BROKERS
Section 14.01. BROKER'S FEE. When this Lease is signed by and delivered
to both Landlord and Tenant, Landlord shall pay a real estate commission to
Landlord's Broker named in Section 1.08 above, if any, as provided in the
written agreement between Landlord and Landlord's Broker, or the sum stated in
Section 1.09 above for services rendered to Landlord by Landlord's Broker in
this transaction. Landlord shall pay Landlord's Broker a commission if Tenant
exercises any option to extend the Lease Term or to buy the Property, or any
similar option or right which Landlord may grant to Tenant, or if Landlord's
Broker is the procuring cause of any other lease or sale entered into between
Landlord and Tenant covering the Property. Such commission shall be the amount
set forth in Landlord's Broker's commission schedule in effect as of the
execution of this Lease. If a Tenant's Broker is named in Section 1.08 above,
Landlord's Broker shall pay an appropriate portion of its commission to
Tenant's Broker if so provided in any agreement between Landlord's Broker and
Tenant's Broker. Nothing contained in this Lease shall impose any obligation on
Landlord to pay a commission or fee to any party other than Landlord's Broker.
Section 14.02. PROTECTION OF BROKERS. If Landlord sells the Property,
or assigns Landlord's interest in this Lease, the buyer or assignee shall, by
accepting such conveyance of the Property or assignment of the Lease, be
conclusively deemed to have agreed to make all payments to Landlord's Broker
thereafter required of Landlord under this Article Fourteen. Landlord's Broker
shall have the right to bring a legal action to enforce or declare rights under
this provision. The prevailing party in such action shall be entitled to
reasonable attorneys' fees to be paid by the losing party. Such attorneys' fees
shall be fixed by the court in such action. This Paragraph is included in this
Lease for the benefit of Landlord's Broker.
Section 14.03. AGENCY DISCLOSURE; NO OTHER BROKERS. Landlord and
Tenant each warrant that they have dealt with no other real estate broker(s) in
connection with this transaction. [Remainder of Form Paragraph deleted
/s/ SVS /s/ MY]
ARTICLE FIFTEEN: COMPLIANCE
The parties hereto agree to comply with all applicable federal, state
and local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this
Agreement, including, but not limited to, the 1964 Civil Rights Act and all
amendments thereto, the Foreign Investment In Real Property Tax Act, the
Comprehensive Environmental Response Compensation and Liability Act, and The
Americans With Disabilities Act.
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED
HERETO OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED,
PLEASE DRAW A LINE THROUGH THE SPACE BELOW.
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Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialled all Riders
which are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on May 30 , 1997 DAIMLER COMMERCE PARTNERS, L.P.,
----------------- --- ----------------------------------
at Santa Ana, California 92705 A California Limited Partnership
------------------------------- ----------------------------------
By: CONIFER INVESTMENTS, INC.
------------------------------
Its: General Partner
-----------------------------
By: /s/ MISAKO YUEN
------------------------------
Its: President
-----------------------------
"TENANT"
Signed on May 30 , 1997 SRS LABS, INC.
----------------- --- ----------------------------------
at Santa Ana, California 92705 a Delaware Corporation
------------------------------- ----------------------------------
By: /s/ STEPHEN V. SEDMAK
------------------------------
Its: President
-----------------------------
By:
------------------------------
Its:
-----------------------------
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH
A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE
DIRECTION OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND
OFFICE REALTORS(R), INC. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE
REALTORS(R), INC., ITS LEGAL COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR
THEIR EMPLOYEES OR AGENTS, AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX
CONSEQUENCES OF THIS LEASE OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD
RETAIN LEGAL COUNSEL TO ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE
ADVICE OF SUCH LEGAL COUNSEL.
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<PAGE> 17
EXHIBIT A
[PARCEL MAP]
<PAGE> 18
DAIMLER COMMERCE CENTER BUILDING TWO EXHIBIT A TO INDUSTRIAL
2905 TO 2917 DAIMLER REAL ESTATE LEASE
RENTABLE SQUARE FEET BY COMPANY
<TABLE>
<CAPTION>
DOWNSTAIRS DOWNSTAIRS TOTAL UPSTAIRS TOTAL % OF % OF % OF
COMPANY OFFICE WAREHOUSE DOWNSTAIRS OFFICE SQ FT INDIVIDUAL GROUP TOTAL
AREA AREA AREA AREA BUILDING SPACE BUILDING
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NUREALITY 2,768 7,074 9,842 1,858 11,700 50.00% 33.33% 25.00%
SRS LABS 2,769 7,073 9,842 1,858 11,700 50.00% 33.33% 25.00%
-------------------------------------------------------------------------------------------------
TOTAL BUILDING TWO A 5,537 14,147 19,684 3,716 23,400 100.00% 66.67% 50.00%
</TABLE>
<TABLE>
<CAPTION>
DOWNSTAIRS DOWNSTAIRS ALLOCATE UPSTAIRS TOTAL % OF % OF % OF
COMPANY OFFICE WAREHOUSE 1/3 OF OFFICE SQ FT INDIVIDUAL GROUP TOTAL
AREA AREA LOBBY AREA BUILDING SPACE BUILDING
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MPC TECHNOLOGIES 2,160 5,740 -220 0 7,680 65.64% 21.88% 16.41%
RYT DEAL 0 2,000 220 1,800 4,020 34.36% 11.45% 8.59%
-------------------------------------------------------------------------------------------------
TOTAL BUILDING TWO B 2,160 7,740 0 1,800 11,700 100.00% 33.33% 26.00%
EXCEL PHOTO
(BUILDING TWO C)
(2917 DAIMLER) 11,700 25.00%
-------------------------------------------------------------- --------
GRAND TOTAL BUILDING TWO 46,800 100%
======== ========
</TABLE>
wch Bldgsqft Page 1 6/7/94
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,527,472
<SECURITIES> 21,487,774
<RECEIVABLES> 1,990,534
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,226,524
<PP&E> 473,824
<DEPRECIATION> 226,464
<TOTAL-ASSETS> 28,534,089
<CURRENT-LIABILITIES> 1,657,174
<BONDS> 0
0
0
<COMMON> 9,581
<OTHER-SE> 26,863,249
<TOTAL-LIABILITY-AND-EQUITY> 28,534,089
<SALES> 2,115,799
<TOTAL-REVENUES> 2,115,799
<CGS> 75,885
<TOTAL-COSTS> 1,042,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (272,597)
<INCOME-PRETAX> 1,346,119
<INCOME-TAX> 498,064
<INCOME-CONTINUING> 848,055
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 848,055
<EPS-PRIMARY> .08
<EPS-DILUTED> 0
</TABLE>
