U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number O-28690
SHOPNET.COM, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
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<CAPTION>
<S> <C>
Delaware 13-3871821
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
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14 East 60th Street, Suite 402, New York, New York 10022
------------------------------------------------------------------
(Address of Principal Executive Offices)
(212) 688-9223
(Issuer's Telephone Number, Including Area Code)
N/A (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 Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that 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: Common Stock, $.001 par value:
5,372,971 shares outstanding as of August 18, 1999.
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheets at June 30, 1999 (unaudited) and December 31, 1998. 3
Consolidated Statements of Operations (unaudited) for the
Three and Six Months Ended June 30, 1999 and 1998 4-5
Consolidated Statement of Stockholders' Equity (unaudited) for the Six Months Ended June 30, 1999. 6
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 1999 and 1998. 7
Notes to Consolidated Financial Statements. 8-14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15-22
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 23
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 23
Item 3. DEFAULTS UPON SENIOR SECURITIES 23
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
Item 5. OTHER INFORMATION 23
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 23
Signatures 24
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<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998
--------------- -----------
Current assets:
<S> <C> <C>
Cash $ 73,506 $ 159,526
Cash - restricted 1,150,000 1,150,000
Accounts receivable 11,934 53,228
Prepaid expenses 111,375 52,668
Inventory 275,596 2,663,003
Advances to officer 18,000 18,000
Loan receivable - affiliate 225,000 -
Deferred tax asset 55,000 55,000
--------------- -----------------
Total current assets 1,920,411 4,151,425
--------------- -----------------
Furniture, computer equipment and leasehold improvements, net 77,232 78,875
---------------- -----------------
Advances to officer - non-current portion 22,000 22,000
Film production and distribution costs, net 1,901,881 1,901,222
Organizational costs, net 37,500 50,000
Costs in excess of net assets of business acquired, net 869,165 904,641
Investments in joint venture and affiliate 334,233 1,177,270
Deferred tax asset-non current 173,658 173,658
Other assets 20,135 20,635
--------------- -----------------
Total assets $ 5,356,215 $ 8,479,726
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 97,133 $ 610,406
Due to factor 500,612 2,063,554
Capital lease obligations 12,589 13,589
Deferred tax liability 50,159 50,159
--------------- -----------------
Total current liabilities 660,493 2,737,708
--------------- -----------------
Capital lease obligations, net of current portion 39,201 43,683
--------------- -----------------
Total liabilities 699,694 2,781,391
--------------- -----------------
Commitments and contingencies (Note 6) - -
Stockholders' equity:
Common stock - $.001 par value, 20,000,000 shares authorized,
5,372,971 shares issued and outstanding 5,374 5,374
Additional paid-in capital 6,319,666 6,307,416
Accumulated deficit (1,668,519) (614,455)
---------------- -----------------
Total stockholders' equity 4,656,521 5,698,335
--------------- -----------------
Total liabilities and stockholders' equity $ 5,356,215 $ 8,479,726
=============== =================
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30,
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<CAPTION>
1999 1998
------------------- -------------
<S> <C> <C>
Net sales $ 1,399,992 $ 1,159,378
Cost of sales 1,245,350 973,336
------------------- --------------------
Gross profit 154,642 186,042
------------------- --------------------
Expenses:
Selling, general and administrative expenses 523,589 569,670
Amortization of costs in excess of net assets of business acquired 17,738 17,738
------------------- --------------------
Total expenses 541,327 587,408
------------------- --------------------
(Loss) before other income (expense)
and provision for income taxes (386,685) (401,366)
-------------------- ---------------------
Other income (expense):
Equity in loss of affiliate (530,879) -
Rental income - -
Interest and finance expense (52,985) (66,136)
Interest income 15,193 25,745
-------------------- ---------------------
Total other income (expense) (568,671) (40,391)
-------------------- ---------------------
(Loss) before provision for
income taxes (955,356) (441,757)
(Benefit) for income taxes - (23,400)
------------------- ---------------------
Net (Loss) $ (955,356) $ (418,357)
==================== =====================
Basic:
Net (Loss) $ (.18) $ (.08)
=================== ==================
Weighted average number of
common shares outstanding 5,372,971 5,023,888
=================== ====================
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
1999 1998
------------------- -------------
<S> <C> <C>
Net sales $ 3,615,087 $ 4,092,491
Cost of sales 2,575,351 2,646,249
------------------- --------------------
Gross profit 1,039,736 1,446,242
------------------- --------------------
Expenses:
Selling, general and administrative expenses 1,087,094 1,215,401
Amortization of costs in excess of net assets of business acquired 35,476 35,476
------------------- --------------------
Total expenses 1,122,570 1,250,877
------------------- --------------------
(Loss) Income before other income (expense)
and provision for income taxes (82,834) 195,365
-------------------- --------------------
Other income (expense):
Equity in loss of affiliate (872,572) -
Rental income 4,500 -
Cancellation of stock issued in lieu of compensation - 62,500
Interest and finance expense (131,406) (136,647)
Interest income 28,248 46,613
------------------- --------------------
Total other income (expense) (971,230) (27,534)
-------------------- ---------------------
(Loss) Income before provision for
income taxes (1,054,064) 167,831
Provision for income taxes - 19,200
------------------- --------------------
Net (Loss) Income $ (1,054,064) $ 148,631
==================== ====================
Basic:
Net (Loss) Income $ (.20) $ .03
=================== =================
Weighted average number of
common shares outstanding 5,372,971 4,698,888
=================== ====================
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
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<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 5,372,971 $ 5,374 $ 6,307,416 $ (614,455) $ 5,698,335
Issuance of Stock Options - - 12,250 - 12,250
Net Loss for the six months
ended June 30, 1999 - - - (1,054,064) (1,054,064)
------------- ------------- ------------- -------------- --------------
Balances at March 31, 1999 5,372,971 $ 5,374 $ 6,319,666 $ (1,668,519) $ 4,656,521
============= ============= ============= ============== =============
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
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<CAPTION>
1999 1998
-----------------------------
Cash flows from operating activities:
<S> <C> <C>
Net (Loss) Income .......................................................... $(1,054,064) $ 148,631
Adjustments to reconcile net income to
net cash provided by operating activities
Issuance of stock options to officers ...................................... 12,250 --
Equity in loss of affiliate ................................................ 872,572 --
Amortization and depreciation .............................................. 53,367 239,234
Cancellation of stock issued for compensation .............................. (62,500)
Decrease (increase) in:
Deferred Taxes ........................................................ -- (800)
Accounts receivable ................................................... 41,294 17,221
Prepaid expenses ............................................................... (58,707) (35,861)
Inventory ............................................................. 2,387,407 2,025,403
Film production costs ................................................. -- (372,306)
Increase (decrease) in:
Accounts payable and accrued expenses ................................. (513,273) (255,628)
Due to factor ......................................................... (1,562,942) (2,018,391)
----------- -----------
Net cash provided by (used for) operating activities ........................... 177,904 (314,997)
----------- -----------
Cash flows from investing activities:
Acquisition of furniture, computer equipment, and
leasehold improvements ................................................... (3,907) (4,973)
Loans receivable-affiliate ..................................................... (300,000) (250,000)
Repayments of loans to affiliate ........................................... 75,000 100,000
Acquisition costs .......................................................... (17,035) --
Investment in joint venture ................................................ (12,500) --
Subsidiary=s redemption of preferred stock ................................. -- (280,000)
----------- -----------
Net cash used for investing activities ..................................... (258,442) (434,973)
----------- -----------
Cash flows from financing activities:
Principal payments on capital leases ....................................... (5,482) --
Sale of common stock ....................................................... -- 754,982
Repayments from (advances to) related parties .............................. -- 12,195
Offering costs incurred .................................................... -- 67,385
----------- -----------
Net cash (used for) provided by financing activities .......................... (5,482) 834,562
----------- -----------
Net (decrease) increase in cash ................................................ (86,020) 84,592
Cash, beginning of period ...................................................... 1,309,526 352,981
----------- -----------
Cash, end of period ............................................................ $ 1,223,506 $ 437,573
===========
Supplemental disclosure of non-cash flow information: Cash paid during the year
for:
Interest .............................................................. $ 131,406 $ 143,256
Income taxes .......................................................... $ 6,506 $ 25,509
</TABLE>
See notes to consolidated financial statements (unaudited).
<PAGE>
NOTE 1 ORGANIZATION
Shopnet.com, Inc. (the "Company") was incorporated in the
State of Delaware on December 1, 1995 under the name of
Hollywood Productions, Inc. On May 10, 1999, the Company filed
an amendment to its Articles of Incorporation to change its
name to Shopnet.com, Inc. In accordance with the name change,
the Company also changed its Nasdaq symbols from "FILM" and
"FILMW" to "SPNT" and "SPNTW," respectively. On May 12, 1999,
the Company incorporated a wholly-owned subsidiary, Hollywood
Productions, Inc., to which the Company shall assign its film
production business and act, thereafter, as a holding company.
The accompanying unaudited financial statements include the
accounts of the Company and its wholly-owned subsidiaries
(herein referred to as the "Company" except where otherwise
required for clarity), Breaking Waves, Inc. ("Breaking Waves")
and (newly formed) Hollywood Productions, Inc. ("Hollywood"),
after elimination of all significant intercompany transactions
and accounts. The Company, directly and through Breaking
Waves, has investments in a joint venture and an affiliate,
which are accounted for under the equity method.
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with
instructions to Form 10-QSB. Accordingly, they do not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial
statements. In the opinion of management, the interim
financial statements include all adjustments necessary in
order to make the financial statements not misleading. The
results of operations for the three and six months ended are
not necessarily indicative of the results to be expected for
the full year. For further information, refer to the Company's
audited financial statements and footnotes thereto at December
31, 1998, included in the Company's Annual Report on Form
10-KSB as filed with the Securities and Exchange Commission.
NOTE 2 ACQUISITION OF BREAKING WAVES, INC.
Pursuant to a stock purchase agreement dated May 31, 1996 (the
"Agreement"), on September 24, 1996, the Company issued 100,000 shares
of Common Stock in exchange for all of the issued and outstanding
capital stock of Breaking Waves. The transaction was accounted for
using the purchase method of accounting. As a result of the
transaction, excess of cost over net assets acquired, totaling
$1,064,283, was recorded and is being amortized over the useful lives
of the related assets, which is fifteen years. Amortization expense
totaled $17,738 for the three months ended June 30, 1999 and 1998,
respectively.
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
NOTE 3 INVESTMENT IN JOINT VENTURE AND AFFILIATE
a) Investment in Joint Venture
Pursuant to a co-production agreement dated April 17, 1998, the
Company has invested $212,500 through June 30, 1999 for a 50% interest
in Battle Studies Productions, LLC ("Battle Studies") a limited
liability company. North Folk Films, Inc. ("NFF"), an unrelated party,
also invested a total of $212,500 for the remaining 50% interest in
Battle Studies. Battle Studies will be treated as a joint venture in
order to co-produce motion pictures and to finance the costs of
production and distribution of such motion pictures. The joint venture
retains all rights to the motion pictures, the screenplays, and all
ancillary rights attached thereto. As of June 30, 1999, Battle Studies
had completed filming its first motion picture which is expected to be
shown at film festivals.
The Company accounts for the investment in Battle Studies on the
equity method. Accordingly, as of June 30, 1999, the Company only
recorded its initial $212,500 investment in the joint venture since no
operations have yet commenced.
b) Investment in Affiliate
On November 24, 1998, pursuant to a sales agreement (the "Sales
Agreement") entered into during September 1998 by and between Breaking
Waves and Play Co. Toys & Entertainment Corp. ("Play Co.," a toy
retailer and publicly traded company whose Chairman of the Board is
also the President of the Company and Breaking Waves), Breaking Waves
purchased 1,400,000 unregistered shares of Play Co. common stock,
representing 25.4% of the then issued and outstanding common stock,
for a total of $504,000 comprised of $300,000 in cash and by shipping
$204,000 of merchandise to Play Co. As of June 30, 1999, as a result
of Play Co.'s issuance of additional common stock, Breaking Waves'
percentage was reduced to 25.2%.
Breaking Waves accounts for its investment under the equity
method. For the three and six months ended June 30, 1999, Breaking
Waves recorded $530,979 and $872,572 respectively of equity loss for
its proportionate share in Play Co.'s loss.
Play Co.'s operations are highly seasonal with approximately
30-40% of its sales historically falling within the last three months
of the calendar year.
NOTE 4 DUE TO FACTOR
On August 20, 1997, Breaking Waves entered into a factoring and
revolving inventory loan and security agreement (as amended December
9, 1998) with Heller Financial, Inc. ("Heller") to sell its interest
in all present and future receivables without recourse. Breaking Waves
submits all sales offers to Heller for credit approval prior to
shipment, and pays Heller a factoring commission of 0.85% of the first
$5,000,000 of receivables sold and 0.65% of receivables sold in excess
of $5,000,000 for each year. Heller retains from the amount payable to
Breaking Waves a reserve for possible obligations such as customer
disputes and possible credit losses on unapproved receivables.
Breaking Waves may take advances of up to 85% of the receivable, with
interest at the rate of 1 3/4% over prime.
<PAGE>
NOTE 4 DUE TO FACTOR (continued)
In connection with the factoring agreement, the Company agreed to
maintain $1,150,000 of cash in a segregated account in order to
collateralize standby letters of credit. Interest expense related to
this agreement totaled $52,985 and $44,598, respectively, for the
three months ended June 30, 1999 and 1998. Heller has a continuing
interest in Breaking Wave's inventory as collateral for the advances.
As of June 30, 1999, the net advances to Breaking Waves from the
factor amounted to $500,612.
NOTE 5 CAPITAL LEASE OBLIGATIONS
During 1998, the Company acquired computer equipment and
proprietary software for its subsidiary, Breaking Waves, pursuant to
the following terms and conditions:
a) On August 13, 1998, the Company acquired various computer
and related components for $28,583 by entering into a capital
lease obligation with interest at approximately 9.2% per annum,
requiring 48 monthly payments of principal and interest of $713.
The lease is secured by the related computer equipment.
b) On September 13, 1998, the Company acquired proprietary
software for $32,923 by entering into a capital lease obligation
with interest at approximately 10.9% per annum, requiring 48
monthly payments of principal and interest of $850. The lease is
secured by the related software.
At June 30, 1999, the aggregate future minimum lease payments due
pursuant to the above capital lease obligations are as follows:
Year Ended
December 31,
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<CAPTION>
<S> <C>
1999 $ 10,619
2000 18,757
2001 18,757
2002 13,355
-----------------
Total minimal lease payments 61,488
Less: amounting representing interest 9,698
Present value of net minimum lease payments $ 51,790
========= ======
</TABLE>
At December 31, 1998, equipment and software under capital leases
is carried at a book value of $59,115.
<PAGE>
SHOPNET.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
NOTE 6 COMMITMENTS AND CONTINGENCIES
a) Lease commitments
The Company and Breaking Waves have entered into lease agreements
for administrative offices. The Company leases its administrative
office pursuant to a 5 year lease expiring November 30, 2001 at a base
annual rent amounting to approximately $70,000. Breaking Waves leased
administrative offices through approximately January 1998 pursuant to
a lease requiring annual payments of approximately $64,000. Breaking
Waves cancelled such lease and simultaneously entered into a new lease
for additional space with the same landlord requiring annual payments
of $71,600 expiring December 2004. Lastly, Breaking Waves leases an
offsite office for one of its designers on a month to month basis with
annual payments approximating $11,000.
The Company's and Breaking Waves' approximate future minimum
rentals under non-cancelable operating leases in effect on June 30,
1999 are as follows:
Year ended
December 31,
1999 $ 141,257
2000 141,257
2001 135,452
2002 71,600
2003 71,600
Thereafter 71,600
-----------------
$ 632,766
=================
Rent expense for the three months ended June 30, 1999 and 1998
amounted to approximately $41,084 and $29,805, respectively.
b) Significant vendors and customers
Breaking Waves purchases approximately 90% of its inventory from
two vendors in Indonesia. For the three months ended June 30, 1999 and
1998, Breaking Waves had two and four customers, respectively, which
comprise 21%, and 33% and 28%, 17%, 11%, and 11% of net sales,
respectively.
c) Seasonality
Breaking Waves' business is considered seasonal with a large
portion of its revenues and profits being derived between November and
March. Each year from April through October, Breaking Waves engages in
the process of designing and manufacturing the following season's
swimwear lines, during which time its incurs the majority of its
production costs with limited revenues.
<PAGE>
NOTE 6 COMMITMENTS AND CONTINGENCIES (continued)
d) License agreements
i) On October 16, 1995, Breaking Waves entered into a
license agreement with Beach Patrol, Inc. ("Beach") for the
exclusive use of certain trademarks in the United States. The
agreement covered a term of January 1, 1996 to June 30, 1998 and
contained a provision for an additional three year extension, at
the option of Breaking Waves, through and until June 30, 2001.
Breaking Waves has exercised this option, thereby so extending
the agreement. The agreement calls for minimum annual royalties
of $75,000 to $200,000 over the life of the agreement with
options based on sales levels from $1,000,000 for the first year
to $4,000,000 in the sixth year. The Company recorded royalties
and advertising under this agreement totaling $37,500 and $30,000
during the three months ended June 30, 1999 and 1998,
respectively.
ii) On October 31, 1996, Breaking Waves entered into a
license agreement with North-South Books, Inc. ("N-S") for the
exclusive use of certain art work and text in the making of
swimsuits and accessories in the United States and Canada. The
agreement expired March 1, 1999. The Company recorded $0 and
$1,170 in royalties under this agreement during the three months
ended June 30, 1999 and 1998, respectively.
iii)On October 17, 1997, Breaking Waves entered into a
license agreement with Kawasaki Motors Corp., U.S.A. ("KMC") with
an effective date of July 1, 1997 for the exclusive use of
certain trademarks in the making of swimwear in the United
States. The fee for the exclusive use of certain trademarks is
five percent (5%) of net sales. The agreement expired May 31,
1999. The Company recorded $7,628 and $0 royalties under this
agreement during the three months ended June 30, 1999 and 1998,
respectively.
e) Co-production and property purchase agreements
Pursuant to co-production and property purchase agreements dated
March 15, 1996, as amended, the Company acquired the rights to
co-produce a motion picture and to finance the costs of production and
distribution of such motion picture with the co-producer agreeing to
finance $100,000 of the costs of production. The Company retains all
rights to the motion picture, the screenplay, and all ancillary rights
attached thereto. The motion picture was completed during the latter
part of 1996 and, accordingly, the Company commenced the marketing and
distribution process.
As of June 30, 1999, the Company invested $2,065,273 for the
co-production and distribution of such motion picture whereas the
co-producers have invested $100,000. For the three months ended June
30, 1999 and 1998, no revenue associated with the motion picture was
generated.
<PAGE>
NOTE 6 COMMITMENTS AND CONTINGENCIES (continued)
f) Employment agreements
On November 27, 1996, the Company entered into two employment
agreements (as amended) with two key employees of Breaking Waves. Such
employees are responsible for the designing, marketing and sales of
Breaking Waves. The employment agreements are for a term of three
years with annual salaries of $60,000 and $130,000 for 1998 (as
amended), respectively, and for $110,000 each for 1997. One of the
employment agreements was further amended effective January 1, 1999
with an annual salary increase from $60,000 to $70,000. In addition to
the salaries, the Company agreed to issue on each of November 27,
1996, 1997, and 1998, shares of common stock in the amount equal to
the fair market value of $25,000 (before amendment) on the date of
each issuance, to each employee subject to a vesting schedule. In
connection with the decrease in salary from originally $110,000 per
year to $70,000 per year for one of the key employees, the Company
reduced the value of shares to be issued thereof to $13,636 for 1998.
Such common stock has not yet been issued.
g) Year 2000
The Company has addressed and will continue to address the year
2000 issue to ensure the reliability of its operational system. The
Company has made and will continue to make certain investments in its
software systems and applications to ensure that it is Year 2000
compliant. These expenditures, which are expensed as incurred, are not
expected to be material. The Company is also working with its
suppliers and customers to ensure their compliance with Year 2000
issues in order to avoid any interruptions in its business.
NOTE 7 RELATED PARTIES TRANSACTIONS
a) For the three months ended June 30, 1999 and 1998, $12,000 and
$9,000, respectively of financial consulting fees were paid to an
affiliate of the Company's President.
b) During October 1996, pursuant to two promissory notes, the
Company loaned two of its officers a total of $87,000 bearing interest
at six and one-half percent (6 1/2%) payable over three years. During
January 1997, the balance of one of the notes amounting to $30,130 was
forgiven as part of a severance package for a previous officer. As of
June 30, 1999, the remaining note amounted to $37,000, of which
$15,000 has been classified as current and $22,000 classified as
non-current.
As of June 30, 1999, the Company's President was advanced
additional funds totaling $3,000 which are non-interest bearing and
due on demand and are classified as current.
c) Pursuant to certain unsecured promissory notes, the Company
loaned a total of $300,000 to Play Co. between February 1999 and June
1999 bearing interest at 9% per annum. Play Co. agreed to repay such
notes with monthly installments by August 1999. As of June 30, 1999
the notes receivables amounted to $225,000 which have been fully
repaid as of August 18, 1999.
<PAGE>
NOTE 7 RELATED PARTIES TRANSACTIONS (continued)
d) During April 1999, the Company granted its President and Vice
President a total of approximately 50,000 stock options. The options
are exercisable at 85% of the closing bid price on April 16, 1999. In
accordance with such grant of options, the Company recorded $12,250 as
compensation expense.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
*CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not historical facts may be
considered forward looking information with respect to plans, projections, or
future performance of the Company as defined under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected. The words "anticipate," "believe," "estimate," "expect,"
"objective," and "think" or similar expressions used herein are intended to
identify forward-looking statements. The forward-looking statements are based on
the Company's current views and assumptions and involve risks and uncertainties
that include, among other things, the effects of the Company's business, actions
of competitors, changes in laws and regulations, including accounting standards,
employee relations, customer demand, prices of purchased raw material and parts,
domestic economic conditions, including housing starts and changes in consumer
disposable income, and foreign economic conditions, including currency rate
fluctuations. Some or all of the facts are beyond the Company's control.
General
Shopnet.com, Inc. ("Shopnet.com") was incorporated in the State of Delaware
on December 1, 1995 as Hollywood Productions, Inc. On May 10, 1999, the Company
filed an amendment to its Articles of Incorporation effecting a change in its
name to Shopnet.com, Inc. On May 12, 1999, the Company incorporated a
wholly-owned subsidiary, Hollywood Productions, Inc. ("Hollywood"), to which the
Company shall assign its film production business, thereby rendering the Company
a holding company for Hollywood and its other wholly-owned subsidiary, Breaking
Waves, Inc. ("Breaking Waves"). The Company was formed initially for the purpose
of acquiring screen plays and producing motion pictures. During September 1996,
in connection with the completion of its Initial Public Offering ("IPO"), the
Company acquired all of the capital stock of Breaking Waves. Breaking Waves
designs, manufactures, and distributes private and brand name label children's
swimwear.
The consolidated financial statements at June 30, 1999 include the accounts
of the Company and its subsidiaries, Breaking Waves and Hollywood (herein
referred to as the "Companies"), after elimination of all significant
intercompany transactions and accounts. As of June 30, 1998, the consolidated
financial statements include the accounts of the Company and Breaking Waves.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related footnotes which provide
additional information concerning the Company's financial activities and
condition. Since the Company and its subsidiaries, Breaking Waves and Hollywood,
operate in different industries, the discussion and analysis is presented by
segment in order to be more meaningful. During the quarter ended June 30, 1999,
Hollywood pursued various avenues in marketing its Dirty Laundry and Machiavelli
Rises motion pictures.
Three months ended June 30, 1999 as compared to the three months ended June
30, 1998
Breaking Waves
For the three months ended June 30, 1999 and 1998, Breaking Waves generated
net sales of $1,399,992 and $1,159,378, respectively, with a cost of sales
amounting to $1,245,350 and $973,336, respectively. The gross profit for the
three months ended June 30, 1999 amounted to $154,642, or 11%, as compared to
the three months ended June 30, 1998 during which it amounted to $186,042, or
16%. Sales for the quarter ended June 30, 1999 increased by $240,614 when
compared to the quarter ended June 30, 1998. The increase in sales is primarily
a result in the timing of orders by customers between periods.
The decrease in gross profit of approximately 5% is primarily a result of
Breaking Waves selling its discontinued line, Jet Ski, at cost or slightly below
cost in order to make room for new merchandise.
Selling, general, and administrative expenses during the three months ended
June 30, 1999 and 1998 amounted to $362,589 and $383,903, respectively which
represents a decrease of $21,314, or approximately 6%.
The major components of the Breaking Waves selling, general, and
administrative expenses during the quarter ended June 30, 1999 are as follows:
$113,686 of officers, office staff, and designer salaries and related benefits,
$16,880 of commission expense, $54,350 of warehousing costs, $45,128 of royalty
fees, $22,226 of rent expense, $15,058 of factor commissions, and $95,261
representing other miscellaneous general corporate overhead expenses.
<PAGE>
The major components of selling, general, and administrative expenses for
the three months ended June 30, 1998 are as follows: $131,961 of officers,
office staff, and design salaries and related benefits, $27,564 of commission
expense, $43,649 of warehousing costs, $31,169 of royalty fees, $22,331 of rent
expense, $14,543 of factor commission and $112,686 representing other
miscellaneous general corporate overhead expenses.
Breaking Waves acquired, in November 1998, an approximate 25% interest in
Play Co. Toys & Entertainment Corp. ("Play Co.") by paying $300,000 in cash and
by shipping $204,000 in merchandise. In connection with the $504,000 investment
in Play Co., then representing 25.4% ownership thereof, Breaking Waves
recognized $530,879 of equity loss in Play Co. for the quarter ended June 30,
1999. Play Co.'s operations are highly seasonal with approximately 30-40% of its
net sales historically falling within the last three months of the calendar
year. As a result of Play Co.'s issuance of additional common stock, Breaking
Waves' percentage was reduced to 25.2%.
Interest expense in connection with its factoring agreement amounted to
$52,863 and $48,305 for the three months ended June 30, 1999 and 1998
respectively.
Breaking Waves generated a net loss of $781,690 inclusive of a $530,879
equity loss pick up from Play Co. for the three months ended June 30, 1999.
Shopnet.com
For the three months ended June 30, 1999 and 1998, Shopnet.com generated
minimal revenue comprised of interest from its money market and minimal sublet
rental income from its corporate office. In addition, its newly formed
wholly-owned subsidiary, Hollywood did not generate any motion picture revenue,
although it expects to generate revenue in the very near future.
Shopnet.com's selling, general, and administrative expense amounted to
approximately $161,122 and $185,767 for the three months ended June 30, 1999 and
1998, respectively.
The major components of the Shopnet.com's expenses are as follows for the
three months ended June 30:
<TABLE>
<CAPTION>
1999 1998
------ ------
Salaries (officer and office staff) and stock compensation
<S> <C> <C>
and related benefits $59,317 $ 79,513
Legal and Professional fees 7,148 6,604
Rent 18,857 17,681
Consulting fees and Directors Fees 9,600 15,250
Other general corporate and administrative expenses 66,200 66,719
</TABLE>
Shopnet.com generated a net loss of $143,429 for the three months ended
June 30, 1999, and a net loss of $166,130 for the three months ended June 30,
1998.
Six months ended June 30, 1999 as compared to the six months ended June 30,
1998
Breaking Waves
For the six months ended June 30, 1999 and 1998, Breaking Waves generated
net sales of $3,615,087 and $4,092,491, respectively, with a cost of sales
amounting to $2,575,351 and $2,646,249, respectively. The gross profit for the
six months ended June 30, 1999 amounted to $1,039,736, or 29%, as compared to
the six months ended June 30, 1998 during which it amounted to $1,446,242, or
35%. Sales for the six months ended June 30, 1999 decreased by $477,404 when
compared to the six months ended June 30, 1998. The decrease in sales is
primarily a result in the timing of orders by customers between periods.
The decrease in gross profit of approximately 6% is primarily a result of
Breaking Waves selling its discontinued line, Jet Ski, at cost or slightly below
cost in order to make room for new merchandise.
Selling, general, and administrative expenses during the six months ended
June 30, 1999 and 1998 amounted to $801,499 and $867,253, respectively.
The major components of the Breaking Waves selling, general, and
administrative expenses during the six months ended June 30, 1999 are as
follows: $243,252 of officers, office staff, and designer salaries and related
benefits, $96,880 of commission expense, $140,862 of warehousing costs, $86,198
of royalty fees, $44,111 of rent expense, $37,443 of factor commissions, and
$152,753 representing other miscellaneous general corporate overhead expenses.
The major components of selling, general, and administrative expenses for
the six months ended June 30, 1998 are as follows: $244,183 of officers, office
staff, and design salaries and related benefits, $129,795 of commission expense,
$146,244 of warehousing costs, $63,832 of royalty fees, $25,016 of rent expense,
$42,954 of factor commission, $71,385 of offering costs and $143,844
representing other miscellaneous general corporate overhead expenses.
Breaking Waves acquired, in November 1998, an approximate 25% interest in
Play Co. Toys & Entertainment Corp. ("Play Co.") by paying $300,000 in cash and
by shipping $204,000 in merchandise. In connection with the $504,000 investment
in Play Co., then representing 25.4% ownership thereof, Breaking Waves
recognized $872,572 of equity loss in Play Co. for the six months ended June 30,
1999. Play Co.'s operations are highly seasonal with approximately 30-40% of its
net sales historically falling within the last three months of the calendar
year. As a result of Play Co.'s issuance of additional common stock, Breaking
Waves' percentage was reduced to 25.2%.
<PAGE>
Interest expense in connection with its factoring agreement amounted to
$128,712 and $136,547 for the six months ended June 30, 1999 and 1998
respectively.
Breaking Waves generated a net loss of $765,528 and a net income of
$434,749 respectively, for the six months ended June 30, 1999 and 1998. The
increase in loss amounting to approximately $1,200,000 is primarily a result of
the $872,000 equity loss pick up from Play Co.'s investment along with the
decrease in sales and related gross profits.
Shopnet.com
For the six months ended June 30, 1999 and 1998, Shopnet.com generated
sales from its motion picture "Dirty Laundry" amounting to $0 and $120,000,
respectively. Although sales have been minimal since the completion of the
motion picture, Shopnet.com expects increase in sales during 1999 and thereafter
as a result of a new release of the picture during the latter part of 1998.
Shopnet.com's selling, general, and administrative expense amounted to
$285,648 and $348,148 for the six months ended June 30, 1999 and 1998,
respectively.
The major components of Shopnet.com's expenses are as follows for the six
months ended June 30:
<TABLE>
<CAPTION>
1999 1998
------ ------
Salaries (officer and office staff) and stock compensation
<S> <C> <C>
and related benefits $106,661 $138,269
Legal and Professional fees 17,812 43,559
Rent 37,321 35,424
Consulting fees and Directors Fees 21,850 34,000
Other general corporate and administrative expenses 102,004 96,896
Shopnet.com generated a net loss of $253,060 for the six months ended
June 30, 1999, and a net loss of $256,242 for the six months ended
June 30, 1998.
</TABLE>
Liquidity and Capital Resources
At June 30, 1999, the Companies have a consolidated working capital
amounting to $1,259,918. The Companies anticipate that their current available
cash will be sufficient for the next twelve months, and they do not anticipate
any cash shortfalls.
The Company considers highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Included in cash
are certificates of deposit of approximately $1,159,000. The Company maintains
cash deposits in accounts which are in excess of Federal Deposit Insurance
Corporation limits by approximately $1,059,000. The Company believes that such
risk is minimal. The Company maintains a letter of credit with a financial
institution as a condition of its factoring agreement. The financial institution
requires the Company to maintain $1,150,000 on deposit as collateral for the
letter of credit. Accordingly, such cash is designated as restricted.
For the three months ended June 30, 1999, the Companies reported a
consolidated net loss of $955,356 inclusive of a $530,879 equity loss pick up
from Play Co., whereas for the three months ended June 30, 1998, the Companies
reported a consolidated net loss of $418,357 after a benefit of income taxes
amounting to $23,400.
Investment in Joint Venture
Pursuant to a co-production agreement dated April 17, 1998, the Company has
invested $212,500 through June 30, 1999 for a 50% interest in Battle Studies
Productions, LLC ("Battle Studies") a limited liability company. North Folk
Films, Inc. ("NFF"), an unrelated party, also invested a total of $212,500 for
the remaining 50% interest in Battle Studies. Battle Studies will be treated as
a joint venture in order to co-produce motion pictures and to finance the costs
of production and distribution of such motion pictures. The joint venture
retains all rights to the motion pictures, the screenplays, and all ancillary
rights attached thereto. As of June 30, 1999, Battle Studies had completed
filming its first motion picture and which is expected to be shown at film
festivals.
The Company accounts for the investment in Battle Studies on the equity
method. Accordingly, as of June 30, 1999, the Company only recorded its initial
$212,500 investment in the joint venture since no operations have yet commenced.
Factoring Arrangements
On August 20, 1997, Breaking Waves entered into a factoring and revolving
inventory loan and security agreement (which was subsequently amended in
December 1998) with Heller Financial, Inc. ("Heller") pursuant to which Heller
agreed to (i) purchase all of Breaking Waves' accounts receivables, (ii) provide
advances against such accounts receivables, (iii) provide a revolving loan, and
(iv) guarantee letters of credit in excess of $1,500,000 as well as provide
certain other services. The Company is a guarantor of Breaking Waves'
obligations to Heller. The Company maintains a letter of credit with a financial
institution in support of and as a condition to its factoring agreement. The
financial institution requires the Company to maintain $1,150,000 on deposit as
collateral for such letter of credit. Breaking Waves may take advances of up to
85% of the purchase price of its eligible accounts receivable.
<PAGE>
The factoring agreement provides (i) factoring commissions of (a) 0.85% on
the first $5 million in accounts sold and assigned to Heller during each year
and (b) 0.65% on all accounts in excess of $5 million sold and assigned to
Heller during each year, but in no event less than $3 per invoice; and (ii) on
accounts bearing terms greater than 90 days, an increase in commission by 0.25%
for each 30 days or part thereof that the terms exceed 60 days. Heller has a
continuing interest in Breaking Wave s inventory as collateral for the advances.
As of June 30, 1999, the net advances to Breaking Waves from the factor amounted
to $500,612.
Capital Lease Obligations
During 1998, Shopnet.com acquired computer equipment and proprietary
software for its subsidiary, Breaking Waves, pursuant to the terms and
conditions set forth herein.
On August 13, 1998, the Company acquired various computer and related
components for $28,583 by entering into a capital lease obligation with interest
at approximately 9.2% per annum, requiring 48 monthly payments of principal and
interest of $713. The lease is secured by the related computer equipment.
On September 13, 1998, the Company acquired proprietary software for
$32,923 by entering into a capital lease obligation with interest at
approximately 10.9% per annum, requiring 48 monthly payments of principal and
interest of $850. The lease is secured by the related software.
Lease Commitments
Shopnet.com and Breaking Waves have entered into lease agreements for
administrative offices. The Company leases its administrative office pursuant to
a 5 year lease expiring November 30, 2001 at a base annual rent amounting to
approximately $70,000. Breaking Waves leased administrative offices through
approximately January 1998 pursuant to a lease requiring annual payments of
approximately $64,000. Breaking Waves amended such lease and rented additional
space at an annual rental of $71,600 expiring December 2004. Breaking Waves also
leases an offsite office for one of its designers on a month to month basis with
annual payments approximating $11,000.
License Agreements
On October 16, 1995, Breaking Waves entered into a license agreement with
Beach Patrol, Inc. ("Beach") to use the trademark "Daffy Waterwear" ("Daffy").
Beach supplies prints and designs used under this agreement for the Daffy line.
Pursuant to the licensing agreement, Breaking Waves was given the right to use
those designs for a children's line under the "Daffy Waterwear" label from
January 1, 1996 to June 30, 1998. Thereafter, the agreement provided for a three
year extension, at the option of Breaking Waves, through and until June 30,
2001. Breaking Waves has exercised this option, thereby so extending the
agreement. For its right to use the trademark, Breaking Waves agreed to pay
Beach, subject to certain variables, the greater of 5% of net sales or as
follows: (i) during the first six months, an aggregate of $75,000, (ii) during
the next twelve months, an aggregate of $85,000, (iii) during the final twelve
months, an aggregate of $100,000, and (iv) during each of the final three years
of the agreement, an aggregate of $150,000, $175,000, and $200,000,
respectively. The Company recorded royalties and advertising under this
agreement totaling $37,500 and $30,000 during the three months ended June 30,
1999 and 1998, respectively.
On October 31, 1996, Breaking Waves entered into a license agreement with
North-South Books, Inc. ("N-S") for the exclusive use of certain art work and
text in the making of swimsuits and accessories in the United States and Canada.
The agreement expired on March 1, 1999. Breaking Waves recorded $0 and $1,170 of
royalties under this agreement during the three months ended June 30, 1999 and
1998, respectively.
On October 17, 1997, Breaking Waves entered into a license agreement with
Kawasaki Motors Corp., U.S.A. ("KMC") with an effective date of July 1, 1997 for
the exclusive use of certain trademarks in the making of swimwear in the United
States. The fee for the exclusive use of certain trademarks is five percent (5%)
of net sales. The agreement expired May 31, 1999. Royalties paid under the
agreement during the three months ended June 30, 1999 and 1998 amounted to
$7,628 and $0, respectively.
Internet Sales
In March 1999, Breaking Waves launched an online wholesale children's
swimwear website at www.breakingwaves.com. The website is designed to complement
the company's wholesale distribution efforts by providing retailers instant
access to more than 200 styles of Breaking Waves swimwear. The entire line of
Breaking Waves swimwear, including products marketed under the "Breaking Waves,"
"All Waves," "Daffy Waterwear," and "Jet Ski" brands, is available for online
purchase by retailers. The Breaking Waves website is being hosted by Mindspring
and incorporates e-commerce features from Cybercash and Mercantec, Inc.
Additionally, a second website was set up (www.smallwavesswimwear.com) which
features discounted styles, closeouts, over-runs, and manufacturers' specials at
highly discounted prices directly to consumers.
Management believes that these websites will fill the needs of existing and
potential customers. Through the Internet, retailers can purchase merchandise
online in a matter of minutes, at their own convenience, instead of having to
wait for a printed wholesale catalog. Management believes that the advantages
and efficiencies created by the websites will assist Breaking Waves in
increasing brand awareness as well as market share. Marketing strategies for
"driving" retailers to the site include co op trade advertisements, tradeshow
exposure, direct mail, and including the site address on all corporate
collateral and product labels.
<PAGE>
Year 2000
The Companies have addressed and will continue to address the year 2000
issue to ensure the reliability of their operational systems. The Companies have
made and will continue to make certain investments in their software systems and
applications to ensure that they are Year 2000 compliant. These expenditures,
which are expensed as incurred, are not expected to be material . The Companies
are also working with their suppliers and customers to ensure their compliance
with Year 2000 issues in order to avoid any interruptions in its business.
Loans to Play Co.
Pursuant to certain unsecured promissory notes, the Company loaned a total
of $300,000 to Play Co. between February 1999 and June 1999 bearing interest at
9% per annum. Play Co. agreed to repay such notes with monthly installments by
August 1999. As of June 30, 1999 the notes receivables amounted to $225,000
which as of August 18, 1999 have been fully repaid.
Stock Options Granted
During April 1999, the Company granted its President and Vice President a
total of approximately 50,000 stock options. The options are exercisable at 85%
of the closing bid price on April 16, 1999. In accordance with such grant of
options, the Company recorded $12,250 as compensation expense.
<PAGE>
PART II
Item 1. Legal Proceedings: The Company is not a party to any material
litigation and is not aware of any threatened litigation that would have a
material adverse effect on its business. Neither the Company's officers,
directors, affiliates, nor owners of record or beneficially of more than five
percent of any class of the Company's Common Stock is a party to any material
proceeding adverse to the Company or has a material interest in any such
proceeding adverse to the Company.
Item 2. Changes in Securities and Use of Proceeds: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: On May 10,
1999, the Company held a special meeting of its shareholders to vote on a
proposal to authorize an amendment to the Company's Certificate of Incorporation
to effect a change in the name of the Company from Hollywood Productions, Inc.
to Shopnet.com, Inc. The proposal was approved: votes cast for same aggregated
2,966,569, votes cast against same aggregated 9,666, and abstentions aggregated
666.
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
<S> <C>
10.31 Lease for premises at 14 East 60th Street, Room 402, New York, New York
27.1 Financial Data Schedule
</TABLE>
During the quarter ended June 30, 1999, no reports on Form 8-K were filed
with the Securities and Exchange Commission.
<PAGE>
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, this 19th day of August 1999.
HOLLYWOOD PRODUCTIONS, INC.
By: /s/ Harold Rashbaum
Harold Rashbaum
President and Chief Executive Officer
By: /s/ Robert DiMilia
Robert DiMilia
Vice President and Secretary
I STANDARD FORM OF OFFICE LEASE
The Real Estate Board of New York, Inc.
3/1/90
Agreement made as of this Twentieth day of November 19 96 OMABUILD
CORPORATION, a Delaware corporation having an office at 14 East 60th Street, New
York, New York 10022
party of the first part, hereinafter referred to as OWNER, and HOLLYWOOD
PRODUCTIONS, INC., a Delaware corporation having an office at 14 East 60th
Street, New York, New York 10022
party of the second part, hereinafter referred to as TENANT, Th Owner
hereby leases to Tenant and Tenant hereby hires from Owner Room 402 in the
building known as 14 East 60th Street in the Borough of Manhattan , City of New
York, for the term of Five (5) years
(or until such term shal~ sooner cease and expire as hereinafter provided)
to commence on the First (1st) day of December nineteen hundred and ninety -six
Thirtieth (30th) dayof November ~ two thousand one, and to end on the both dates
inclusive, at an annual rental rate of Sixty Nine Thousand Six Hundred Fifty
Seven ($69,657) Dollars
which Tenant agrees to pay in lawful money of the United States which shall
be legal tender in payment of all debts and dues, public and private, at the
time of payment, in equal monthly instaflments in advance on the first day of
each month during said term, at the office of Owner or such other place as Owner
may designate, without any set off or deduction whatsoever, except that Tenant
shall pay the first monthly installment(s) on the execution hereof (unless this
lease be a renewal).
In the event that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment of rent payable hereunder and
the same shall be payable to Owner as additional rent.
The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby convenant
as follows:
Rent 1. Tenant shall pay the rent as above and as hereinafter provided.
Occupancy 2. Tenant shall use and occupy demised premises for office
purposes. and for no other purpose.
Tenant Alterations: 3. Tenant shall make no changes in or to the
demisedpremises of any nature without Owner's prior written consent. Subject to
the prior written consent of Owner, and to the provisions of this article,
Tenant at Tenant's expense, may make alterations, installations, additions or
improvements which are non-structural and which do not affect utility services
or plumbing and electrical lines, in or to the interior of the demised premis~s
by using contractors or mechanics first approved by Owner. Tenant shall, before
making any alterations, additions, installations or improvements, at its
expense, obtain all permits, approvals and certificates required by any
governmental or quasi-governmental bodies and (upon completion) certificates of
final approval thereof and shall deliver promptly duplicates of all such
permits, approvals and certificates to Owner and Tenant agrees to carry and will
cause Tenant's contractors and subcontractors to carry such workman's
compensation, general liability, personal and property damage insurance as Owner
<PAGE>
may require. If any mechanic's lien is filed against the demised premises, or
the building of which the same forms a part, for work claimed to have been done
for, or materials furnished to, Tenant, whether or not done pursuant to this
article, the same shall be discharged by Tenant within thirty days thereafter,
at Tenant's expense, by filing the bond required by law. All fixtures and all
paneling, partitions, railings and like installations, installed in the premises
at any time, either by Tenant or by Owner in Tenant's behalf, shall, upon
installation, become the property of Owner and shall remain upon and be
surrendered with the demised premises unless Owner, by notice to Tenant no later
than twenty days prior to the date fixed as the termination of this lease,
elects to relinquish Owner's right thereto and to have them removed by Tenant,
in which event the same shall be removed from the premises by Tenant prior to
the expiration of the lease, at Tenant's expense. Nothing in this Article shall
be construed to give Owner title to or to prevent Tenant's removal of trade
fixtures, moveable office furniture and equipment, but upon removal of any such
from the premises o~opon removal of other installations as may be required by
Owner, Tenant shall immediately and at its expense, repair and restore the
premises to the condition existing prior to installation and repair any damage
to the demised premises or the building due to such removal. All property
permitted or required to be removed, by Tenant at the end of the term remaining
in the premises after Tenant's removal shall be deemed abandoned and may, at the
election of Owner, either be retained as Owner's property or may be removed from
the premises by Owner, at Tenant's expense.
Maintenance and Repairs 4. Tenant shall, throughout the term of this lease,
take and good care of the demised premises and the fixtures appurtenances
therein. Tenant shall be responsible for all damage or injury to the demised
premises or any other part of the building and the systems and equipment
thereof, whether requiring structural or nonstructural repairs cau~ed by or
resulting from carelessness, omission, neglect or improper conduct of Tenant,
Tenant's subtenants, agents, employees, invitees or licensees, or which arise
out of any work, labor, service or equipment done for or surplied '0 Tenant or
any subtenant or arising Out of tite installation, use or operation of the
property or equipment of Tenant or any subtenant. Tenant shall also repair all
damage to the building and the demised premises caused by the moving of Tenant's
fixtures, furniture and equipment. Tenant shall promptly make, at Tenant's
expense, all repairs in and to the demised premises for which Tenant is
responsible, using only the contractor for the trade or trades in question,
selected from a list of at least two contractors per trade submitted by Owner.
Any other repairs in or to the building or the facilities and systems thereof
for which Tenant is responsible shall be performed by Owner at the Tenant's
expense. Owner shall maintain in good working order and repair the exterior and
the structural portions of the building, including the structural portions of
its demised premises, and the public portions of the building interior and the
building plumbing, electrical, heating and ventilating systems (to the extent
such systems presently exist) serving the demised premises. Tenant agrees to
give prompt notice of any defective condition in the premises for which Owner
may be responsible hereunder. There shall be no allowance to Tenant for
diminution of rental value and no liability on the part of Owner by reason of
inconvenience, annoyance or injury to business arising from Owner or others
making repairs, alterations, additions or improvements in or to any portion of
the building or the demised premises or in and to the fixtures, appurtenances or
equipment thereof. It is specifically agreed that Tenant shall not be entitled
to any setoff or reduction of rent by reason of any failure of Owner to comply
with the covenants of this or any other article of this Lease. Tenant agrees
that Tenant's sole remedy at law in such instance will be by way of an action
for damages for breach of contract. The provisions of this Article 4 shall not
apply in the case of fire or other casualty which are dealt with in Article 9
hereof.
Window Cleaning: 5. Tenant will not clean nor require, permit, suffer or
allow any window in the demised premises to be cleaned from the outside in
violation of Section 202 of the Labor Law or any other applicable law or of the
Rules of the Board of Standards and Appeals, or of any other Board or body
having or asserting jurisdiction.
<PAGE>
Requirements of Law, Fire Insurance, Floor Loads: 6. Prior to the
commencement of the lease term, if, Tenant is then in possession, and at all
times thereafter, Tenant, at Tenant's sole cost and expense, shall prompt- ly
comply with all present and future laws, orders and regulations of all state,
federal, municipal and local governments, departments, commissions and boards
and any direction of any public officer pursuant to law, and all orders, rules
and regulations of the New York Board of Fire Underwriters, Insurance Services
Office, or any similar body which shall impose any violation, order or duty upon
Owner or Tenant with respect to the demised premises, whether or not arising out
of Tenant's use or manner of use thereof, (including Tenant's permitted use) or,
with respect to the building if arising Out of Tenant's use or manner of use of
the premises or the building (including the use permitted under the lease).
Nothing herein shall require Tenant to make structural repairs or alterations
unless Tenant has, by its manner of use of the demised premises or method of
operation therein, violated any such laws, ordinances, orders, rules,
regulations or requirements with respect thereto. Tenant may, after securing
Owner to Owner's satisfaction against all damages, interest, penalties and
expenses, including, but not limited to, reasonable attorney's fees, by cash
deposit or by surety bond in an amount and in a company satisfactory to Owner,
contest and appeal any such laws, ordinances, orders, rules, regulations or
requirements provided same is done with all reasonable promptness and provided
such appeal shall not subject Owner to prosecution for a criminal offense or
constitute a default under any lease or mortgage under which Owner may be
obligated, or cause the demised premises or any part thereof to be condemned or
vacated. Tenant shall not do or permit any act or thing to be done in or to the
demised premises which is contrary to law, or which will invalidate or be in
conflict with public liability, fire or other policies of insurance at any time
carried by or for the benefit of Owner with respect to the demised premises or
the building of which the demised premises form a part, or which shall, or might
subject Owner to any liability or responsibility to any person or for property
damage. Tenant shall not keep anything in the demised premises except as now or
hereafter permitted by the Fire Department, Board of Fire Underwriters, Fire
Insurance Rating Organization or other authority having jurisdiction, and then
only in such manner and such quantity so as not to increase the rate for fire
insurance applicable to the building, nor use the premises in a manner which
will increase the insurance rate for the building or any property located
therein over that in effect prior to the commencement of Tenant's occupancy.
Tenant shall pay all costs, expenses, fines, penalties, or damages, which may be
imposed upon Owner by reason of Tenant's failure to comply with the provisions
of this article and if by reason of such failure the fire insurance rate shall,
at the beginning of this leas~ or at any time thereafter, be higher than it
otherwise would be, then Tenant shall reimburse Owner, as additional rent
hereunder, for that portion of all fire insurance premiums thereafter paid by
Owner which shall have been charged because of such failure by Tenant. In any
action or proceeding wherein Owner and Tenant are parties, a schedule or
"make-up" of rate for the building or demised premises issued by the New York
Fire Insurance Exchange, or other body making fire insurance rates applicable to
said premises shall be conclusive evidence of the facts therein stated and of
the several items and charges in the fire insurance rates then applicable to
said premises. Tenant shall not place a load upon any floor of the demised
premises exceeding the floor load per square foot area which it was designed to
carry and which is allowed by law. Owner reserves the right to prescribe the
weight and position of all safes, business machines and mechanical equipment.
Such installations shall be placed and maintained by Tenant, at Tenant's
expense, in settings sufficient, in Owner's judgement, to absorb and prevent
vibration, noise and annoyance.
<PAGE>
Subordination: 7. This lease is subject and subordinate to all ground~ or
underlying leases ana to all mortgages which may now or hereafter affect such
leases or the real property of which demised premises are a part and to all
renewals, modifications, consolidations, replacements and extensions of any such
underlying leases and mortgages. This clause shall be self-operative and no
further instrument of subordination shall be required by any ground or
underlying lessor or by any mortgagee, affecting any lease or the real property
of which the demised premises are a part. In confirmation of such subordination,
Tenant shall execute promptly any certificate that Owner may request.
Property-Loss, Damage, Reimburse ment, Indemnity: 8. Owner or its agents
shall not be liable for any dam- age to property of Tenant or of others
entrusted to employees of the building, nor for loss of or damage to any
property of Tenant by theft or otherwise, nor for any in jury or damage to
persons or property resulting from any cause of whatsoever nature, unless cauted
by or due to the negligence of Owner, its agents, servants or employees. Owner
or its agents will not be liable for any such damage caused by other tenants or
persons in, upon or about said building or caused by operations in construction
of any private, public or quasi public work. If at any time any windows of the
demised premises are temporarily closed, darkened or bricked up (or permanently
closed, darkened or bricked up, if required by law) for any reason whatsoever
including, but not limited to Owner's own acts, Owner shall not be liable for
any damage Tenant may sustain thereby and Tenant shall not be entitled to any
com pensation therefor nor abatement or diminution of rent nor shall the same
release Tenant from its obligations hereunder nor constitute an eviction. Tenant
shall indemnify and save harmless Owner against and from all liabilities,
obligations, damages, penalties, claims, costs and expenses for which Owner
shall not be reimbursed by insurance, including reasonable attorneys fees, paid,
suffered or incurred as a result of any breach by Te-pant, Tenant's P~ents,
contractors, employees, invitees, or licensees, of any covenant o~ condition of
this lease, or the carelessness, negligence or improper conduct of the Tenant,
Tenant's agents, contractors, employees, invitees or licensees. Tenant's
liability under this lease extends to the acts and omissions of any sub-tenant,
and-any agent, contractor, employee, invitee or licensee of any sub-tenant. In
case any action or proceeding is brought against Owner by reason of any such
claim, Tenant, upon written notice from Owner, will, at Tenant's expense, resist
or defend such action or proceeding by counsel approved by Owner in writing,
such approval not to be unreasonably withheld.
Destruction, Fire and Other Casualty: 9. (a) If the demised premises or any
part thereof shall be damaged by fire or other casualty, Tenant shall give
immediate notice thereof to Owner and this lease shall continue, in full force
and effect except as hereinafter set forth. (b) If the demised premises are
partially damaged or rendered partially unusable by fire or other casualty, the
damages thereto shall be repaired by iand at the expense of Owner and the rent,
until such repair shall be substantially completed, shall be apportioned from
the day following the casualty according to the part of the premises which is
usable. (c) If the demised premises are totally damaged or rendered wholly
unusable by fire or other casualty, then the rent shall be proportionate-
ly paid up to the time of the casualty and thenceforth shall cease until
the date when the premises shall have been repaired and restored by Owner,
subject to Owner's right to elect not to restore the same as hereinafter
provided. (d) If the demised premises are rendered wholly unusable or (whether
or not the demised premises are damaged in whole or in part) if the building
shall be so damaged that Owner shall decide to demolish it or to rebuild it,
then, in any of such events, Owner may elect to terminate this lease by written
notice to Tenant, given within 90 days after such fire or casualty, specifying a
date for the expiration of the lease, which date shall not be more than 60 days
after the giving of such notice, and upon the date specified in such notice the
term of this lease shall expire as fully and completely as if such date were the
date set forth above for the termination of this lease and Tenant shall
forthwith quit, surrender and vacate the premises without prejudice however, to
Landlord's rights and remedies against Tenant under the lease provisions in
<PAGE>
effect prior to such termination, and any rent owing shall be paid up to such
date and any payments of rent made by Tenant which were on account of any period
subsequent to such date shall be returned to Tenant. Unless Owner shall serve a
termination notice as provided for herein, Owner shall make the repairs and
restorations under the conditions of ~) and (c) hereof, with all reasonable
expedition, subject to delays due to adjustment of insurance claims, labor
troubles and causes beyond Owner's control. After any such casualty, Tenant sh~
cooperate with Owner's restoration by removing from the premises as promptly as
reasonably possible, all of Tenant's salvageable inventory and movable
equipment, furniture, and other property. Tenant's liability for rent shall
resume five (5) days after written notice from Owner that the premises are
substantially ready for Tenant's occupancy. (e) Nothing contained hereinabove
shall relieve Tenant from liability that may exist as a result of damage from
fire or other casualty. Notwithstanding the foregoing, each party shall look
first to any insurance' in its favor before making any claim against the other
party for recovery for loss or damage resulting from fire or other casualty, and
to the extent that such insurance is in force and collectible and to the extent
permitted by law, Owner and Tenant each hereby releases and waives all right of
recovery against the other or any one claiming through or under each of them by
way of subrogation or otherwise. The foregoing release and waiver shall be in
force only if both releasors' insurance policies contain a clause providing that
such a release or waiver shall not invalidate the insurance. If, and to the
extent, that such waiver can be obtained only by the payment of additional
premiums, then the party benefitting from the waiver shall pay such premium
within ten days after written demand or shall be deemed to have agreed that the
party obtaining insurance coverage shall be free of any further obligation under
the provisions herof with respect to waiver of subrogation. Tenant acknowledges
that Owner will not carry insurance on Tenant's furniture and/or furnishings or
any fixtures or equipment, improvements, or appurtenances removable by Tenant
and agrees that Owner will not be obligated to repair any damage thereto or
replace the same. (fi Tenant hereby waives the provisions of Section 227 of the
Real Property Law and agrees that the provisions of this article shall govern
and control in lieu thereof.
Eminent Domain: 10. If the whole or any part of the demised premises shall
be acquired or condemned by Eminent Domain for any public or quasi public use or
purpose, then and in that event, the term of this lease shall cease and
terminate from the date of title vesting in such proceeding and Tenant shall
have no claim for the value of any unexpired term of said lease and assigr~ to
Owner, Tenant's entire interest in any such award. -.
Assignment, 11. Mortgage, Etc.: Tenant, for itself, its heirs,
distributees, executors, administrators, legal representatives, successors and
assigns, expressly covenants that it shall not assign, mortgage or encumber this
agreement, nor underlet, or suffer or permit the demised premises or any part
thereof to be used by others, without the prior written consent of Owner in each
instance. Transfer of the majority of the stock of a corporate Tenant shall be
deemed an assignment. If this lease be assigned, or if the demised premises or
any part thereof be underlet or occupied by anybody other than Tenant, Owner
may, after default by Tenant, collect rent from the assignee, under-tenant or
occupant, and apply the net amount collected to the rent herein reserved, but no
such assignment, underletting, occupancy or collection shall be deemed a waiver
of this covenant, or the acceptance of the assignee, under-tenant or occupant as
tenant, or a release of Tenant from the further performance by Tenant of
covenants on the part of Tenant herein contained. The consent by Owner to an
assignment or underletting shall not in any wise be construed to relleve Tenant
from obtaining the express consent in writing of Owner to any further assignment
or underletting.
Electric Current: 12. Rates and conditions in respect to submetering or
rent inclusion, as the case may be, to be added in RIDER attached hereto. Tenant
covenants and agrees that at all times its use of electric current shall not ex
ceed the capacity of existing feeders to the building or the risers or wiring
installation and Tenant may not use any electrical equipment which, in Owner's
opinion, reasonably exercised, will overload such installations or interfere
with the use thereof by other tenants of the building. The change at any time of
the character of, electric service shall in no wise make Owner liable or
responsible to Tenant, for any loss, damages or expenses which Tenant may
sustaun.
<PAGE>
Access to Premises: 13. Owner or Owner's agents shall have the right ~ut
shall not be obligated) to enter the demised premises ~ any emergency at any
time, and, ~t other reasonable times, to examine the same and to make such
repairs, replacements and improvements as Owner may deem necessary and
reasonably desirable to the demised premises or to any other portion of the
building or which Owner may elect to perform. Tenant shall permit Owner to use
and maintain and replace pipes and conduits in and through the demised premises
and to erect new pipes and conduits therein provided they are concealed within
the walls, fipor, or ceiling. Owner may, during the progress of any work in the
demised premises, take all necessary materials and equipment into said premises
without the same constituting an eviction nor shall the Tenant be entitled to
any abatement of rent while such work is in progress nor to any damages by
reason of loss or interruption of business or otherwise. Throughout the term
hereof Owner shall have the right to enter the demised premises at reasonable
hour~for the purpose of showing the *Upon reasonable notice to Tenant same to
prospective purchasers or mortgagees of the building, and during the last six
months of the term for the purpose of showing the same to prospective tenants.
If Tenant is not present to open and permit an entry into the premises, Owner or
Owner's agents may enter the same whenever such entry may be necessary or
permissible by master key or forcibly and provided reasonable care is exercised
to safeguard Tenant's property, such entry shall not render Owner or its agents
liable therefor, nor in any event shall the obligations of Tenant hereunder be
affected. If during the last month of the term Tenant shall have removed all or
substantially all of Tenant's property therefrom Owner may immediately enter,
alter, renovate or redecorate the demised premises without limitation or
abatement of rent, or incurring liability to Tenant for any compensation and
such act shall have no effect on this lease or Tenant's obligations hereunder.
Vault, Vault Space, Area: 14. No Vaults, vault space or area, whether or
not en- closed or covered, not within the property line of the building is
leased hereunder, anything contained in or indicated on any sketch, blue print
or plan, or anything contained elsewhere in this lease to the contrary
notwithstanding. Owner makes no representation as to the location of the
property line of the building. All vaults and vault space and all such areas not
within the property line of the building, which Tenant may be permitted to use
and/or occupy, is to be used and/or occupied under a revocable license, and if
any such license be revoked, or if the amount of such space or area be
diminished or required by any federal, state or municipal authority or public
otility, Owner shall not be subject to any liability nor shall Tenant be
entitled to any compensation or diminution or abatement of rent, nor shall such
revocation, diminution or requisition be deemed constructive or actual eviction.
Any tax, fee or charge of municipal authorities for such vault or area shall be
paid by Tenant.
Occupancy: 15. Tenant will not at any time use or occupy the demised
premises in violation of the certificate of occupancy issued for the building of
which the demised premises are a part. Tenant has inspected the premises and
accepts them as is, subject to the riders annexed hereto with respect to Owner's
work, if any. In any event, Owner makes no representation as td the condition of
the premises and Tenant agrees to accept the same subject to violations, whether
or not of record.
Bankruptcy: 16. (a) Anything elsewhere in this lease to the contrary
notwithstanding, this lease may be cancelled by Owner by the sending of a
written notice to Tenant within a reasonable time after the happening of any one
or more of the following events: (1) the commencement of a case in bankruptcy or
under the laws of any state naming Tenant as the debtor; or (2) the making by
Tenant of an assignment or any other arrangement for the benefit of creditors
under any state statute. Neither Tenant nor any person claiming through or under
Tenant, or by reason of any statute or order of court, shall thereafter be
entitled to possession of the premises demised but shall forthwith quit and
surrender the premises. If this lease shall be assigned in accordance with its
terms, the provisions of this Article 16 shall be applicable only to the party
then owning Tenant's interest in this lease.
<PAGE>
(b) it is stipulated and agreed that in the event of the termination of
this lease pursuant to (a) hereof, Owner shall forth with, notwithstanding any
other provisions of this lease to the contrary, be entitled to recover from
Tenant as and for liquidated damages an amount equal to the difference between
the rent reserved hereunder for the unexpired portion of the term demised and
the fair and reasonable rental value of the demised premises for the same
period. In the computation of such damages the difference between any
installment of rent becoming due hereunder after the date of termination and the
fair and reasonable rental value of the demised premises for the period for
which such installment was payable shall be discounted t9 the date of
termination at the rate of four percent (4%) per annum. If such premises or any
part thereof be relet by the Owner for the unexpired term of said lease, or any
part thereof, before presentation of proof of such liquidated damages to any
court, commission or tribunal, the amount of rent reserved upon such reletting
shall be deemed to be the fair and reasonable rental value for the part or the
whole of the premises so re-let during the term of the re-letting. Nothing
herein contained shall limit or prejudice the right of the Owner to prove for
and obtain as liquidated damages by reason of such termination, an amount equal
to the maximum allowed by any statute or rule of law in effect at the time when,
and governing the proceedings in which, such damages are to be proved, whether
or not such amount be greater, equal to, or less than the amount of the
difference referred to above.
Default: 17. (1) If Tenant def~~lts in fulfilling any of the covenants of
this lease other than the covenants for the payment of rent or additional rent;
or if the demised premises become vacant or deserted; or if any execution or
attachment shall be issued against Tenant or any of Tenant's property whereupon
the demised premises shall be taken or occupied by someone other than Tenant; or
if this lease be rejected under ss. 235 of Title 11 of the U.S. Code (bankruptcy
code); or if Tenant shall fail to move into or take possession of the premises
within fifteen (15) days after the commencement of the term of this lease, then,
in any one or more of such events, upon Owner serving a written five (5) days
notice ~pon Tenant specifying the nature of said default and upon the expiration
of said five (5) days, if Tenant shall have failed to comply with or remedy such
default, or if the said default or omission complained of shall be of a nature
that the same cannot be completely cured or remedied within said five (5) day
period, and if Tenant shall not have diligently commenced curing such default
within such five (5) day period, and shall not thereafter with reasonable
diligence and in good faith, proceed to remedy or cure such default, then Owner
may serve a written three (3) days' notice of cancellation of this lease upon
Tenant, and upon the expiration of said three (3) days this lease and the term
thereunder shall end and expire as 'fully and completely as if the expiration of
such three (3)~day period were the day herein defrnitely fixed for the end and
expiration of.this lease and the term thereof and Tenant'shall then iquit and
surrender the demised premises to Owner but Tenant shall remain liable as
hereinafter~provided,
(2) If the notice provided for in (1) hereof shall have been
given, and the term shall expire as aforesaid; or if Tenant shall make
default in the payment of the rent reserved herein or any item of additional
rent herein mentioned or any part of either or in making any other payment
herein required; then and in any of such events Owner may without notice,
re-enter the demised premises either by force or otherwise, and dispossess
Tenant by summary proceedings or otherwise, and the legal representative of
Tenant or other occupant of demised premises and remove their effects and hold
the premises as if this lease had not been made, and Tenant hereby waives the
service of notice of intention to re-enter or to institute legal proceedings to
that end. If Tenant shall make default hereunder prior to the date fixed as the
commencement of any renewal or extension of this lease, Owner may cancel and
terminate such renewal or extension agreement by written notice.
<PAGE>
Remedies of Owner and Waiver of Waiver of 18.- In case of any such default,
re-entry, expiration and/ or dispossess by summary proceedings or otherwise, (a)
the rent shall become due thereupon and be Waiver of paid up to the time of such
re-entry, dispossess and/or expiration, (b) Owner may re-let the premises or any
part or parts thereof, either in the name of Owner or otherwise, for a term or
terms, which may at Owner's option be less than or exceed the period which would
otherwise have constituted the balance of the term of this lease and may grant
concessions or free rent or charge a higher rental than that in this lease,
and/or (c) Tenant or the legal representatives of Tenant shall also pay Owner as
liquidated damages for the failure of Tenant to observe and perform said
Tenant's convenants herein contained, any deficiency between the rent hereby
reserved and/or covenanted to be paid and the net amount, if any, of the rents
collected on account of the lease or leases of the demised premises for each
month of the period which would otherwise have constituted the balance of the
term of this lease. The failure of Owner to re-let the premises or any part or
parts thereof shall not release or affect Tenant's liability for damages. In
computing such liquidated damages there shall be added to the said deficiency
such expenses as Owner may incur in connection with re-letting, such as legal
expenses, attorneys' fees, brokerage, advertising and for keeping the demised
premises in good order or for preparing the same for re-letting. Any such
liquidated damages shall be paid in monthly installments by Tenant on the rent
day specified in this lease and any suit brought to collect the amount of ti,e
deficiency for my month shall not~prejudice in any way the rights of Owner to
co~lect the dificiency for any subsequent month by a similar proceeding. Owner,
in putting the demised premises in good order or preparing the same for
re-rental may, at Owner's option, make such alterations, repairs, replacements,
and/or decorations in the demised premises as Owner, in Owner's sole judgement,
considers advisable and necessary for the purpose of re-letting the demised
premises, and the making of such alterations, repairs, replacements, and/or
decorations shall not operate or be construed to release Tenant from liability
hereunder as aforesaid. Owner shall in no event be liable in any way whatsoever
for failure to re-let the demised premises, or in-the event that the demised
premises are re-let, for failure to collect the rent thereof under such
re-letting, and in no event shall Tenant be entitled to receive any excess, i~
any, 9f such net rents collected over the sums payable by Tenant to Owner
hereunder. In the event of a breach or threatened breach by Tenant of any of the
covenants or provisions hereof, Owner shall have the right of injunction and the
right to invoke any remedy allowed at law or in equity as if re-entry, summary
proceedings and other remedies were not herein provided for. Mention in this
lease of any particular remedy, shall not preclude Owner from any other remedy,
in law or in equity. Tenant hereby expressly waives any and all rights of
redemption granted by or under any present or future laws in the event of Tenant
being evicted or dispossessed for any cause, or in the event of Owner obtaining
possession of demised premises, by reason of the violation by Tenant of any of
the covenants and conditions of this lease, or otherwise.
Fees and Expenses 19. If Tenant shall default in the observance
orperformance of any term or covenant on Tenant's part to be observed or
performed under or by virtue of any of the terms or provisions in any article of
this lease, then, unless otherwise provided elsewhere in this lease, Owner may
immediately or at any time thereafter and without notice perform the obligation
of Tenant thereunder. If Owner, in connection with the foregoing or in
connection with any default by Tenant in the covenant to pay rent hereunder,
makes any expenditures or incurs any obligations for the payment of money,
including but not limited to attorney's fees, in instituting, prosecuting or
defending any action or proceeding, then Tenant will reimburse Owner for such
sums so paid or obligations incurred with interest and costs. The foregoing
expenses incurred by reason of Tenant's default shall be deemed to be additonal
rent hereunder and shall be paid by Tenant to Owner within five (5) days of
rendition of any bill or statement to Tenant therefor. If Tenant's lease term
shall have expired at the time of making of such expenditures or incurring of
such obligations, such sums shall be recoverable by Owner as damages.
<PAGE>
Building Alterations and Management: 20. Owner shall have the right at any
time without the same constituting an eviction and without incurring and
liability to Tenant therefor to change the arrangement and/or location of public
entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets
or other public parts of the building and to change the name, number or
designation by which the building may be known. There shall be no allowance to
Tenant for diminution of rental value and no liability on the part of Owner by
reason of inconvenience, annoyance or injury to business arising from Owner or
other Tenants making any repairs in the building or any such alterations,
additions and improvements. Furthermore, Tenant shall not have any claim against
Owner by reason of Owner's imposition of such controls of the manner of access
to the building by Tenant's social or business visitors as the Owner may deem
necessary for the security of the building and its occupants.
No Repre- 21. sentatlons Owner: Neither Owner nor Owners's agents have made
by any representations or promises with respect to the physical condition of the
building, the land upon which it is erected or the demised premises, the rents,
leases, expenses of operation or any other matter or thing affecting or related
to the premises except as herein expressly set forth and no rights, easements or
licenses are acquired by Tenant by implication or otherwise except as expressly
set forth in the provisions iof this lease. Tenant has inspected the building
and the demised premises and is thoroughly acquainted with their condition and
'agrees to take the sarne "as is" and acknowledges that the taking of possesion
of the demised premises by Tenant shall be conclusive evidence that the said
premises and the building of which the same form a part were in good and
satisfactory condition at the time such possession was so taken, except as to
latent defects. All understandings and agreements heretofore made between the
parties hereto are merged in this contract, which alone fully and completely~
expresses the agreement between Owner and Tenant and any executory agreement
hereafter made shall be ineffective to change, modify, discharge or effect an
abandonment of it in whole or in part, unless such executory agreement is in
writing and signed by the party against whom enforcement of the change,
modification, discharge or' abandonment is sought.
End of Term: 22. Upon the expiration or other termination of the term of
this lease, Tenant shall quit and surrender to Owner the demised premises, broom
clean, in good order and condition, ordinary wear and damages which Tenant is
not required to repair as provided elsewhere in this lease excepted, and Tenant
shall remove all its property. Tenant's obligation to observe or perform this
covenant shall survive the expiration or other termination of this lease. If the
last day of the term of this Lease or any renewal thereof, falls on Sunday, this
lease shall expire at noon on the preceding Saturday unless it be a legal
holiday in which case it shall expire at noon on the preceding business day.
Quiet 23. Enjoyment: Owner covenants and agrees with Tenant that upon
Tenant paying the rent and additional rent and observing and performing all the
terms, covenants and conditions, on Tenant's part to be observed and performed,
Tenant may peaceably and quietly enjoy the premises hereby demised, subject,
nevertheless, to the terms and conditions of this lease including, but not
limited to, Article 31 hereof and to the ground leases, underlying leases and
mortgages hereinbefore mentioned.
Failure 24. to Give Possession: If Owner is unable to give possession of
the demised premises on the date of the commencement of the term hereof, because
of the holding-over or retention of possession of a'ny tenant, undertenant or
occupants or if the demised premises are located in a building being
constructed, because such building has not been sufficiently completed to make
the premises ready for occupancyor because of the fact that a certificate of
occupancy has not been procured or for any other reason, Owner shall not be
subject to any liability for failure to give possession on said date and the
validity of the lease shall not be impaired under such circumstances, nor shall
the same be construed in any wise to extend the term of this lease, but the rent
payable hereunder shall be abated ~rovided Tenant is not responsible for Owner's
inability to obtain possession) until after Owner shall have given Tenant
written notice khat the premises are substantially ready for Tenant's occupancy.
If permission is given to Tenant to enter into the possession of the demised
<PAGE>
premises or to occupy premises other than the demised premises prior to the date
specified as the commencement of the term of this lease, Tenant covenants and
agrees that such occupancy shall be deemed to be under all the terms, covenants,
conditions and provisions of this lease, except as to the covenant to pay rent.
The provisions of this article are intended to constitute "an express provision
to the contrary" within the meaning of Section 223-a of the New York Real
Property Law.
No Waiver: 25. The failure of Owner to seek redress for violation of, or to
insist upon the strict performance of any covenant or condition of this lease or
of any of the Rules or Regulations, set forth or hereafter adopted by Owner,
shall not prevent a subsequent act which would have originally constituted a
violation from having all the force and effect of an original violation. The
receipt by Owner of rent with knowledge of the breach of any covenant of this
lease shall not be deemed a waiver of such breach and no provision of this lease
shall be deemed to have been waived by Owner unless such waiver be in writing
signed by Owner. No payment by Tenant or receipt by Ownier of a lesser amount
than the monthly rent herein stipulated shall be deemed to be other than on
account of the earliest stipulated rent, nor shall any endorsement oir statement
of any check or any letter accompanying any check or payment 'as rent be deemed
an accord and satisfaction, and Owner may accept such check or payment without
prejudice to Owner's right to recover the balance of such rent or pursue any
other remedy in this lease provided. No act or thing done by Owner or Owner's
agents during the term hereby demised shall be~eemed an acceptance of a
surrender of saidprenaises, and no agreement to accept such surrender shall be
valid unless in writing signed by Owner. No employee of Owner or Owner's agent
shail have any power to.accept the keys of said premises prior to the
termination of the lease and the delivery of keys to any such agent or employee
shall not operate as a termination of the lease or a surrender of the premises.
Waiver of Trial by Jury: 26. It is mutually agreed by and between Owner and
Tenant that the respective parties hereto shall and they hereby do waive trial
by jury in any action, proceeding or counter daim brought by either of the
parties hereto against the other (except for personal injury or property damage)
on any matters whatsoever arising out of or in any way connected with this
lease, the rela'tionship of Owner and Tenant, Tenant's use of or occupancy of
said premises, and any emergency statutory or any other statutory remedy. It is
further mutually agreed that in the event Owner commences any summary proceeding
for possession of the premises, Tenant will not interpose any counterclaiin of
whatever nature or description in any such proceeding including a counterdalna
under~Article 4
Inability to Perform: 27. This Lease and the obligation of Teijant to pay
rent hereunder and perform all of the other covenants and agreements hereunder
on part of Tenant to be per-formed shall in no wise be affected, Impaired or
excused because Owner is unable to fulfill any of its obligations under this
le'ase or to supply or is delayed in supplying any service expressly or
impliedly to be supplied or is unable to make, or is delayed in making any
repair, additions, alterations or decoration~ or is unable to supply or is
delayed in supplying any equipment or fixtures if Owner is prevented or delayed
from so doing by reason of strike or labor trotibles or any cause whatsoever
including, but not limited to, government preemption in connection with a
National Emergency or by reason of any rule, order or regulation of any
department or subdivision thereof of any government agency or by reason of the
conditions of supply and demand which have been or are affected by war or other
emergency.
Bills and Notices: 28. Except as otherwise in this lease provided, a bill,
statement, notice or communication which Owner may desire or be.required to give
to Tenant, shall be deemed sufficiently given or'rendered if, in writing,
delivered to Tenant personally or sent by registered or certified mail addressed
to Tenant at the building of which the demised premises form a part or at the
last known residence address or business address of Tenant or left at any of the
aforesaid premises addressed to Tenant, and the time of the rendition of such
bill or statement and of the giving of such notice or communication shall be
deemed to be the time when the same is delivered to Tenant, mailed, or left at
the premises as herein provided. Any notice by Tenant to Owner must be served by
registered or certified mail addressed to Owner at the address first hereinabove
given or at such other address as Owner shall designate by written notice.
<PAGE>
Services Provided by Owners 29. As long as Tenant is not in default under
any of the covenants of this lease, Owner shall provide: (a) necessary elevator
facilities on business days from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m.
to I p.m. and have one elevator subject to call at all other times; ~) heat to
the demised premises when and as required by law, on business days from 8
[deleted] water for ordinary lavatory purposes, but if Tenant uses or consumes
water for any other purposes or in unusual quantities (of which fact Owner shall
be the sole judge), Owner may install a water meter at Tenant's expense which
Tenant shall thereafter maintain at Tenant's expense in good working order and
repair to register such water consumption and Tenant shall pay for water
consumed as shown on said meter as additional rent as and when bills are
rendered; (d) cleaning service for the demised premises on business days at
Owner~ 5 expense provided that the same are kept in order by Tenant. If,
however, said premises are to be kept clean by Tenant, it shall be done at
Tenant's sole expense, in a manner satisfactory to Owner and no one other than
persons approved by Owner shall be permitted to enter said premises or the
building of which they are a part for such purpose. Tenant shall pay Owner the
cost of removal of any of Tenant's refuse and rubbish from the building; (e) If
the demised premises 'ire serviced by Owner's air conditioning/cooling and
ventilating system, air conditioning/cooling will be furnished to tenant from
May 15th through September 3oth on business days (Mondays through Fridays,
holidays excepted) from 8:00 a.m. to 6:OO-p.m., and ventilation will be
furnished on business days during the aforesaid hours except when air
conditioning/cooling is being furnished as aforesaid. If Tenant requires air
conditioning/cooling or ventilation for more extended hours or on Saturdays,
Sundays or on holidays, as defined ~nder Owner's contract with Operating
Engineers Local 94-94A, Owner will furnish the same at Tenant's expense. RIDER
to be added in respect to rates and conditions for such additional service; ~
(f) Owner reserves the right to stop services of the heating, elevators,
plumbing, air~onditioning, power systems or cleaning or other services, if any,
when necessary by reason of accident or for repairs, alterations, replacements
or improvements necessary or desirable in the judgment of Owner for as long as
may be reasonably required by reason thereof. If the building of which the
demised premises are a part supplies manually-operated elevator service, Owner
at any time may substitute automatic-control elevator service and upon ten days'
written notice to Tenant, proceed with alterations necessary therefor without in
any wise affecting this lease or the obligation of Tenant hereunder. The same
shall be done with a minimum of inconvenience to Tenant and Owner shall pursue
the alteration with due diligence. *and Local 32B-32J
Captions: 30. The Captions are inserted only as a matter of convenience and
for reference and in no way define, limit or describe the scope of this lease
nor the intent of any provisions thereof.
Definitions: 31. The term "office", ~r "offices", wherever used in this
lease, shall not be construed to mean premises used as a ~tore or stores,for the
sale or display, at any time, of goods, wares or merchandise, of any kind, or as
a restaurant, shop, booth, bootblack or other stand, barber shop, or for other
similar purposes or for manufacturing. The term "Owner" means a landlord or
lesso'r, and as used in this lease means only the owner, or the mortgagee in
possession, for the time being of the land and building (or the owner of a lease
of the building or of the land and building) of which the demised premises form
a part, so that in the event of any sale or sales of said. land and building or
of said lease, or in the event of a lease of said building, or of the land and
building, the said Owner shall be and hereby is entirely freed and relieved of
all covenants and obligations of Owner hereunder, and it shall be deemed and
construed without further agreement between the parties or their successors in
interest,. or between the parties and the purchaser, a,t any such sale, or the
said lessee of the building, or of the land and building, that the purchaser or
the lessee of the building has assumed and agreed to carry out any and all
covenants and obligations of Owner, hereunder. The words "re-enter" and
"re-entry" as used in this lease are not restricted to their technical legal
meaning. The term "business days" as used in this lease shall exclude Saturdays
(except such portion thereof as is covered by specific hours in Article 29
hereof), Sundays and all days observed by the State or Federal Governnient as
legal holidays and those designated as holidays by the applicable building
service union employees service contract or by the applicable, Operating
Engineers contract with respect to HVAC service.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.1
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
Balance Sheet, Statement of Operations, Statement of Cash Flows and Notes
thereto incorporated in Part I, Item 2 of this Form 10-QSB and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> dec-31-1999
<PERIOD-END> jun-30-1999
<CASH> 1,223,506
<SECURITIES> 0
<RECEIVABLES> 11,934
<ALLOWANCES> 0
<INVENTORY> 111,375
<CURRENT-ASSETS> 1,920,411
<PP&E> 77,232
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,356,215
<CURRENT-LIABILITIES> 660,493
<BONDS> 0
0
0
<COMMON> 5,374
<OTHER-SE> 4,651,147
<TOTAL-LIABILITY-AND-EQUITY> 5,356,215
<SALES> 1,399,992
<TOTAL-REVENUES> 0
<CGS> 1,245,350
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 541,327
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,985
<INCOME-PRETAX> (955,356)
<INCOME-TAX> 0
<INCOME-CONTINUING> (955,356)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (955,356)
<EPS-BASIC> (.18)
<EPS-DILUTED> (.18)
</TABLE>
