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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO.
JUNE 30, 1997 000-21477
JAVELIN SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
DELAWARE 52-1945748
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1881 Langley Avenue, Irvine, California 92614
(Address of Principal Executive Offices)(Zip Code)
Issuer's telephone number: (714) 223-5130
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.01 Par Value
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
The issuer's revenues for the fiscal period ended June 30, 1997 were $7,014,571.
The aggregate market value of the voting stock held by non-affiliates of the
issuer as of August 29, 1997, was $7,650,000. Shares of common stock held by
each officer and director and by each person who owns 5% or more of the
outstanding common stock of the Company have been excluded because such persons
may be deemed to be affiliates.
The total number of shares outstanding of the Issuer's Common Stock was
3,020,650 as of August 29, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
Issuer's definitive Proxy Statement to be filed with the Commission pursuant to
Regulation 14A in connection with the Issuer's 1997 Annual Meeting of
Stockholders is incorporated herein by reference into Part III of this report.
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JAVELIN SYSTEMS, INC.
FORM 10-KSB
YEAR ENDED JUNE 30, 1997
TABLE OF CONTENTS
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Item
Number Page
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PART I
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1. Description of Business.................................................................. 1
2. Description of Property.................................................................. 11
3. Legal Proceedings........................................................................ 11
4. Submission of Matters to a Vote of Security Holders...................................... 11
PART II
5. Market for Common Equity and Related Stockholders Matters................................ 12
6. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 14
7. Financial Statements..................................................................... 16
8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 16
PART III
9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act....................................................... 17
10. Executive Compensation................................................................... 17
11. Security Ownership of Certain Beneficial Owners and Management........................... 17
12. Certain Relationships and Related Transactions........................................... 17
PART IV
13. Exhibits, Lists and Reports on Form 8-K.................................................. 17
Signatures............................................................................... 19
Power of Attorney........................................................................ 20
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This Annual Report on Form 10-KSB contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company intends
that such statements shall be protected by the safe harbors provided for in such
sections. Such statements are subject to risks and uncertainties that could
cause actual results to vary materially from those projected in the forward-
looking statements. The Company may experience significant fluctuations in
future operating results due to a number of economic, competitive, governmental
and technological factors, including, among other things, changes in laws, the
size and timing of customer orders, new or increased competition, delays in new
product enhancements and new product introductions, quality control
difficulties, changes in market demand, market acceptance of new products,
product returns and seasonality in product purchases by distributors. Any of
these factors, or others, could cause operating results to vary significantly
from those in prior periods, and those projected in the forward-looking
statements. Additional information with respect to these and other factors
which could materially affect the Company and its operations is included in the
Company's filings with the Securities and Exchange Commission, including the
Registration Statement on Form SB-2 dated October 25, 1996 and any subsequent
filings.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Javelin Systems, Inc. (the "Company") designs, develops, markets and sells
open system touch screen point-of-sale ("POS") computers targeted to the
foodservice and retail industries and the information kiosk markets. The
Company's family of network-ready computers integrate substantially all of the
functionality of a standard desktop PC into a small footprint, family of systems
that run on industry standard operating systems, such as Microsoft's DOS,
Windows, Windows 95 and Windows NT. The Company's open systems provide quick
service restaurants ("QSRs"), full service restaurants and hospitality and
retail establishments with a hardware solution for transaction processing, in-
store controls and management information. The Company's systems are sealed to
protect against liquid and other foreign matter entering the interior electronic
chamber. The Company's systems are currently being marketed by a number of
original equipment manufacturers ("OEMs") and value added resellers ("VARs", and
collectively with OEMs, "Resellers"). The Company believes it has achieved a
strategic advantage by introducing high performance, network ready systems that
can utilize off-the-shelf, industry-specific application software developed by
its Resellers and niche market software developers.
The foodservice industry, which provided 70 percent of the Company's fiscal
1997 revenues, is divided into four major foodservice market segments: QSRs,
full-service restaurants, hotel restaurants, and noncommercial foodservice.
According to Restaurant Consulting Group, Inc. ("RCG"), an Illinois-based
research firm, the total number of restaurants in the United States as of the
Spring of 1995 was 394,420. The Company is primarily a supplier to the QSR and
full-service restaurant segments and intends to increase its penetration into
the hotel restaurant and noncommercial foodservice segments. The Company's
products are primarily distributed through strategic relationships with
Resellers. Over 90% of the Company's net sales were within the United States
during the fiscal years ended June 30, 1996 and June 30, 1997.
The Company was incorporated in the State of Delaware on September 19, 1995
and commenced shipments of its products in December 1995.
INDUSTRY OVERVIEW
While PC-based systems have become the standard platform in many
industries, the foodservice POS industry can be characterized as a unique
vertical market that has not kept pace with the technological developments and
productivity gains associated with using open systems. Until recently, the
solutions provided by foodservice POS vendors have been of proprietary design
and high cost. This is particularly true of some major providers of POS systems
whose hardware will only operate with the software they provide. The Company
believes the foodservice industry is in the beginning of its transition to PC-
based systems.
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The Company believes that the foodservice POS industry provides a major
market opportunity because of the scope of the overall restaurant industry and
the current shift towards open systems restaurant management software developed
for Microsoft operating systems and hardware that uses Intel or similar
microprocessors. In responding to this market shift, the Company has elected to
focus its efforts on the development and sale of open system PC-based hardware
for the foodservice POS industry.
MARKET SEGMENTS. The Company targets the following market segments:
Quick Service Restaurants. This market is the largest segment within the
foodservice industry with approximately 206,000 units in the United States as of
the Spring of 1995 according to RCG. The fast food restaurants were generally
the first to accept the latest touch screen technology like the NexDisplay-4.
The Company's products have been sold by its Resellers to certain Taco Bell,
Blimpies, Claim Jumper, Chart House and Kenny Rogers Roasters restaurants.
Full Service Restaurants. According to RCG, this segment represented
approximately 111,000 units in the United States as of the Spring of 1995. The
Company has found this segment to be more price sensitive and more likely to
adopt technology later in the product life cycle. The Company's product has
been accepted in this market in head-to-head challenges with similar featured
products from Micros Systems, Inc. ("Micros") and International Business
Machines ("IBM"). The Company's products have been sold by its Resellers to
certain Chart House, Claim Jumper and Billboard Cafe restaurants, and to the
American Culinary Institute.
Hotel Restaurants. According to Technomic, Inc., an Illinois-based
foodservice market research firm, this segment represented approximately 20,260
units in the United States in 1995. The Company believes that the casino, theme
park, and cruise line industries are potential growth areas within this segment.
Kiosks. The Company has been introduced to the fast-growing, evolving
information kiosk market by its vertical market software integrators who found
the Company's flexible touch screen computers ideally suited for the many
environments in which information kiosks are located. Currently the Company's
NexDisplay touch screen computers are installed in a prestigious hotel chain
providing Internet access to hotel guests, and are also being used in an
automated ticketing application for a well-known museum as well as in an
automated reservation system in a sports milieu. The information kiosk market
potential is the subject of ongoing market research.
Industrial Process Control. The Company's product is being utilized as an
operator interface by Mitsubishi/Siltec, a leading supplier of manufacturing
equipment to the semiconductor industry. The market potential for the Company's
products in this segment is currently the subject of a market research study by
the Company.
PRODUCTS
NexDisplay-4
The NexDisplay-4 is a small footprint, high performance color touch screen
computer. Unlike standard off-the-shelf PC products, the NexDisplay-4 has been
designed and manufactured for harsh environments and optimized with features
required by the foodservice industry, such as an integrated customer display.
As a result of the product's inherent flexibility and rugged design, it is being
successfully marketed and sold as a POS workstation, a customer activated
system, and as an industrial operator interface.
NexDisplay-P
The NexDisplay-P, believed by the Company to be the first fully integrated,
Pentium-based touch screen computer, was announced in March of 1997 and shipped
in June 1997. NexDisplay-P provides end users the ability to dramatically
increase speed and performance when using graphically intensive POS applications
that operate in Windows 95 and Windows NT environments.
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NexDisplay-LC
The NexDisplay-LC is a small footprint, fully-integrated network computer.
NexDisplay-LC has a footprint of less than eight square inches and supports both
10.4 and 12.1 inch touch screen displays. This versatile system can be wall-
mounted, fixed to an adjustable base or attached to an articulated arm. The
Company believes the NexDisplay-LC is well suited to meet the needs of the
foodservice, retail, industrial and information kiosk vertical markets because
of its size, flexibility and rugged design.
PRODUCT DISTRIBUTION
The Company's products are primarily distributed through strategic
relationships with OEMs and VARs. These Resellers typically provide
installation, support and service directly to their customers. By distributing
its products through Resellers, the Company has been able to take advantage of
the existing name recognition and market position of its Resellers and reach a
broader market for its products while minimizing expenditures for direct sales,
marketing, technical support and service. The Company intends to continue to
distribute its products through Resellers and intends to expand its national and
international distribution network by using the following channels:
Original Equipment Manufacturers (OEMs)
The Company currently sells its products to OEMs with significant market
presence in the foodservice and specialty retail industries. The Company's
current OEMs include Hospitality Systems, Inc., POSNET Computers, Inc., Riva
Technologies, Siemens Nixdorf Information Systems Retail Americas Group, and
Omron Systems of America Inc. The OEMs market the Company's products under their
own names and sell either through dealers or directly. Because of the high
likelihood of the Company's product being offered by more than one OEM into an
end user account, the Company offers the OEM an opportunity to choose its own
customized design. The OEM is charged for mechanical design, prototyping, and
tooling. Sales to OEMs represented approximately 30% of the Company's net
sales during the fiscal year ended June 30, 1997. One of the Company's principal
strategies is to expand the OEM distribution channel both domestically and
internationally.
Value Added Resellers (VARs)
The Company also sells its products to VARs who integrate industry-specific
software with the Company's hardware product for resale into various vertical
markets. The Company works closely with these VARs as well as the various
software developers to stay abreast of the diversified needs of the Company's
targeted markets. By the end of fiscal 1997, the Company had expanded its
network from 125 to 250 VARs. The Company believes that VAR distribution
channels are advantageous to the Company as they generally have existing
geographically diverse customers, focus their businesses on providing customized
solutions to their customers and maintain their own sales and technical support
staff.
The Company has entered into a multi-year distribution agreement with
ScanSource, Inc., the nation's largest distributor of POS solutions to VARs.
This agreement greatly expanded the Company's efforts to broaden the
availability and acceptance of its NexDisplay family of products.
During the fiscal year ended June 30, 1996 sales of the Company's products
to two customers accounted for approximately 54% of the Company's net sales.
During the fiscal year ended June 30, 1997 sales of the Company's products to
two customers accounted for approximately 16% each of the Company's net sales.
Sales were not to the same major customers in 1996 and 1997.
MARKETING AND SALES
The Company's marketing and sales staff, primarily located at the Company's
Irvine, California office, is responsible for the development and support of the
Company's domestic and international distribution network. The sales staff is
augmented by one independent sales representative. Commissions to sales
representatives are negotiated on a customer-by-customer basis and the Company
has no long term agreements with any of its sales
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representatives. The Company intends to expand its sales force to a total of
five salespersons in 1998, each of whom will be given regional responsibilities
but will be based out of the Company's executive offices located in Irvine,
California. The Company maintains a computerized order entry system at its
Irvine office to track incoming orders and orders in process.
The Company sells to a technically sophisticated customer base of OEMs and
VARs that is expected to handle most technical problems without reliance on the
Company, thereby reducing the need for the Company to maintain a large in-house
technical support staff. The Company's technical support staff currently
consists of two people responsible for telephonic support and return merchandise
authorization. The Company expects that an increased volume of sales will place
an increased burden on its technical support staff and intends to add at least
one more technician in 1998. The Company consults with the Company's Resellers
to assist in identifying potential product enhancements, new product development
and potential new markets. The Company believes that this marketing feedback is
a critical component in the Company's ability to maintain its competitive edge
in terms of rapid and seamless design innovation as well as maintaining its
time-to-market advantage for product enhancements and new products. The Company
currently markets its products with a Company brochure and participates in trade
shows both in the United States and abroad. The Company also focuses on
additional methods to promote its products, including product refinement, new
product introduction and competitive pricing, all with the goal of increasing
the distribution of the Company's products.
SOURCES OF MANUFACTURING AND QUALITY ASSURANCE
The Company's motherboards are manufactured by third party contract
manufacturers located in Hong Kong and California. The Company imports some of
the motherboards utilized in its products from Sunwood Services Limited
("Sunwood"), a Hong Kong-based company owned by John R. Amos, a founder and
stockholder of the Company, under purchase orders submitted from time to time.
The Company also uses other United States-based manufacturers capable of
manufacturing the Company's motherboard. In addition, the Company purchases its
LCD displays from All American, a distributor located in California. The
Company has no written long term contracts with the manufacturers of its
products or with any suppliers of the components used in the Company's products.
Moreover, the Company historically has placed orders for products and components
based on its projected sales over the next approximately 90 days and does not
normally have binding purchase orders for products at the time it places its
orders with its manufacturers and suppliers. Consequently, the Company is
subject to significant risk if actual sales of its products do not approximate
its projected sales. To date, the Company has not experienced any material
delays in the delivery of its products or components; however, delivery
schedules are subject to various factors beyond the control of the Company and
any delays in the future could adversely affect the Company's results of
operations. The Company currently maintains an approximately 45 to 50-day
supply of products in its inventory. However, the Company believes that a 60-
day supply is more desirable, and the Company intends to increase its inventory
of products. Because the Company orders components and has products
manufactured in advance of binding commitments for the sale of its products, and
because the Company does not have firm contracts with any of its Resellers
providing for a minimum purchase requirement, no assurance can be given that
the Company will be able to continue to appropriately match its inventory levels
to its actual sales in the future.
The principal components that make up the Company's products are standard
electronics available from a wide variety of suppliers. Certain of the
components utilized in the Company's products, however, are currently provided
by a single supplier. The Company believes that, with respect to these
components, there are a number of alternative suppliers that could supply
components that could be integrated into the Company's products without any
significant interruption in the Company's operations. No assurance can be
given, however, that the Company will be able to successfully obtain alternative
sources of supply for all of its components, or that the Company will be able to
redesign its products on an appropriate timetable to incorporate alternative
components. Any significant interruption in the supply of components could have
a material adverse effect on the Company's results of operations and financial
condition.
The Company designs all of the hardware sub-assemblies used in its products
and employs the services of an ISO 9000 certified manufacturer to build and test
these sub-assemblies. Final assembly, configuration and
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testing of the Company's products is performed by the Company which utilizes
burn-in, automated testing and comprehensive inspection to assure the quality of
the finished products. The Company also conducts ongoing reliability testing to
ensure that all products meet the reliability requirements of its customers.
The Company's manufacturing operations consist of the procurement of
components and the assembly, testing and quality assurance of finished goods for
shipment to its customers. The principal components that make up the Company's
products are standard electronics available from a known variety of suppliers.
BACKLOG
As of June 30, 1997, the Company did not have any significant backlog.
COMPETITION
The market for the Company's products is highly competitive and the Company
expects this competition to increase as open systems architecture becomes more
common. The principal elements of the competition in the Company's markets
include product features and performance, price, quality and reliability, brand
awareness, compatibility with open systems, accuracy of touch screen input,
quality of display and level of customer service. The Company's products
compete with a number of products designed to provide user friendly touch screen
workstations. Most of the Company's competitors, as well as certain potential
competitors, are more established, benefit from greater name recognition, have
significantly greater financial, production and marketing resources, and have
more established distribution networks than the Company.
The Company believes its use of open systems architecture and time to
market advantage are important competitive elements. Several of the Company's
competitors currently also offer open systems and the Company believes that the
number of competitors offering open systems solutions will grow over the next
several years. In order to effectively compete against these competitors, the
Company will need to continue its growth and attain sufficient revenues to have
the resources for the timely development of new products in response to
evolving technology and customer demands and to sell products through a broad
distribution channel in competition with these other existing and potential
competitors. No assurance can be given that the Company will be able to grow
sufficiently to enable it to compete effectively in this marketplace.
The Company's competitors include a substantial number of large well-
established companies including IBM, Micros, PAR Technology Corporation,
National Cash Register ("NCR"), Panasonic and Olivetti, each of which also
offers open systems architecture. Although the Company believes that it
currently has a competitive advantage with respect to these competitors from a
technological and cost standpoint, including compatibility with open systems,
there can be no assurance that the Company will be able to maintain its
competitive advantage or that these existing substantial competitors, or new
competitors, will not develop competitive products utilizing open systems
architecture and with favorable pricing. There can be no assurance that the
Company will be able to successfully compete in this marketplace or develop
sufficient new products to remain competitive, and any failure to do so could
have a material adverse effect on its results of operations and financial
condition.
GOVERNMENTAL REGULATION
The Company's operations are subject to a number of federal, state and
local laws relating to health, safety and labor matters. The Company believes
its business is operated in substantial compliance with all material applicable
government regulations. There can be no assurance that future regulations will
not require the Company to modify its products, business or operations to meet
health, safety or labor requirements, or that the Company will be able, for
financial or other reasons, to comply with such future requirements. Failure to
comply with future governmental regulations could subject the Company to fines
and injunctions, which could result in a material adverse effect on the
Company's results of operations and financial condition. Although the Company
is not aware of any claim involving violation of health, safety or labor laws or
regulations, there can be no assurance that such claim may not arise in the
future, which may have a material adverse effect on the Company.
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INTELLECTUAL PROPERTY
The Company relies on nondisclosure agreements to protect its intellectual
property. The Company holds no patents and believes that its competitive
position is not materially dependent upon patent protection. The Company
believes that most of the current technology used in the design and manufacture
of most of the Company's products is generally known and available to others.
EMPLOYEES
As of June 30, 1997, the Company had approximately 35 full-time employees,
including 4 employed in sales and marketing, 25 employed in research and
development, engineering, technical support and production, and 6 employed as
administrative and support staff. None of the Company's employees are
represented by unions and the Company considers its employee relations to be
good.
RESEARCH AND DEVELOPMENT
For the fiscal years ended June 30, 1997 and June 30, 1996, the Company
spent approximately $396,000 and $47,000, respectively, on research and
development.
RISK FACTORS
Lack of Operating History
The Company was incorporated in September 1995 and commenced shipment of
its initial products in December 1995. Consequently, the Company has a limited
operating history upon which an evaluation of the Company and its prospects can
be based. Because of the Company's limited operating history, the Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies with a limited operating history. To address
these risks, the Company must, among other things, continue to attract, retain
and motivate qualified personnel, continue to develop and improve its
technologies and products and continue to expand its customer base and
distribution network. There can be no assurance that the Company will be
successful in addressing such risks. Moreover, because of the limited time
Company has been in operation, there can be no assurance that the Company will
be able to successfully market its products over an extended period of time.
History of Operating Losses; Continued Profitability Uncertain
From September 1995 through the present, the Company has expended
significant resources in developing its technologies and products and
establishing distribution channels for its products, which has resulted in the
Company incurring a net loss of approximately $827,000 (which included a non-
cash interest expense of approximately $636,000 related to the issuance of
certain private placement warrants) for the fiscal year ended June 30, 1997.
There can be no assurance that the Company will be able to realize sufficient
revenues in the future to sustain profitable operations.
Evolving Technology and Market
The POS computer industry is characterized by evolving technology and
industry standards. The Company's touch screen computers presently consist of
the NexDisplay-4, the NexDisplay-P and the NexDisplay-LC, which are sold in
various configurations to meet the needs of the Company's customers. The Company
is in the process of developing additional touch screen computers and intends to
introduce several new products during the fiscal year ending June 30, 1998,
although no assurance can be given that the Company will be successful in
developing any new products. The Company's success will depend, in part, on its
ability to maintain and enhance its existing products and broaden its product
offerings by developing and introducing new products that keep pace with
technological developments in a cost effective manner, respond to evolving
customer preferences and requirements and achieve market acceptance. Lack of
market acceptance for the Company's existing or new products, the
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Company's failure to introduce new products in a timely or cost-effective manner
or the Company's failure to achieve a technological advantage over its
competition while also remaining price competitive, could materially adversely
affect the Company's results of operations and financial condition. There can be
no assurance that the Company will be successful in its product development
efforts. In addition, there can be no assurance that the Company's products,
even if successfully developed, will achieve timely market acceptance. Moreover,
the introduction of products embodying new technology and the emergence of new
industry standards could render the Company's existing products obsolete and
unmarketable.
The Company's future success will depend on its ability to continue to
develop and manufacture new competitive products and to enhance its existing
products, both of which will require continued investment in engineering and
product development. The success of product enhancements and new products
depends on a variety of factors, including product selection and specification,
timely and efficient completion of product design, cost-effective implementation
of the manufacturing and assembly processes and effective sales and marketing
efforts. There can be no assurance that the Company will be able to successfully
manage all of the diverse aspects of successful new product development in order
to develop and maintain competitive products.
Competition
The market for the Company's products is highly competitive, and the
Company expects this competition to increase as open systems architecture in its
targeted industries becomes more common. The principal elements of competition
in the Company's markets include product features and performance, price,
quality and reliability, brand awareness, compatibility with open systems,
accuracy of touch screen input, quality of display, and level of customer
service. The Company's products compete with a number of products designed to
provide user friendly touch screen workstations. Most of the Company's
competitors, as well as certain potential competitors, are more established,
benefit from greater name recognition, have significantly greater financial,
technological, production and marketing resources, and have more extensive
distribution networks than the Company.
The Company believes its use of open systems architecture in its targeted
industries is an important competitive element. Several of the Company's
competitors currently also offer open systems and the Company believes that the
number of competitors offering open systems solutions will grow over the next
several years. The Company anticipates that a significant source of such future
competition may be from existing competitors in the POS market that the Company
believes are currently attempting to develop POS systems utilizing open systems
architecture. Due to the greater sales, marketing, product development and
financial resources of the Company's competitors, the Company anticipates that
competition from these competitors will intensify in the future. In order to
effectively compete against these competitors, the Company will need to continue
its growth trend and attain sufficient revenues to have the resources to timely
develop new products in response to evolving technology and customer demands and
to sell products through a broad distribution channel in competition with these
other existing and potential competitors. No assurance can be given that the
Company will be able to grow sufficiently to enable it to compete effectively in
this marketplace.
The Company's competitors include a substantial number of large well-
established companies including IBM, Micros, PAR Technology Corporation, NCR,
Panasonic and Olivetti, each of which also offers open systems architecture.
Although the Company believes that it currently has a competitive advantage with
respect to these competitors from a technological and cost standpoint, including
compatibility with open systems, there can be no assurance that the Company will
be able to maintain its competitive advantage or that these existing substantial
competitors, or new competitors, will not develop competitive products utilizing
open systems architecture and with favorable pricing. Moreover, the Company has
little or no proprietary barriers to entry that could keep its competitors from
developing similar products and technology or selling competing products in the
Company's markets.
Increased competition from manufacturers or distributors of products
similar to or competitive with the Company's products could result in price
reductions, reduced margins and loss of market share or could render the
Company's technology obsolete, all of which could have a material adverse effect
on the Company's results of operations and financial condition. There can be no
assurance that the Company will be able to successfully
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compete in this marketplace or develop sufficient new products to remain
competitive, and any failure to do so could have a material adverse effect on
its results of operations and financial condition.
Management of Company Growth
The Company is currently experiencing rapid growth and expansion, which has
placed, and will continue to place, a strain on its administrative, engineering
and operations resources and increased demands on its systems and controls.
Currently, the Company feels it has sufficient management personnel in place but
anticipates that its continued growth will require it to recruit and hire a
number of new engineers. There can be no assurance that the Company will be
successful at hiring or retaining these personnel. The Company's ability to
manage its growth successfully will also require the Company to continue to
expand and improve its operational, management and financial systems and
controls. If the Company's management is unable to manage growth effectively,
the Company's business, results of operations and financial condition may be
materially and adversely affected.
In addition, the Company plans to increase its operating expenses in order
to expand its product line, increase its sales and marketing operations, develop
new distribution channels and broaden its customer support capabilities. There
can be no assurance that such internal expansion will be successfully
implemented, that the cost of such expansion will not exceed the revenues
generated, or that the Company's sales and marketing organization will be able
to successfully compete against the significantly more extensive and well-funded
sales and marketing operations of many of the Company's current or potential
competitors. If the Company is unable to effectively manage its internal
expansion, the Company's results of operations and financial condition could be
materially adversely affected. Moreover, the foregoing expenses may be incurred
prior to any potential positive impact on revenues. If such expenses are not
subsequently followed by sufficient increased revenues, the Company's operating
results and financial condition would be materially adversely affected.
Evolving Distribution Channels
The Company's distribution strategy is to develop multiple distribution
channels. The Company has historically sold its products through Resellers and
intends to continue to utilize these distribution channels in the future. The
Company's net sales have been significantly dependent on sales by Resellers,
with such sales representing approximately 100% of the Company's net sales since
inception. Any factors, such as general adverse economic conditions, high
inventory levels, intellectual property issues, financial condition, marketing
considerations or governmental regulations and restrictions, that affect the
ability of the Company's Resellers to sell the Company's products will adversely
affect the Company's sales and could have a material adverse impact on the
Company's results of operations and financial condition. The use by the Company
of these secondary distribution channels to sell its products may limit the
Company's knowledge of the requirements and concerns of the end users of the
Company's product and thereby reduce the ability of the Company to anticipate or
react quickly to changes in the market for open system products. There is no
assurance that circumstances affecting the Company's Resellers will not have an
adverse effect on the Company.
There can be no assurance that the Company will be able to attract
Resellers that will be able to market the Company's products effectively and
will be qualified to provide timely and cost-effective customer support and
service or that the Company will be able to manage conflicts among its
Resellers. In addition, the Company's agreements with Resellers typically do not
restrict Resellers from distributing competing products, and in most cases may
be terminated by either party without cause. The inability to recruit, manage or
retain important Resellers, or their inability to penetrate their respective
market segments, could materially adversely affect the Company's results of
operations and financial condition.
Dependence Upon Significant Customers
During its fiscal year ended June 30, 1997, the Company derived from two
customers approximately 16% each of its total net sales. No other customers
accounted for more than 10% of the Company's net sales during the fiscal year
ended June 30, 1997. Any significant decrease in sales to the Company's
principal customers, or any termination of existing relationships with any of
the Company's principal Resellers which are not offset by increases
8
<PAGE>
in sales to other existing or new Resellers, could have a material adverse
effect upon the Company's results of operations and financial condition.
Dependence Upon Independent Software Providers
The Company's business strategy is to produce PC-based open system hardware
for the foodservice and retail industries as well as the newly targeted
industrial and information kiosk markets. The Company does not develop or sell
software. Consequently, the Company is dependent upon third party software
providers to develop new and improved software that runs on the Company's
hardware platform. As in other sectors of the computer industry, hardware sales
are often driven by advances in software technology. Accordingly, if software
providers do not continue to provide state-of-the-art software that runs on the
Company's hardware, the Company's results of operations and financial condition
could be materially adversely affected.
Variability in Operating Results
As a result of the Company's limited operating history, the Company does
not have extensive historical financial data on which to base planned operating
expenses. The Company typically operates with little backlog. As a result,
quarterly sales and operating results generally depend on the volume and timing
of and ability to fulfill orders received within the quarter, which can be
difficult to forecast. The Company may be unable to adjust spending in a timely
manner to compensate for any unexpected changes in revenues. Accordingly, any
significant shortfall of demand for the Company's products in relation to the
Company's expectations would have an adverse impact on the Company's results of
operations and financial condition.
The Company may experience significant fluctuations in future operating
results due to number of factors including, among other things, demand for the
Company's products, the size and timing of customers orders, new or increased
competition, delays in products enhancements and new product introductions,
quality control difficulties, changes in market demand, market acceptance of new
products, product returns, seasonability in product purchases by Resellers and
end users, the mix of domestic and international revenues, fluctuations in costs
of components, pricing trends in the open systems industry in general and in the
specific markets in which the Company is active and general economic conditions.
Any of these factors could cause operating results to vary significantly from
prior periods. Significant variability in orders during any period may have a
material adverse impact on the Company's cash flow, and any significant decrease
in orders could have a material adverse impact on the Company's results of
operations and financial condition. As a result, the Company believe that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as any indication of future performance
and that one or more periods of favorable results should not be relied upon as
an indication of future favorable results. Fluctuations in the Company's
operating results could cause the price of the Company's Common Stock to
fluctuate substantially.
FUTURE CAPITAL REQUIREMENTS
The Company expects that the net proceeds from its initial public offering,
together with other available funds, will enable the Company to maintain its
current and planned operations for the next 12 months. There can be no
assurance that these available funds will be sufficient to enable the Company to
increase its revenues in an amount sufficient to sustain profitable operations.
To the extent that the proceeds from the initial public offering and cash flow
from operations, if any, are insufficient to fund the Company's activities, the
Company will be required to raise additional funds through equity or debt
financings. No assurance can be given that such financings will be available on
terms acceptable to the Company, if at all, and, if available, such financings
may result in further dilution to the Company's stockholders and/or in
additional interest expense.
Lack of Patents
The Company holds no patents and believes that its competitive position is
not materially dependent upon patent protection. The Company believes that most
of the technology used in the design and manufacture of most of the Company's
products is generally known and available to others. Consequently, there can be
no assurances that
9
<PAGE>
others will not develop, market and sell products substantially equivalent to
the Company's products, or utilize technologies similar to those used by the
Company. Although the Company believes that its products do not infringe on any
third party's patents, there can be no assurance that the Company will not
become involved in litigation involving patents or proprietary rights. Patent
and proprietary rights litigation entails substantial legal and other costs, and
there can be no assurance that the Company will have the necessary financial
resources to defend or prosecute its rights in connection with any such
litigation. Responding to, defending or bringing claims related to the Company's
rights to its intellectual property may require the Company's management to
redirect its resources to address such claims, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Control by Existing Stockholders
At June 30, 1997, the Company's directors and officers collectively
beneficially owned approximately 62.5% of the Company's Common Stock.
Consequently, these persons will have the ability to control the election of all
the Company's directors, to determine the outcome of most corporate actions
submitted to the vote of the Company's stockholders and to generally control the
affairs and management of the Company. In addition, such concentration of
ownership and control may have the effect of delaying, deferring or preventing a
change of control in the Company.
Dependence on Key Personnel; Limited Experience
The Company's success is dependent, in part, upon the continued services of
certain key executive officers, including Richard P. Stack, the Company's
President and Chief Executive Officer, C. Norman Campbell, the Company's Vice
President Engineering, and Alexander J. Nelson, the Company's Vice President,
Sales and Marketing. The Company's success depends to a significant degree upon
the continued contributions of its existing key management, sales, marketing,
research and development and manufacturing personnel, many of whom would be
difficult to replace. If certain of these employees were to leave, the Company
could be materially and adversely affected. The Company believes its future
success will also depend largely upon its ability to attract and retain highly-
skilled hardware engineers, managerial, and sales and marketing personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting and retaining the necessary
personnel.
Possible Issuance of Preferred Stock; Anti-takeover Effect of Delaware Law and
Certain Charter Provisions
The Company is authorized to issue up to 1,000,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock"). The Preferred Stock
may be issued in one or more series, the terms of which may be determined at the
time of issuance by the Board of Directors, without further action by the
Company's stockholders, and may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and sinking fund
provisions as determined by the Board of Directors. Although the Company has no
present plans to issue shares of Preferred Stock, the issuance of any additional
shares of Preferred Stock in the future could affect the rights of the holders
of Common Stock and thereby reduce the value of the Common Stock. In particular,
specific rights granted to future holders of Preferred Stock could be used to
restrict the Company's ability to merge with or sell its assets to a third
party, thereby preserving control of the Company by its present owners. In
addition, the Company's Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws contain provisions creating a classified board.
These provisions, together with certain provisions of Delaware law, may also
have the effect of delaying or preventing changes in control or management of
the Company which could adversely affect the market price of the Company's
Common Stock.
No Dividends
The Company has never paid any cash dividends on shares of its Common Stock
and does not anticipate that it will pay dividends in the foreseeable future.
The Company intends to apply any earnings to fund the development of its
business.
10
<PAGE>
Possible Effect of Outstanding Options and Warrants
As of June 30, 1997, there were 300,000 shares of Common Stock reserved for
issuance upon exercise of outstanding stock options granted and available for
grant under the Company's 1996 Stock Incentive Award Plan. Of such reserved
shares, there were 245,500 shares of Common Stock reserved for issuance upon the
exercise of outstanding stock options and 54,500 shares were available for
future grant. None of the outstanding options were exercisable at June 30,
1997.
The Company has agreed to sell to Meridian Capital Group, Inc.
("Meridian"), for a total of $8.50, warrants (the "Meridian Warrants") to
purchase up to 85,000 shares of Common Stock at an exercise price per share of
$6.25. The Meridian Warrants are exercisable for a period of four years
beginning October 25, 1997, and are not transferable for a period of one year
therefrom except to officers of Meridian or any successor to Meridian. In
addition, the Company has granted certain rights to the holders of the Meridian
Warrants to register the Common Stock underlying the Meridian Warrants under the
Securities Act of 1933, as amended. In the event a significant number of
outstanding options and/or warrants were to be exercised in any period, the
trading price of the Common Stock may be adversely impacted.
Price Volatility
The Common Stock is quoted on the Nasdaq SmallCap Market, which has
experience and is likely to experience in the future significant price and
volume fluctuations which could adversely affect the market price of the Common
Stock without regard to the operating performance of the Company. In addition,
the Company believes that factors such as quarterly fluctuation in the financial
results of the Company, the condition of the overall economy and the condition
of the financial markets could cause the price of the Common Stock to fluctuate
substantially.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices, research and product development,
warehousing and distribution facilities are currently housed in a single leased
industrial unit comprised of approximately 13,000 square feet located in Irvine,
California. Under the terms of the lease, the Company presently pays rent of
approximately $8,822 per month with scheduled increases during the second and
third years of the lease to approximately $9,087 and $9,359 per month,
respectively. The lease expires on June 30, 2002. The Company believes that its
existing facilities are adequate to meet its needs for at least the next three
years. The Company also continues to lease a facility in Tustin, California.
This lease expires October 31, 1998. Currently, monthly rent is $2,843 and is
scheduled to increase in November 1997 to $2,922 per month. Effective October 1,
1997, the Company has subleased this facility.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
11
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades on the Nasdaq SmallCap Market under the
symbol "JVLN." The following table sets forth, for the periods indicated, the
high and low sales prices of the Company's Common Stock as furnished by Nasdaq.
Prices reflect inter-dealer prices without retail mark-up, mark-down or
commissions, and may not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
YEAR ENDED JUNE 30, 1997 ------------ -------------
<S> <C> <C>
Second Quarter (from October 25, 1996) $ 5.37 $ 4.75
Third Quarter 5.50 4.75
Fourth Quarter 6.25 4.75
</TABLE>
There were approximately 533 holders of record as of August 29, 1997.
No dividends have been declared or paid on the Company's Common Stock.
Recent Sales of Unregistered Securities.
Since inception (September 19, 1995), the Company has sold and issued the
following securities which were not registered under the Securities Act of 1933,
as amended (the "Act"):
1. On September 26, 1995, the Company issued 430,000 shares of Common
Stock to Richard P. Stack, 288,100 shares of Common Stock to C. Norman Campbell
and 77,400 shares of Common Stock to John R. Amos at a per share price of
approximately $.006. The issuance of the Common Stock was deemed to be exempt
from registration under the Act by virtue of Section 4(2) of the Act and Rule
504 of Regulation D promulgated thereunder because the issuance did not involve
a public offering.
2. On November 1, 1995, the Company issued 288,100 shares of Common Stock
to C. Norman Campbell and 107,500 shares of Common Stock to Alex Nelson at a per
share price of approximately $.006. The issuance of the Common Stock was deemed
to be exempt from registration under the Act by virtue of Section 4(2) of the
Act and Rule 504 of Regulation D promulgated thereunder because the issuance did
not involve a public offering.
3. On January 9, 1996, the Company issued 180,600 shares of Common Stock
to The Steven J. Goodman Revocable Living Trust ("Goodman") and 25,800 shares of
Common Stock to GAK Limited, a Delaware limited partnership ("GAK"), of which
Horace and Madeleine Hertz are the general partners, at a per share price of
approximately $.02. The issuance of the Common Stock was deemed to be exempt
from registration under the Act by virtue of Section 4(2) of the Act and Rule
504 of Regulation D promulgated thereunder because the issuance did not involve
a public offering.
4. On April 1, 1996, the Company issued 430,000 shares of Common Stock to
Richard P. Stack at a per share price of approximately $.19 upon conversion of a
convertible promissory note originally issued in October 1995. The issuance of
the convertible promissory note and the Common Stock was deemed to be exempt
from registration under the Act by virtue of Section 4(2) of the Act and Rule
504 of Regulation D promulgated thereunder because the issuance did not involve
a public offering.
5. On April 3, 1996, the Company issued 116,100 shares of Common Stock to
Goodman at a per share price of approximately $.22. The issuance of the Common
Stock was deemed to be exempt from registration under the Act by virtue of
Section 4(2) of the Act and Rule 504 of Regulation D promulgated thereunder
because the issuance did not involve a public offering.
12
<PAGE>
6. On May 1, 1996, the Company issued 86,000 shares of Common Stock to
Teresa M. McRae at a per share price of approximately $.47 upon conversion of a
convertible promissory note originally issued in October 1995. The issuance of
the convertible promissory note and the Common Stock was deemed to be exempt
from registration under the Act by virtue of Section 4(2) of the Act and Rule
504 of Regulation D promulgated thereunder because the issuance did not involve
a public offering.
7. On May 23, 1996, the Company issued 38,780 shares of Common Stock to
GAK at a per share price of approximately $.65. The issuance of the Common
Stock was deemed to be exempt from registration under the Act by virtue of
Section 4(2) of the Act and Rule 504 of Regulation D promulgated thereunder
because the issuance did not involve a public offering.
8. On May 31, 1996, the Company issued 17,200 shares of Common Stock to
Richard A. Stack at a per share price of approximately $.70 upon conversion of a
convertible promissory note originally issued in October 1995. The issuance of
the convertible promissory note and the Common Stock was deemed to be exempt
from registration under the Act by virtue of Section 4(2) of the Act and Rule
504 of Regulation D promulgated thereunder because the issuance did not involve
a public offering.
9. On June 3, 1996, the Company issued 10,750 shares of Common Stock to
Herbert R. and Janice N. Donica, as joint tenants by the entireties, at a per
share price of approximately $2.33. The issuance of the Common Stock was deemed
to be exempt from registration under the Act by virtue of Section 4(2) of the
Act and Rule 504 of Regulation D promulgated thereunder because the issuance did
not involve a public offering.
10. On October 1, 1995, the Company issued a Promissory Note in the amount
of $15,000 to Richard P. Stack. The issuance of the Promissory Note was deemed
to be exempt from registration under the Act by virtue of Section 4(2) of the
Act and Rule 504 of Regulation D promulgated thereunder because the issuance did
not involve a public offering.
11. In February 1996, the Company issued two Promissory Notes, each in the
original principal amount of $20,000, to each of Peter Aiello and Jim Cox. The
Promissory Note issued to Mr. Cox is convertible at his option into shares of
Common Stock at a per share price of $2.50 per share. Effective as of June 30,
1997, Mr. Cox converted his Promissory Note into 8,000 shares of Common Stock.
The issuance of the Promissory Notes and the Common Stock issued upon conversion
of Mr. Cox's Promissory Note was deemed to be exempt from registration under the
Act by virtue of Section 4(2) of the Act and Rule 504 of Regulation D
promulgated thereunder because the issuance did not involve a public offering.
12. At various times commencing May 1996 through August 1996, the Company
issued Promissory Notes to the following accredited investors in the following
original principal amounts: (1) The Steven J. Goodman Charitable Remainder Trust
(the "Goodman CRT"), $50,000; (2) John R. Amos, $25,000; (3) Kanayo Partabrai
Gangwani, $25,000; (4) Jack S. Kompan, two Promissory Notes aggregating $50,000;
(5) Universal Partners, L.P., a partnership that specializes in providing bridge
financing of which Windy City Bridges, Inc. is a general partner, $25,000; (6)
Scott Robinson, $25,000; (7) Rebecca L. Gregarek, $12,500; (8) David M. Munch,
$25,000; (9) David J. Gregarek, $25,000; (10) Jay Louis Kear Family Trust,
$25,000; (11) Mildred J. Geiss, $37,500; (12) Westerling Family Trust, $100,000;
(13) Yu Family Revocable Trust, $25,000; (14) Kenneth and Linda Bloom, $25,000;
(15) Christopher Neil, $25,000; (16) Izzy Rabinowitz, $50,000; (17) Don R.
Thorne, $50,000; (18) Mark Ratto, $12,500; (19) B.C. Investments, $12,500; (20)
Chris Brown, $50,000; (21) Victor A. Ince and Terry A. Ince, joint tenants,
$25,000; (22) Caribou Bridge Fund, LLC, $25,000. Concurrent with the issuance
of each of the foregoing Promissory Notes, the Company issued warrants to
purchase shares of Common Stock (the "Warrants") in an amount equal to the
number of shares that results from dividing $5.00 into the original principal
amount of the Promissory Note, with the exception of the Promissory Notes issued
to Mr. Amos, Mr. Gangwani and Mr. Kompan which provided for $2.50 being divided
into the original principal amount of their respective Promissory Notes. The
total purchase price for all of the shares of Common Stock issuable upon the
exercise of such Warrants is an aggregate of $1.00 per Warrant, or $23.00 in the
aggregate. The Warrants became exercisable October 25, 1996 and were all
exercised between October and December 1996. In connection with the sales of
certain of the Promissory Notes and Warrants, the Company paid a total of
$15,000 in commissions to Spencer Edwards in its capacity as a selling agent
13
<PAGE>
and $27,500 to Meridian in its capacity as a selling agent. The issuance of the
Promissory Notes and the Warrants was deemed to be exempt from registration
under the Act by virtue of Section 4(2) of the Act and Rule 504 of Regulation D
promulgated thereunder because the issuances did not involve a public offering.
The foregoing information has been adjusted to reflect a 4,300 for 1 stock
split of the Common Stock effected in August 1996.
13. Subsequent to July 1, 1996 and on various dates through October 25,
1996, the Company issued incentive and nonstatutory stock options to purchase an
aggregate of 185,000 shares of Common Stock to directors, executive officers,
employees and consultants. The exercise price for such options ranges from
$2.50 to $5.00 per share. The Company issued such options in reliance upon the
exemption provided by Rule 701 under the Act. Subsequent to October 25, 1996
and on various dates through August 29, 1997, the Company issued incentive and
nonstatutory stock options to purchase an aggregate of 96,500 shares of Common
Stock to directors, officers, employees and consultants. The exercise price for
such options ranges from $4.75 to $5.75 per share. The Company issued such
options in reliance upon the exemption provided by Section 4(2) of the Act.
The following discussion and analysis should be read together with the
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-KSB.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company is an innovative designer, manufacturer and marketer, of open
system touch screen computers targeted for the foodservice and retail
industries, industrial companies and the information kiosk markets.
This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 27A of the Act, and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act"), and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. The
Company may experience significant fluctuations in future operating results due
to a number of factors, including, among other things, the size and timing of
customer orders, new or increased competition, delays in new product
enhancements and new product introductions, quality control difficulties,
changes in market demand, market acceptance of new products, product returns,
changes in inventory levels, and pricing trends in the industry in general, and
in the specific markets in which the Company is active. Any of these factors
could cause operating results to vary significantly from prior periods.
Significant variability in orders during any period may have a material adverse
impact on the Company's cash flow or work flow, and any significant decrease in
orders could have a material adverse impact on the Company's results of
operations and financial condition. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as any indication of future
performance. Fluctuations in the Company's operating results could cause the
price of the Company's Common Stock to fluctuate substantially.
Assumptions relating to the foregoing involve judgments with respect to,
among other things, future economic, competitive and market conditions, all of
which are difficult or impossible to predict accurately, and many of which are
beyond the control of the Company. In addition, the business and operations of
the Company are subject to substantial risks which increase the uncertainty
inherent in the forward-looking statements. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved.
RESULTS OF OPERATIONS
The Company's fiscal year in 1996 was approximately nine months and its
fiscal year in 1997 was twelve months. The results of operations for the nine
months ended June 30, 1996 and the twelve months ended June 30, 1997 were as
follows:
14
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------
Fiscal Year
-----------------------------------------
1996 1997
---- ----
<S> <C> <C>
Net Sales $1,463,627 $7,014,571
Cost of Sales 1,104,171 5,499,490
---------- ----------
Gross Profit 359,456 1,515,081
Operating Expenses:
Research and Development 46,771 396,365
Selling and Marketing 83,495 390,834
General and Administrative 244,736 859,863
---------- ----------
Total Operating Expenses 375,002 1,647,062
---------- ----------
Operating Income (loss) (15,546) (131,981)
Interest Expense (38,796) (709,447)
Interest Income -- 14,542
========== ==========
Net Income $ (54,342) $ (826,886)
========== ==========
</TABLE>
Fiscal 1997 Compared to Fiscal 1996.
The Company's fiscal 1997 revenues totaled $7,014,571 from the sales of its
NexDisplay-4, NexDisplay-P and NexDisplay-LC compared with fiscal 1996 revenues
of $1,463,627 from sales of the NexDisplay-4, an increase of 379%. The increase
in revenues for fiscal 1997 was attributable to the large growth in the number
of the Company's VARs and the Company's successful shift in sales strategy to
concentrate on sales to OEMs. Additionally, the Company introduced two new
products, the NexDisplay-P and the NexDisplay-LC, during the second half of
fiscal 1997 that addressed new targeted markets.
Cost of sales for fiscal 1997 was 78% of revenues compared with 75% for
fiscal 1996. The increase in fiscal 1997 was primarily attributable to
component cost increases. In the future, the Company's gross margins may be
affected by several factors, including the mix of products sold, the price of
products sold, price competition, manufacturing volumes, fluctuations in
component costs, changes in other components of cost of sales and the
technological innovations in products sold. Timing and new product
introductions may impact gross margins and result in excess or obsolete
inventories.
Research and development expenses for fiscal 1997 increased by $349,594
(approximately 747%) to $396,365 from $46,771 for fiscal 1996. The primary
reasons for the increase were payroll costs and the introduction of two new
products. For the fiscal year ending June 30, 1998, management anticipates a
continued increase in product development costs primarily due to the anticipated
introduction of several product enhancements and new products. The increase is
also attributable to the Company's belief that its future success depends on a
high level of research and development and its ability to attract and retain
highly skilled engineers.
Selling and marketing expenses for fiscal 1997 increased by $307,339
(approximately 368%) to $390,834 from $83,495 for fiscal 1996. These increases
in expenses were due to the addition of sales, marketing and technical support
personnel. The growth in personnel was primarily due to the need to manage the
activities of an increased number of VAR and OEM customers and the introduction
of new products. Management anticipates that such expenses will continue to
increase in fiscal 1998 as the Company implements its strategy to expand its
product line, distribution network and markets.
General and administrative expenses for fiscal 1997 increased by $615,127
(approximately 251%) to $859,863 from $244,736 for fiscal 1996. The major
reasons for the increase were the addition of personnel and consultants. The
Company grew from 8 to 35 employees during fiscal 1997. For fiscal 1998
management anticipates an increase in general and administrative costs,
primarily related to payroll costs as the Company expands its personnel.
15
<PAGE>
Interest expense for fiscal 1997 increased by $670,651 (approximately
1,729%) to $709,447 from $38,796 for fiscal 1996. Such expense included a non-
cash interest expense of $636,097 related to the issuance of private placement
warrants (see Note 6 of Notes to the Financial Statements).
A provision for federal and state income taxes was not required since the
Company incurred losses for fiscal 1997.
The net loss for fiscal 1997 was $826,886 compared to $54,342 for fiscal
1996. The increase in net loss was primarily due to the non-cash interest
expense related to warrants issued in connection with certain promissory notes
in the aggregate principal amount of $636,097 and to the increase in expenses
due to the growth of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its development activities through a combination
of an initial public offering and cash generated through operations. Net
proceeds from the October 25, 1996 initial public offering amounted to
approximately $3,238,694.
At June 30, 1997, the Company had working capital of $3,028,833, including
inventory of $1,674,097. As of June 30, 1997, the Company had cash of $686,167.
The Company does not require substantial working capital to fund its business as
inventory is maintained on a just-in-time basis from the Company's suppliers and
product is built to order. The Company's future capital requirements will
depend on many factors, including the rate of revenue growth, the timing and
extent of spending to support product development efforts and expansion of
sales and marketing, the timing of introductions of new products and
enhancements to existing products, and market acceptance of the Company's
products.
In January 1997, the Company secured a revolving line of credit with a
bank, from which it may borrow an amount equal to 80 percent of the Company's
eligible accounts receivable (as defined therein) with monthly interest based
upon the prime rate of a national financial institution. Borrowings under the
line of credit are collateralized by substantially all of the assets of the
Company. As of June 30, 1997, borrowings under the line aggregated $200,000 and
there was approximately $972,225 available for future borrowings.
ITEM 7. FINANCIAL STATEMENTS.
The information required by this item is included in Pages F-1 through F-
14 attached hereto and incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
16
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this item is incorporated herein by reference
from Issuer's Definitive Proxy Statement to be filed with the Commission
pursuant to Regulation 14A in connection with the Issuer's 1997 Annual Meeting
of Stockholders (the "Proxy Statement") under the headings "Proposal 1--Election
of Directors," "Compliance with Section 16(a) of the Securities Exchange Act of
1934" and "Additional Information--Management."
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by reference
from Issuer's Proxy Statement under the heading "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by reference
from Issuer's Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by
reference from Issuer's Proxy Statement under the heading "Certain Relationships
and Related Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
1. (a) Financial Statements. Financial statements are attached to this
report as pages F-1 through F-14. The index to the financial
statements is found in the Financial Section on page F-1.
(b) The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1997.
2. Exhibits. See Exhibit Index below.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------- -----------------------
<C> <S>
3.1(1) Amended and Restated Certificate of Incorporation of Registrant.
3.2(1) Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.
3.3(1) Amended and Restated Bylaws of Registrant.
3.4(1) Amendment to Amended and Restated Bylaws of Registrant.
4.1 Reference is made to Exhibits 3.1 through 3.4.
4.2(1) Specimen stock certificate.
10.1(1) 1996 Stock Incentive Award Plan of Registrant.
10.2(1) Form of Director Non-Qualified Stock Option Agreement.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.3(1) Form of 1996 Employee Non-Qualified Stock Option Agreement.
10.4(1) Employment Agreement dated August 19, 1996 by and between the Registrant and Richard P. Stack.
10.5(1) Employment Agreement dated August 19, 1996 by and between the Registrant and C. Norman Campbell.
10.6(1) Form of Indemnity Agreement entered into with each of the Registrant's officers and directors.
10.7(1) Standard Industrial/Commercial Single-Tenant Lease-Gross dated October 19, 1995 by and between Robert P. Peebles Trust,
dated 4/11/79, and the Registrant for that certain real property located at 2882 C Walnut Avenue, Tustin, California 92780.
10.8 Standard Industrial/Commercial Single-Tenant Lease-Net dated May 5, 1997 by and between Klein-Miller Investment Co. and the
Registrant for that certain real property located at 1881 Langley Avenue, Irvine, California 92714.
10.9 Standard Sublease dated September 9, 1997 by and between the Registrant and D. Howard Lewis and William R. Miller for that
certain real property located at 2882-C Walnut Avenue, Tustin, California 92780.
10.10(1) Securities Purchase Agreement dated July 2, 1996 by and between the Registrant and Jack S. Kompan.
10.11(1) Promissory Note dated July 2, 1996 in the original principal amount of $25,000 payable by the Registrant in favor of Jack
S. Kompan.
10.12(1) Letter Agreement dated July 22, 1996 between the Registrant and John R. Amos regarding the transfer of certain intellectual
property by John R. Amos to the Registrant.
10.13(1) Letter Agreement dated July 29, 1996 between the Registrant and C. Norman Campbell regarding the transfer of certain
intellectual property by C. Norman Campbell to the Registrant.
10.14 Distributor Agreement dated March 14, 1997 between the Registrant and ScanSource, Inc.
11.1 Statement re Calculation of Net Loss Per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 21.
27.1 Financial Data Schedule.
- -----------------
(1) Filed as an exhibit to Registrant's Registration Statement on Form SB-2, as amended (No. 333-11217), and incorporated
herein by reference.
</TABLE>
18
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Javelin Systems, Inc.
Date: September 25, 1997 By: /s/ RICHARD P. STACK
-------------------------------------
Richard P. Stack
President and Chief Executive Officer
Date: September 25, 1997 By: /s/ LAWRENCE W. MCCORKLE
-------------------------------------
Lawrence W. McCorkle
Controller, Treasurer and Secretary
19
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard P. Stack his attorney-in-fact, with the
power of substitution, for him, in any and all capacities, to sign any
amendments to this report, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and conforming all that the attorney-in-fact, or his
substitute, may do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ RICHARD P. STACK President, Chief Executive September 25, 1997
- ---------------------------------------------------- Officer, Director
Richard P. Stack
/s/ C. NORMAN CAMPBELL Vice President, Engineering September 25, 1997
- ---------------------------------------------------- Director
C. Norman Campbell
/s/ STEVEN J. GOODMAN Director September 25, 1997
- ----------------------------------------------------
Steven J. Goodman
/s/ JAY L. KEAR Director September 25, 1997
- ----------------------------------------------------
Jay L. Kear
/s/ ANDREW F. PUZDER Director September 25, 1997
- ----------------------------------------------------
Andrew F. Puzder
</TABLE>
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------- -----------------------
<C> <S>
3.1(1) Amended and Restated Certificate of Incorporation of Registrant.
3.2(1) Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.
3.3(1) Amended and Restated Bylaws of Registrant.
3.4(1) Amendment to Amended and Restated Bylaws of Registrant.
4.1 Reference is made to Exhibits 3.1 through 3.4.
4.2(1) Specimen stock certificate.
10.1(1) 1996 Stock Incentive Award Plan of Registrant.
10.2(1) Form of Director Non-Qualified Stock Option Agreement.
10.3(1) Form of 1996 Employee Non-Qualified Stock Option Agreement.
10.4(1) Employment Agreement dated August 19, 1996 by and between the Registrant and Richard P. Stack.
10.5(1) Employment Agreement dated August 19, 1996 by and between the Registrant and C. Norman Campbell.
10.6(1) Form of Indemnity Agreement entered into with each of the Registrant's officers and directors.
10.7(1) Standard Industrial/Commercial Single-Tenant Lease-Gross dated October 19, 1995 by and between Robert P. Peebles Trust,
dated 4/11/79, and the Registrant for that certain real property located at 2882 C Walnut Avenue, Tustin, California 92780.
10.8 Standard Industrial/Commercial Single-Tenant Lease-Net dated May 5, 1997 by and between Klein-Miller Investment Co. and the
Registrant for that certain real property located at 1881 Langley Avenue, Irvine, California 92714.
10.9 Standard Sublease dated September 9, 1997 by and between the Registrant and D. Howard Lewis and William R. Miller for that
certain real property located at 2882-C Walnut Avenue, Tustin, California 92780.
10.10(1) Securities Purchase Agreement dated July 2, 1996 by and between the Registrant and Jack S. Kompan.
10.11(1) Promissory Note dated July 2, 1996 in the original principal amount of $25,000 payable by the Registrant in favor of Jack
S. Kompan.
10.12(1) Letter Agreement dated July 22, 1996 between the Registrant and John R. Amos regarding the transfer of certain intellectual
property by John R. Amos to the Registrant.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.13(1) Letter Agreement dated July 29, 1996 between the Registrant and C. Norman Campbell regarding the transfer of certain
intellectual property by C. Norman Campbell to the Registrant.
10.14 Distributor Agreement dated March 14, 1997 between the Registrant and ScanSource, Inc.
11.1 Statement re Calculation of Net Loss Per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 21.
27.1 Financial Data Schedule.
- -------------
(1) Filed as an exhibit to Registrant's Registration Statement on Form SB-2, as amended (No. 333-11217), and incorporated
herein by reference.
</TABLE>
22
<PAGE>
JAVELIN SYSTEMS, INC.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1997
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors........................................................................ F-2
Financial Statements
Balance Sheets........................................................................................ F-3
Statements of Operations.............................................................................. F-4
Statement of Stockholders' Equity..................................................................... F-5
Statements of Cash Flows.............................................................................. F-6
Notes to Financial Statements......................................................................... F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
Javelin Systems, Inc.
We have audited the accompanying balance sheets of Javelin Systems, Inc. as of
June 30, 1997 and 1996, and the related statements of operations, stockholders'
equity and cash flows for each of two years in the period ended June 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Javelin Systems, Inc. at June
30, 1997 and 1996, and the results of its operations and its cash flows for each
of the two years in the period ended June 30, 1997 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Orange County, California
August 1, 1997
F-2
<PAGE>
Javelin Systems, Inc.
Balance Sheets
<TABLE>
<CAPTION>
As of June 30 1997 1996
---------- ---------
<S> <C> <C>
Assets
Current assets:
Cash....................................................................... $ 686,167 $ 6,404
Accounts receivable, net of allowance for doubtful accounts
of $41,000 and $0 in 1997 and 1996, respectively........................ 2,470,591 693,679
Inventories................................................................ 1,674,097 209,350
Other current assets....................................................... 46,535 4,107
---------- ---------
Total current assets......................................................... 4,877,390 913,540
Furniture, fixtures and equipment, at cost:
Computer equipment......................................................... 112,837 21,960
Furniture and fixtures..................................................... 150,787 4,455
Leasehold improvements..................................................... 72,703 4,551
---------- ---------
336,327 30,966
Less accumulated depreciation and amortization............................. 40,808 3,044
---------- ---------
Net property, plant and equipment....................................... 295,519 27,922
Other assets, net............................................................ 30,101 9,851
---------- ---------
Total assets................................................................. $5,203,010 $ 951,313
========== =========
Liabilities and stockholders' equity
Current liabilities:
Line of credit............................................................. $ 200,000 $ 206,552
Accounts payable........................................................... 1,503,825 356,769
Accrued expenses........................................................... 144,732 32,973
Current maturities of notes payable to stockholders........................ -- 65,000
Current maturities of long-term debt....................................... -- 20,000
---------- ---------
Total current liabilities.................................................... 1,848,557 681,294
Notes payable to stockholders, net of current portion........................ -- 25,000
Long-term debt, net of current portion....................................... -- 50,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value:
Authorized shares -- 1,000,000
Issued and outstanding shares -- none................................... -- --
Common stock, $0.01 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 3,119,250.............................. 31,193 21,043
Additional paid-in capital................................................. 4,295,291 348,163
Deferred compensation...................................................... (90,803) (119,845)
Accumulated deficit........................................................ (881,228) (54,342)
---------- ---------
Total stockholders' equity................................................... 3,354,453 195,019
Total liabilities and stockholders' equity................................... $5,203,010 $ 951,313
========== =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
Javelin Systems, Inc.
Statements of Operations
For the period from September 19, 1995 (date of inception) to June 30, 1996 and
for the year ended June 30, 1997
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net sales.................................................................... $7,014,571 $1,463,627
Cost of sales................................................................ 5,499,490 1,104,171
---------- ----------
Gross profit................................................................. 1,515,081 359,456
Operating expenses:
Research and development................................................... 396,365 46,771
Selling and marketing...................................................... 390,834 83,495
General and administrative................................................. 859,863 244,736
---------- ----------
Total operating expenses..................................................... 1,647,062 375,002
---------- ----------
Operating loss............................................................... (131,981) (15,546)
Interest expense............................................................. (709,447) (38,796)
Interest income.............................................................. 14,542 --
---------- ----------
Net loss..................................................................... $ (826,886) $ (54,342)
========== ==========
Net loss per share........................................................... $ (0.30) $ (0.03)
========== ==========
Shares used in computing net loss per share.................................. 2,782,535 2,086,260
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
Javelin Systems, Inc.
Statement of Stockholders' Equity
For the period from September 19, 1995 (date of inception) to June 30, 1996 and
for the year ended June 30, 1997
<TABLE>
<CAPTION>
Deferred
charge
related
to warrants
issued in
Common stock Additional connection
-------------------- Paid-in Deferred with notes Accumulated
Shares Amount Capital Compensation payable deficit Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
cash......................... 1,274,950 $12,750 $ 72,300 $ -- $ -- $ -- $ 85,050
Issuance of common stock for
equipment.................... 288,100 2,881 (1,206) -- -- -- 1,675
Issuance of common stock upon
conversion of notes payable.. 541,200 5,412 147,069 -- -- -- 152,481
Value assigned to warrants
issued in connection with
notes payable................ -- -- 130,000 -- (130,000) -- --
Amortization of deferred
charge....................... -- -- -- -- 10,155 -- 10,155
Net loss...................... -- -- -- -- -- (54,342) (54,342)
-------------------------------------------------------------------------------------------
Balance at June 30, 1996...... 2,104,250 21,043 348,163 -- (119,845) (54,342) 195,019
Value assigned to warrants
issued in connection with
notes payable................ -- -- 516,252 -- (516,252) -- --
Amortization of deferred
charge....................... -- -- -- -- 636,097 -- 636,097
Exercise of warrants.......... 165,000 1,650 1,682 -- -- -- 3,332
Proceeds from initial public
offering, net................ 850,000 8,500 3,230,194 -- -- -- 3,238,694
Deferred stock compensation... -- -- 199,000 (199,000) -- -- --
Amortization of deferred stock
compensation................. -- -- -- 108,197 -- -- 108,197
Net loss...................... -- -- -- -- -- (826,886) (826,886)
-------------------------------------------------------------------------------------------
Balances, June 30, 1997....... 3,119,250 $31,193 $4,295,291 $ (90,803) $ -- $(881,228) $3,354,453
===========================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Javelin Systems, Inc.
Statements of Cash Flows
For the period from September 19, 1995 (date of inception) to June 30, 1996 and
For the year ended June 30, 1997
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Operating activities
Net loss..................................................................... $ (826,886) $ (54,342)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 37,764 3,251
Amortization of deferred charge related to warrants........................ 636,097 10,155
Amortization of deferred stock compensation................................ 108,197 --
Changes in operating assets and liabilities:
Accounts receivable..................................................... (1,776,912) (693,679)
Inventories............................................................. (1,464,747) (209,350)
Other current assets.................................................... (42,428) (4,107)
Accounts payable........................................................ 1,147,056 356,769
Accrued expenses........................................................ 111,759 32,973
----------- ---------
Net cash used in operating activities........................................ (2,070,100) (558,330)
Investing activities
Purchase of furniture, fixtures and equipment................................ (305,361) (29,291)
Other assets................................................................. (20,250) (8,542)
----------- ---------
Net cash used in investing activities........................................ (325,611) (37,833)
Financing activities
Net borrowings under line of credit.......................................... (6,552) 206,552
Proceeds from issuance of notes payable to related parties................... -- 222,481
Payments of notes payable to related parties................................. (90,000) --
Increase (decrease) in long-term debt........................................ (70,000) 90,000
Issuance of common stock..................................................... -- 85,050
Net proceeds from initial public offering.................................... 3,238,694 --
Proceeds from exercise of warrants........................................... 3,332 --
Deferred offering costs...................................................... -- (1,516)
----------- ---------
Net cash provided by financing activities.................................... 3,075,474 602,567
----------- ---------
Net increase in cash......................................................... 679,763 6,404
Cash at beginning of period.................................................. 6,404 --
----------- ---------
Cash at end of period........................................................ $ 686,167 $ 6,404
=========== =========
Supplementary disclosure of cash paid during the period for:
Interest..................................................................... $ 71,367 $ 28,641
State franchise taxes........................................................ $ 800 $ 800
Supplementary disclosure of non cash financing activities:
Equipment acquired for common stock.......................................... $ -- $ 1,675
Notes payable converted to common stock...................................... $ -- $ 152,481
</TABLE>
See accompanying notes.
F-6
<PAGE>
Javelin Systems, Inc.
Notes to Financial Statements
1. Summary of Significant Accounting Policies
General
Javelin Systems, Inc. ("the Company") was incorporated in the State of Delaware
under the name of Sunwood Research, Inc. on September 19, 1995. Subsequently,
the Company changed its name to Javelin Systems, Inc. on August 25, 1996. The
Company designs, develops, markets and sells open system touch screen point-of-
sale ("POS") computers, primarily for the foodservice industry. The ability of
the Company to establish itself as a successful operating entity on an ongoing
basis is dependent upon future events, including further marketing of its
products and achieving profitable operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the accompanying financial statements. Actual
results could differ from those estimates.
Inventories
Inventories consist primarily of computer hardware and components and are stated
at the lower of cost (first-in, first-out) or market.
Property, Plant and Equipment
Additions to property, plant and equipment and leasehold improvements are
recorded at cost. Depreciation is computed using the straight line method over
the estimated useful lives of the respective assets, generally three to five
years.
Long-Lived Assets
Effective July 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." In accordance with SFAS
No. 121, the Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. The adoption of SFAS
No. 121 had no impact on the Company's financial condition or results of
operations.
Revenue Recognition
Revenues from sales of products are recognized upon shipment of the products.
The Company generally does not have any significant remaining obligations upon
shipment of its products. Product returns and sales allowances, which have not
been significant historically, are provided for at the date of sale.
F-7
<PAGE>
Javelin Systems, Inc.
Notes to Financial Statements -- (Continued)
1. Summary of Significant Accounting Policies (continued)
Warranties
The Company's products are under warranty for defects in material and
workmanship for one year. Certain components included in the Company's products
are covered by manufacturer's warranties. Costs related to after-sale service
and repair are accrued as warranty expense at the time of sale, and to date,
such costs have been insignificant.
Advertising
The Company expenses the costs of advertising as incurred. To date, advertising
expenses have not been significant.
Research and Development
The Company expenses the cost of research and development as incurred.
Income Taxes
Deferred taxes are provided for items recognized in different periods for
financial and tax reporting purposes in accordance with Financial Accounting
Standards Board Statement No. 109, Accounting for Income Taxes.
Stock Based Compensation
Effective July 1, 1996, the Company has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123) and accordingly, is continuing to account for
its stock-based compensation plans under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations. The
adoption of SFAS No. 123 had no impact on the Company's results of operations or
financial position.
Net Loss Per Common Share
Net loss per common share is computed using the weighted average number of
common shares and common share equivalents outstanding during the period
presented. Common share equivalents result from the effect of outstanding
options and warrants to purchase common stock. Pursuant to the requirements of
the Securities and Exchange Commission, common shares and common share
equivalents issued by the Company during the twelve months immediately preceding
the initial public offering have been included in the calculation of the shares
used in computing net loss per common share as if they were outstanding for the
entire period presented, using the treasury stock method.
Concentration of Business and Credit Risk
The Company operates within an industry that is subject to rapid technological
advancement, intense competition and uncertain market acceptance. The
introduction of new technologies, competitors' alternative products and ultimate
market acceptance of the products sold by the Company, could have a substantial
impact on the future operations of the Company.
F-8
<PAGE>
Javelin Systems, Inc.
Notes to Financial Statements -- (Continued)
1. Summary of Significant Accounting Policies (continued)
Financial instruments which potentially subject the Company to a concentration
of credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers and collateral is
generally not required. Accordingly, the Company performs ongoing credit
evaluations of its customers and maintains allowances for potential losses
which, when realized, have been within the range of management's expectations.
During fiscal year ended June 30, 1997 two customers aggregated 16% each of net
sales. During the period ended June 30, 1996 two customers aggregated 30% and
24%, respectively, of net sales. Sales were not to the same major customers in
1997 and 1996.
Impact of Recently Issued Accounting Standards
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share", which
requires the disclosure of basic earnings per share and diluted earnings per
share. The Company expects to adopt SFAS 128 in fiscal 1998 and anticipates it
will not have an impact on previously reported earnings per share.
Additionally, in February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129 ("SFAS 129"), "Disclosure
of Information about Capital Structure", which requires certain additional
disclosures of information about an entity's capital structure. The Company
expects to adopt SFAS 129 in fiscal 1998 and does not believe the effect of the
adoption will be material.
2. Inventories
Inventories consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Raw materials $1,525,653 $203,950
Finished goods 148,444 5,400
------------------ ------------------
$1,674,097 $209,350
================== ==================
</TABLE>
3. Line of Credit
The Company has a line of credit with a financial institution under which it may
borrow up to 80% of the Company's eligible accounts receivable (as defined) with
monthly interest based upon the prime rate of a national financial institution
(8.5% at June 30, 1997 and no less than 2.5% per month at June 30, 1996).
Borrowings under the line of credit are collateralized by substantially all the
assets of the Company. As of June 30, 1996, borrowings under the line aggregated
$206,552 and there was $20,898 available for future borrowings. As of June
30, 1997, borrowings aggregated $200,000 and there was $972,225 available for
future borrowings. The line of credit expires in December 1997.
F-9
<PAGE>
Javelin Systems, Inc.
Notes to Financial Statements -- (Continued)
4. Notes Payable to Stockholders and Long-Term Debt
Notes payable to stockholders at June 30, 1996 consists of the following:
<TABLE>
<S> <C>
Promissory notes, bearing interest at 10%, due on
various dates in 1997 and 1998................................. $75,000
Unsecured, noninterest bearing demand note....................... 15,000
------------------
90,000
Less current portion............................................. 65,000
------------------
$25,000
==================
</TABLE>
Long-term debt at June 30, 1996 consists of the following:
<TABLE>
<S> <C>
Unsecured demand note, bearing interest at 8%.................... $20,000
Promissory notes, bearing interest at 10% due on
various dates in 1997 and 1998................................. 50,000
------------------
70,000
Less current portion............................................. 20,000
------------------
$50,000
==================
</TABLE>
Due to their short-term nature and/or market rate of interest, the fair values
of the Company's notes payable to stockholders, long-term debt and other
financial instruments approximate their carrying values.
All notes payable and long-term debt amounts at June 30, 1996 were paid in full
during fiscal 1997. The Company had no long-term debt at June 30, 1997.
5. Commitments and Contingencies
Operating Leases
The Company leases its facilities and certain equipment under noncancelable
operating leases subject to scheduled rent increases. The leases expire at
various dates through June 30, 2002.
Future minimum annual lease payments at June 30, 1997 are as follows:
<TABLE>
<S> <C>
1998....................................... $145,500
1999....................................... 114,633
2000....................................... 109,042
2001....................................... 112,313
2002....................................... 115,682
Thereafter................................. --
-----------------
$597,170
=================
</TABLE>
Rent expense under operating lease agreements aggregated $34,251 for the year
ended June 30, 1997 and $16,596 for the period ended June 30, 1996 and is
included in general and administrative expenses in the accompanying statement of
operations.
Effective October 1, 1997, the Company subleased its Tustin facility. This
sublease expires on October 31, 1998.
F-10
<PAGE>
Javelin Systems, Inc.
Notes to Financial Statements -- (Continued)
6. Stockholders' Equity
Registration Statement
In November 1996, the Board of Directors authorized the Company to file a
registration statement on Form SB-2 with the Securities and Exchange Commission
for an initial public offering of 850,000 shares of common stock at an offering
price of $5.00 per share.
Warrants
In connection with the issuance of $725,000 of the Company's 10% promissory
notes at various dates through August 1996 and the initial public offering, the
Company granted warrants to purchase shares of the Company's common stock. The
warrants entitled the holders to purchase a total of 165,000 shares of the
Company's common stock at an aggregate price of $3,332. The outstanding warrants
became exercisable following the effectiveness of the public offering of the
Company's common stock and had no expiration date. As of June 30, 1997, all
warrants have been exercised. The Company has assigned a value of $646,252 to
the warrants which has been accounted for as additional paid in capital in the
accompanying financial statements at June 30, 1997. The deferred charge related
to the warrants was fully amortized after the exercise of all the warrants.
Stock Split
On August 23, 1996, the Company effected a 4,300-for-1 stock split. All
references in the accompanying financial statements and notes to shares
outstanding and per share amounts have been adjusted to reflect the impact of
this stock split.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123 requires the
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, the Company recognizes as compensation
expense the difference between the exercise price and the fair market value of
the underlying stock on the date of grant. Stock based compensation expense is
deferred and amortized over the life of the stock option. During fiscal 1997,
the Company recognized $108,197 in stock based compensation expense. No stock
options were granted for the period ended June 30, 1996.
F-11
<PAGE>
Javelin Systems, Inc.
Notes to Financial Statements -- (Continued)
In August 1996, the Company adopted a stock incentive award plan (the "Plan")
under which the Board of Directors, or a committee appointed for such purpose,
may from time to time grant options, restricted stock or other stock-based
compensation to the directors, officers, eligible employees or consultants of
the Company to acquire up to an aggregate of 300,000 shares of common stock, in
such numbers, under such terms and at such exercise prices as are determined by
the Board or such committee. Options vest over a 3 year period based on the
following schedule: 40% after year one, 30% after year two, and 30% at the end
of year three. All options expire five years from the date of grant. It is the
Company's intention to grant options under the Plan principally to employees.
The following is a summary of changes in options pursuant to the Plan for the
year ended June 30, 1997. No stock options were granted for the period ended
June 30, 1996:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
For options granted at fair market value on the date of grant: Options Price
- ------------------------------------------------------------- ------- --------
<S> <C> <C>
Outstanding - beginning of year -- --
Granted 68,000 $4.90
Exercised -- --
Canceled -- --
------
Outstanding - end of year 68,000 $4.90
======
Exercisable at end or year -- --
Weighted-average fair value of options granted during the
year at fair market value $ 1.68
</TABLE>
<TABLE>
<CAPTION>
Weighted
Average
Exercise
For options granted at less than fair market value on the date of grant: Options Price
- ------------------------------------------------------------------------ -------- --------
<S> <C> <C>
Outstanding - beginning of year -- --
Granted 191,000 $3.71
Exercised -- --
Canceled 13,500 $3.50
-------
Outstanding - end of year 177,500 $3.73
=======
Exercisable at end or year -- --
Weighted-average fair value of options granted during the year at less than
fair market value $ 1.65
</TABLE>
The range of exercise prices for options outstanding at June 30, 1997 was $2.50
to $5.00. The weighted average remaining contractual life of options
outstanding at June 30, 1997 was approximately 4.3 years.
F-12
<PAGE>
Javelin Systems, Inc.
Notes to Financial Statements -- (Continued)
Pro forma information regarding net income and earnings per share is required by
SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to June
30, 1996 under the fair value method of the Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for fiscal 1997: risk-free
interest rate equal to 6.0%; no dividend yield; a volatility factor of the
expected market price of the Company's common stock of 0.41; and a weighted-
average expected life of each option equal to 3 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information for the year ended June 30, 1997 follows:
<TABLE>
<CAPTION>
As reported Pro forma
----------- ---------
<S> <C> <C>
Net loss $826,886 $885,986
Loss per share $ 0.30 $ 0.32
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to June 30,
1996, its pro forma effect will not be fully reflected until fiscal 1999.
7. Income Taxes
No provision for federal or state income taxes is required since the Company has
incurred losses since inception.
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their bases for
financial reporting purposes. Temporary differences which give rise to deferred
tax assets are as follows at June 30:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net operating loss carryforwards................. $ 38,400 $ 7,200
Inventory adjustments............................ 35,600 --
Accrued liabilities.............................. 15,700 10,400
Valuation allowance.............................. (89,700) (17,600)
-------- --------
Net deferred tax assets.......................... $ -- $ --
======== ========
</TABLE>
The Company has incurred operating losses since inception, and due to the
uncertainty regarding future results of operations, the Company has provided a
full valuation allowance against its net deferred tax assets.
The Company's effective income tax rate is different than the federal statutory
rate primarily due to nondeductible capital expenditures and changes in the
valuation allowance.
F-13
<PAGE>
Javelin Systems, Inc.
Notes to Financial Statements -- (Continued)
At June 30, 1997, the Company has federal and state net operating loss
carryforwards available to offset future taxable income of approximately $90,000
and $89,000, respectively. These losses begin to expire in 2011 and 2004,
respectively. Under the change in ownership provisions of the Tax Reform Act of
1986, net operating loss carryforwards for federal and state income tax
reporting purposes may be subject to annual limitations. Should a change in
ownership occur, the ability to utilize net operating loss carryforwards may be
limited in future years.
8. Related Party
During the year ended June 30, 1997 and the period ended June 30, 1996, the
Company purchased electronic components from a company owned by a stockholder
and founder of the Company totaling $1,234,328 and $445,000, respectively.
Included in accounts payable at June 30, 1997 and 1996 is $116,360 and $73,580
respectively, due to that Company.
F-14
<PAGE>
EXHIBIT 10.8
[AIR LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. Basic Provisions ("Basic Provisions")
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only, May
5, 1997, is made by and between Klein-Miller Investment Co., a general
--------------------------------------
partnership ("LESSOR") and Javelin Systems, Inc., a Delaware corporation
- ----------- ---------------------------------------------------
("LESSEE"), (collectively the "PARTIES", or individually a "PARTY").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 1881 Langley Avenue, Irvine, located in the County of Orange, State of
--------------------------- ------
California 92714, and generally described as (describe briefly the nature of the
- ----------------
property and, if applicable, the "PROJECT", if the property is located within a
Project) an approximate 12,880 square foot industrial building and adjacent
-------------------------------------------------------------------
parking. ("PREMISES") (See also Paragraph 2)
- --------
1.3 TERM: 5 years and 0 months ("ORIGINAL TERM") commencing
--- ---
July 1, 1997 ("COMMENCEMENT DATE") and ending June 30, 2002
- ------------ -------------
("EXPIRATION DATE"). (See also Paragraph 3)
1.4 EARLY POSSESSION: JUNE 1, 1997 ("EARLY POSSESSION DATE"). (See also
------------
Paragraphs 3.2 and 3.3)
1.5 BASE RENT: $8,565.20 per month ("BASE RENT"), payable on the 1st day
--------- ---
of each month commencing July 1, 1997 (See also Paragraph 4)
------------
[x] If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted. See Addendum Paragraph 50.
1.6 BASE RENT PAID UPON EXECUTION: $8,565.20 as Base Rent for the period
-------------------------------------
July 1, 1997 through July 31, 1997.
- ----------------------------------
1.7 SECURITY DEPOSIT: $ 17,130.40 ("Security Deposit"). (See also
-----------
Paragraph 5)
1.8 AGREED USE: Offices, design, research and development, manufacturing,
---------------------------------------------------------
assembly, warehousing and marketing. (See also Paragraph 6)
------------------------------------
1.9 INSURING PARTY. Lessor is the "INSURING PARTY" unless otherwise
stated herein. (See also Paragraph 8)
1.10 REAL ESTATE BROKERS: (See also Paragraph 15)
(a) REPRESENTATION: The following real estate brokers (collectively,
the "BROKERS") and brokerage relationships exist in this transaction (check
applicable boxes):
[x] CB Commercial Real Estate Group, Inc., represents Lessor exclusively
-------------------------------------
("LESSOR'S BROKER");
[x] Daum Commercial Real Estate Services represents Lessee exclusively
------------------------------------
("LESSEE'S BROKER"); or [ ] represents both Lessor
--------------------------
and Lessee (DUAL AGENCY).
(b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by
both Parties, Lessor shall pay to the Broker the fee agreed to in their separate
written agreement (or if there is no such agreement, the sum of % of the total
Base Rent for the brokerage services rendered by said Broker) in the manner
agreed to in said agreement.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by
--------------------------------------------------------
("Guarantor"). (See also Paragraph 37)
- --------------------------------------
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 64 and Exhibits A and B, all of which
-- -- -------
constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of size set forth in this Lease, or that may have been
used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom clean and
free of debris on the Commencement Date or the Early Possession Date, whichever
first occurs ("START DATE"), and, so long as the required service contracts
described in Paragraph 7.1(b) below are obtained by Lessee within thirty (30)
days following the Start Date, warrants that the existing electrical, plumbing,
fire sprinkler, lighting, heating, ventilating and air conditioning systems
("HVAC"), loading doors, if any, and all other such elements in the Premises,
other than those constructed by Lessee, shall be in good operating condition on
said date and that the structural elements of the roof, bearing walls and
foundation of any buildings on the Premises (the "BUILDING") shall be free of
material defects. If a non-compliance with said warranty exists as of the Start
Date, Lessor shall, as Lessor's sole obligation with respect to such matter,
except as otherwise provided in this Lease, promptly after receipt of written
notice from Lessee setting forth with specificity the nature and extent of such
non-compliance, rectify same at Lessor's expense. If, after the Start Date,
Lessee does not give Lessor written notice of any non-compliance with this
warranty within; (i) one year as to the surface of the roof and the structural
portions of the roof, foundations and bearing walls, (ii) six (6) months as to
the HVAC systems, (iii) thirty (30) days as to the remaining systems and other
elements of the Building, correction of such non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense. See Addendum Paragraph
52
2.3 Compliance. Lessor warrants that the improvements on the Premises
comply with all applicable laws, covenants or restrictions of record, building
codes, regulations and ordinances ("applicable requirements") in effect on the
Start Date. Said warranty does not apply to the use to which Lessee will put the
Premises or to any Alterations or Utility Installations (as defined in Paragraph
7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for
determining whether or not the zoning is appropriate for Lessee's intended use,
and acknowledges that past uses of the Premises may no longer be allowed. If the
Premises do not comply with said warranty, Lessor shall, except as otherwise
provided, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify the same
at Lessor's expense. If the Applicable Requirements are hereafter changed (as
opposed to being in existence at the Start Date, which is addressed in Paragraph
6.2(e) below) so as to require during the term of this Lease the construction of
an addition to or an alteration of the Building, the remediation of any
Hazardous Substance, or the reinforcement or other physical modification of the
Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the cost of
such work as follows:
and compliance is required
PAGE 1 Initials RS LM
-----
<PAGE>
(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are
required as a result of the specific and unique use of the Premises by Lessee as
compared with uses by tenants in general, Lessee shall be fully responsible for
the cost thereof, provided, however that if such Capital Expenditure is required
during the last two (2) years of this Lease and the cost thereof exceeds six (6)
months' Base Rent, Lessee may instead terminate this Lease unless Lessor
notifies Lessee in writing, within ten (10) days after receipt of Lessee's
termination notice that Lessor has elected to pay the difference between the
actual cost thereof and the amount equal to six (6) months's Base Rent. If
Lessee elects termination, Lessee shall immediately cease the use of the
Premises which requires such Capital Expenditure and deliver to Lessor written
notice specifying a termination date at least ninety (90) days thereafter. Such
termination date shall, however, in no event be earlier than the last day that
Lessee could legally utilize the Premises without commencing such Capital
Expenditure.
(b) If such Capital Expenditure is not the result of the specific and
unique use of the Premises by Lessee (such as, governmentally mandated seismic
modifications), then Lessor and Lessee shall allocate the obligation to pay for
such costs pursuant to the provisions of Paragraph 7.1(c); provided, however,
that if such Capital Expenditure is required during the last two years of this
Lease or if Lessor reasonably determines that it is not economically feasible to
pay its share thereof, Lessor shall have the option to terminate this Lease
upon ninety (90) days prior written notice to Lessee unless Lessee notifies
Lessor, in writing, within ten (10) days after receipt of Lessor's termination
notice that Lessee will pay for such Capital Expenditure. If Lessor does not
elect to terminate, and fails to tender its share of any such Capital
Expenditure, Lessee may advance such funds and deduct same, with interest, from
Rent until Lessor's share of such costs have been fully paid. If Lessee is
unable to finance Lessor's share, or if the balance of the Rent due and payable
for the remainder of this Lease is not sufficient to fully reimburse Lessee
on an offset basis, Lessee shall have the right to terminate this Lease upon
thirty (30) days written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered
by Lessee as a result of an actual or proposed change in use, change in
intensity of use, or modification to the Premises then, and in that event,
Lessee shall be fully responsible for the cost thereof, and Lessee shall not
have any right to terminate this Lease.
2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been advised by
Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements), and their suitability for Lessee's intended use, (b) Lessee has
made such investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to its occupancy of the
Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Lease. In addition, Lessor acknowledges that: (a)
Broker has made no representations, promises or warranties concerning Lessee's
ability to honor the Lease or suitability to occupy the Premises, and (b) it is
Lessor's sole responsibility to investigate the financial capability and/or
suitability of all proposed tenants.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be abated
for the period of such early possession. All other terms of this Lease
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date.
3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is not delivered within sixty (60)
days after the Commencement Date, Lessee may, at its option, by notice in
writing within ten (10) days after the end of such sixty (60) day period, cancel
this Lease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Lessor within said ten (10)
day period, Lessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Lessee when required and Lessee does
not terminate this Lease, as aforesaid, any period of rent abatement that Lessee
would otherwise have enjoyed shall run from the date of delivery of possession
and continue for a period equal to what Lessee would otherwise have enjoyed
under the terms hereof, but minus any days of delay caused by the acts or
omissions of Lessee. If possession of the Premises is not delivered with four
(4) months after the Commencement Date, this Lease shall terminate unless other
agreements are reached between Lessor and Lessee, in writing.
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession of
the Premises to Lessee until Lessee complies with its obligation to provide
evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee
shall be required to perform all of its obligations under this Lease from and
after the Start Date, including the payment of Rent, notwithstanding Lessor's
election to withhold possession pending receipt of such evidence of insurance.
Further, if Lessee is required to perform any other conditions prior to or
concurrent with the Start Date, the Start Date shall occur but Lessor may elect
to withhold possession until such conditions are satisfied.
4. RENT.
4.1. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease (except for the Security Deposit) are deemed to be rent
("rent").
4.2 PAYMENT. Lessee shall cause payment of Rent to be received by Lessor in
lawful money of the United States, without offset or deduction, on or before the
day on which it is due. Rent for any period during the term hereof is for less
than one (1) full calendar month shall be prorated based upon the actual number
of days of said month. Payment of Rent shall be made to Lessor at its address
stated herein or to such other persons or place as Lessor may from time to time
designate in writing. Acceptance of a payment which is less than the amount then
due shall not be a waiver of Lessor's rights to the balance of such Rent,
regardless of Lessor's endorsement of any check so stating.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the
Security Deposit as security for Lessee's faithful performance of its
Obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. If the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from the
Lessor, deposit additional moneys with Lessor so that the total amount of the
Security Deposit shall at all times bear the same proportion to the increased
Base Rent as the initial Security Deposit bore to the initial Base Rent. Should
the Agreed Use be amended to accommodate a material change in the business of
Lessee or to accommodate a sublessee or assignee. Lessor shall have the right to
increase the Security Deposit to the extent necessary, in Lessor's reasonable
judgment, to account for any increased wear and tear that the Premises may
suffer as a result thereof. If a change in control of Lessee occurs during this
Lease and following such change the financial condition of Lessee is, in
Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such
additional monies with Lessor as shall be sufficient to cause the Security
Deposit to be at a commercially reasonable level based on said change in
financial condition. Lessor shall not be required to keep the Security Deposit
separate from its general accounts. Within fourteen (14) days after the
expiration or termination of this Lease, if Lessor elects to apply the Security
Deposit only to unpaid Rent, and otherwise within thirty (30) days after the
Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall
return that portion of the Security Deposit not used or applied by Lessor. No
part of the Security Deposit shall be considered to be held in trust, to bear
interest or to be prepayment for any monies to be paid by Lessee under this
Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the Agreed Use,
or any other legal use which is reasonably comparable thereto, and for no other
purpose. Lessee shall not use or permit the use of the Premises in a manner that
is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or
occupants, or causes damage to neighboring properties. Lessor shall not
unreasonably withhold
Page 2 Initials RS LM
-----
<PAGE>
or delay its consent to any written request for a modification of the Agreed
Use, so long as the same will not impair the structural integrity of the
improvements on the Premises or the mechanical or electrical systems therein, is
not significantly more burdensome to the Premises. If Lessor elects to withhold
consent, Lessor shall within five (5) business days after such request give
written notification of same, which notice shall include an explanation of
Lessor's objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as
used in this Lease shall mean any product, substance or waste whose presence,
use, manufacture, disposal, transportation, or release, either by itself or in
combination with other materials expected to be on the Premises, is either: (i)
potentially injurious to the public health, safety or welfare, the environment
or the premises, (ii) regulated or monitored by any governmental authority, or
(iii) a basis for potential liability of Lessor to any governmental agency or
third party under any applicable stature or common law theory. Hazardous
Substances shall include, but not be limited to, hydrocarbons, petroleum
gasoline, and/or crude oil or any products, by-products or fractions thereof.
Lessee shall not engage in any activity in or on the Premises which constitutes
a Reportable Use of Hazardous Substances without the express prior written
consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation. possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long as such use
is in compliance with all Applicable Requirements, is not a Reportable Use, and
does not expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may condition its consent to any Reportable Use upon receiving such
additional assurances as Lessor reasonably deems necessary to protect itself,
the public, the premises and/or the environment against damage, contamination,
injury and/or liability, including, but not limited to, the installation (and
removal on or before lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the Security
Deposit. Lessor may withhold its consent in its absolute discretion.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises, other than as previously consented to by Lessor, Lessee
shall immediately give written notice of such fact to Lessor, and provide Lessor
with a copy of any report, notice, claim or other documentation which it has
concerning the presence of such Hazardous Substance.
(c) LESSEE REMEDIATION. Lessee shall not cause or permit any Hazardous
Substance to be spilled or released in, on, under, or about the Premises
(including through the plumbing or sanitary sewer system) and shall promptly, at
Lessee's expense, take all investigatory and/or remedial action reasonably
recommended, whether or not formally ordered or required, for the cleanup of any
contamination of, and for the maintenance, security and/or monitoring of the
Premises or neighboring properties, that was caused or materially contributed to
by Lessee or pertaining to or involving any Hazardous Substance brought onto the
Premises during the term of this Lease, by or for Lessee, or any third party.
(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, harmless from
and against any and all loss of rents and/or damages, liabilities judgments,
claims, expenses, penalties, and attorneys' and consultants' fees arising out of
or involving any Hazardous Substance brought onto the Premises by or for lessee,
or any third party (provided, however, that Lessee shall have no liability under
this Lease with respect to underground migration of any Hazardous Substance
under the Premises from adjacent properties). Lessee's obligations shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the cost
of investigation, removal, remediation, restoration and/or abatement, and shall
survive the expiration or termination of this Lease. NO TERMINATION,
CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY LESSOR AND LESSEE SHALL
RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO HAZARDOUS
SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE TIME OF
SUCH AGREEMENT.
(e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages which existed as a
result of Hazardous Substances on the Premises prior to the Start Date or which
are caused by the gross negligence or intentional acts of Lessor, its agents or
employees. Lessor's obligations, as and when required by the Applicable
Requirements, shall include, but not be limited to, the cost of investigation,
removal, remediation, restoration and/or abatement, and shall survive the
expiration or termination of this Lease.
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date. Lessee shall
cooperate fully in any such activities at the request of Lessor, including
allowing Lessor and Lessor's agents to have reasonable access to the Premises at
reasonable times in order to carry out Lessor's investigative and remedial
responsibilities.
(g) LANDLORD TERMINATION OPTION. If a Hazardous Substance Condition
occurs during the term of this Lease, unless Lessee is legally responsible
therefor (in which case Lessee shall make the investigation and remediation
thereof required by the Applicable Requirements and this Lease shall continue in
full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and
Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and
remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to remediate
such condition exceeds twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater, give written notice to Lessee, within thirty (30) days
after receipt by Lessor of knowledge of the occurrence of such Hazardous
Substance Condition, of Lessor's desire to terminate this Lease as of the date
sixty (60) days following the date of such notice. In the event Lessor elects to
give a termination notice, Lessee may, within ten (10) days thereafter, give
written notice to Lessor of Lessee's commitment to pay the amount by which the
cost of the remediation of such Hazardous Substance Condition exceeds an amount
equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater. Lessee shall provide Lessor with said funds or satisfactory assurance
thereof within thirty (30) days following such commitment. In such event, this
Lease shall continue in full force and effect and Lessor shall proceed to make
such remediation as soon as reasonably possible after the required funds are
available If Lessee does not give such notice and provide the required funds or
assurance thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor's notice of termination.
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise
provided in this Lease, Lessee, shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within ten (10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving the failure of
Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender and consultants
shall have the right to enter into premises at any time, in the case of an
emergency, and otherwise at reasonable times, for the purpose of inspecting the
condition of the Premises and for verifying compliance by Lessee with this
Lease. The cost of any such inspections shall be paid by Lessor, unless a
violation of Applicable Requirements, or a contamination is found to exist or be
imminent, or the inspection is requested or ordered by a governmental authority.
In such case, Lessee shall upon request reimburse Lessor for the cost of such
inspections, so long as such inspection is reasonably related to the violation
or contamination.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS. See Addendum Paragraph 53
(a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep
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the Premises. Utility Installations, and Alterations in good order, condition
and repair (whether or not the portion of the Premises requiring repairs or the
means of repairing the same, are reasonably or readily accessible to Lessee, and
whether or not the need for such repairs occurs as a result of Lessees use, any
prior use, the elements or the age of such portion of the Premises), including,
but not limited to, all equipment or facilities, such as plumbing, HVAC,
electrical, lighting facilities, boilers, pressure vessels, fire protection
system, fixtures, walls (interior and exterior), foundations, ceilings, roofs,
floors, windows, doors, plate glass, skylights, landscaping, driveways, parking
lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or
adjacent to the Premises. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices,
specifically including the procurement and maintenance of the service contracts
required by Paragraph 7.1(b) below. Lessee's obligations shall include
restorations, replacements or renewals when necessary to keep the Premises and
all improvements thereon or a part thereof in good order, condition and state of
repair. Lessee shall, during the term of this Lease, keep the exterior
appearance of the Building in a first-class condition consistent with the
exterior appearance of other similar facilities of comparable age and size in
the vicinity, including, when necessary, the exterior repainting of the
Building.
(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense, procure
and maintain contracts, with copies to Lessor, in customary form and substance
for, and with contractors specializing and experienced in the maintenance of the
following equipment and improvements, ("basic elements"), if any, as and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire protection systems, (iv) landscaping and irrigation systems,
(v) roof covering and drains, and (vi) asphalt and parking lots, (vii)
clarifiers and (viii) any other equipment, if reasonably required by Lessor.
(c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as set
forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if the Basic Elements described in Paragraph 7.1(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of replacing
such Basic Elements, then such Basic Elements shall be replaced by Lessor, and
the cost thereof shall be prorated between the Parties and Lessee shall only be
obligated to pay, each month during the remainder of the term of this Lease, on
the date on which Base Rent is due, an amount equal to the product of
multiplying the cost of such replacement by a fraction, the numerator of which
is one, and the denominator of which is the number of months of the useful life
of such replacement as such useful life is specified pursuant to Federal income
tax regulations or guidelines for depreciation thereof (including interest on
the unamortized balance as is then commercially reasonable in the judgment of
Lessor's accountants), with Lessee reserving the right to prepay its obligation
at any time.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 9 (Damage or Destruction) and (Condemnation), it
is intended by the Parties hereto that Lessor have no obligation, in any manner
whatsoever, to repair and maintain the Premises, or the equipment therein, all
of which obligations are intended to be that of the Lessee. It is the intention
of the Parties that the terms of this Lease govern the respective obligations
of the Parties as to maintenance and repair of the Premises, and they expressly
waive the benefit of any statute now or hereafter in effect to the extent it is
inconsistent with the terms of this Lease.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
refers to all floor and window coverings, air lines, power panels, electrical
distribution, security and fire protection systems, communication systems,
lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises.
The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can
be removed without doing material damage to the Premises. The term "ALTERATIONS"
shall mean any modification of the improvements, other than Utility
installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED
ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or
Utility Installations made by Lessee that are not yet owned by Lessor pursuant
to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations to the Premises without Lessor's prior written consent. Lessee
may, however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof) without such consent but upon notice to Lessor, as
long as they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, and the cumulative cost
thereof during this Lease as extended does not exceed $50,000 in the aggregate
or $10,000 in any one year.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be deemed
conditioned upon Lessee's: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days notice prior to the commencement of
any work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility. If Lessee shall contest the validity of any such
lien, claim or demand, then Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof. If Lessor shall require, Lessee shall furnish a surety bond in an
amount equal to one and one-half times the amount of such contested lien, claim
or demand, indemnifying Lessor against liability for the same. If Lessor elects
to participate in any such action, Lessee shall pay Lessor's attorneys' fees and
costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require removal or elect
ownership as hereinafter provided, all Alterations and Utility Installations
made by Lessee shall be the property of Lessee, but considered a part of the
Premises. Lessor may, at any time, elect in writing to be the owner of all or
any specified part of the Lessee Owned Alterations and Utility Installations.
Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned
Alterations and Utility Installations shall, at the expiration or termination of
this Lease, become the property of Lessor and be surrendered by Lessee with the
Premises.
(b) REMOVAL. By delivery to Lessee of written notice from Lessor not
later than ninety (90) days prior to the end of the term of this Lease, Lessor
may require that any or all Lessee Owned Alterations or Utility Installations be
removed by the expiration or termination of this Lease. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the
Expiration Date or any earlier termination date, with all of the improvements,
parts and surfaces thereof broom clean and free of debris, and in good operating
order, condition and state of repair, ordinary wear and tear excepted. "Ordinary
wear and tear shall not include any damage or deterioration that would have been
prevented by good maintenance practice. Lessee shall repair any damage
occasioned by the installation, maintenance or removal of Trade Fixtures,
furnishings, and equipment as well as the removal of any storage tank installed
by or for the Lessee, and the removal, replacement, or remediation of any soil,
material or groundwater contaminated by Lessee. Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee. The failure by Lessee to
timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express
written consent of Lessor shall constitute a holdover under the provisions of
Paragraph 26 below.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance required
under Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000.000 per
occurrence. Premiums for policy periods commencing prior to or extending beyond
the Lease term shall be prorated to correspond to the Lease term. Payment shall
be made by Lessee to Lessor within ten (10) days following receipt of an
invoice.
8.2 LIABILLTY INSURANCE. See Addendum Paragraph 55
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee
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and Lessor against claims for bodily injury, personal injury and property damage
based upon or arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be on an
occurrence basis providing single limit coverage in an amount not less than
$2,000,000 per occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF
PREMISES ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION
ENDORSEMENT" for damage caused by heat, smoke or fumes from a hostile fire. The
Policy shall not contain any intra-insured exclusions as between insured persons
or organizations, but shall include coverage for liability assumed under this
Lease as an "insured contract" for the performance of Lessee's indemnity
obligations under this Lease. The limits of said insurance shall not, however,
limit the liability of Lessee nor relieve Lessee of any obligation hereunder.
All insurance carried by Lessee shall be primary to and not contributory with
any similar insurance carried by Lessor, whose insurance shall be considered
excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall maintain liability insurance as
described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance
required to be maintained by Lessee. Lessee shall not be named as an additional
insured therein.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and
keep in force a policy or policies in the name of Lessor, with loss payable to
Lessor and to any Lender insuring loss or damage to the Premises. The amount of
such insurance shall be equal to the full replacement cost of the Premises, as
the same shall exist from time to time, or the amount required by any Lenders,
but in no event more than the commercially reasonable and available insurable
value thereof. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations, Trade Fixtures, and Lessee's personal
property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor.
If the coverage is available and commercially appropriate, such policy or
policies shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by a Lender),
including coverage for debris removal and the enforcement of any Applicable
Requirements requiring the upgrading, demolition, reconstruction or replacement
of any portion of the Premises as the result of a covered loss. Said policy or
policies shall also contain an agreed valuation provision in lieu of any
coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located. If
such insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence, and Lessee shall be liable for such deductible
amount in the event of an Insured Loss.
(b) RENTAL VALUE. The Insuring Party shall obtain and keep in force a
policy or policies in the name of Lessor with loss payable to Lessor and any
Lender, insuring the loss of the full Rent for one (1) year. Said insurance
shall provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide for
one full year's loss of Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurance clause,
and the amount of coverage shall be adjusted annually to reflect the projected
Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee
shall be liable for any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a larger building,
or of a group of buildings owned by Lessor which are adjacent to the Premises,
the Lessee shall pay for any increase in the premiums for the property insurance
of such building or buildings if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.
(b) BUSINESS INTERRUPTION. If reasonably available, and if Lessor
requests Lessee to do so in writing, Lessee shall obtain and maintain loss of
income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 INSURANCE POLICIES. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior, to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to a decrease in the amount or items covered except after
thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty
(30) days prior to the expiration of such policies, furnish Lessor with evidence
of renewals or "insurance binders" evidencing renewal thereof, or Lessor may
order such insurance and charge the cost thereof to Lessee, which amount shall
be payable by Lessee to Lessor upon demand. Such policies shall be for a term of
at least one year, or the length of the remaining term of this Lease, whichever
is less. If either Party shall fail to procure and maintain the insurance
required to be carried by it, the other Party may, but shall not be required to,
procure and maintain the same.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages against the other, for loss of or damage to its
property arising out of or incident to the perils required to be insured against
herein. The effect of such releases and waivers is not limited by the amount of
insurance carried or required, or by any deductibles applicable hereto. The
Parties agree to have their respective property damage insurance carriers waive
any right to subrogation that such companies may have against Lessor or Lessee,
as the case may be, so long as the insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's sole negligence, Lessee shall
indemnify, protect, defend and hold harmless the Premises, Lessor and its
agents, Lessor's master or ground lessor, partners and Lenders, from and against
any and all claims, loss of rents and/or damages, liens, judgments, penalties,
attorneys' and consultants' fees, expenses and/or liabilities arising out of,
involving, or in connection with, the use and/or occupancy of the Premises by
Lessee. If any action or proceeding is brought against Lessor by reason of any
of the foregoing matters, Lessee shall upon notice defend the same at Lessee's
expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate
with Lessee in such defense. Lessor need not have first paid any such claim in
order to be defended or indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Except in the event of fraud,
gross negligence or willful acts of Lessor, its partners, employees, agents,
directors, officers, shareholders, invitees or contractors, Lessor shall not be
liable for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or any
other person in or about the Premises, whether such damage or injury is caused
by or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which can reasonably be repaired in six (6) months or less from
the date of the damage or destruction. Lessor shall notify Lessee in writing
within thirty (30) days from the date of the damage or destruction as to whether
or not the damage is Partial or Total.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations,
which cannot reasonably be repaired in six (6) months or less from the date of
the damage or destruction. Lessor shall notify Lessee in writing within thirty
(30) days from the date of the damage or destruction as to whether or not the
damage is Partial or Total.
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(c) "INSURED LOSS" shall mean damage or destruction to improvements on
the Premises other than Lessee Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of Applicable Requirements, and without
deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an
Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage
(but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds (except as to
the deductible which is Lessee's responsibility) as and when required to
complete said repairs. In the event, however, such shortage was due to the fact
that, by reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, the party responsible for making the repairs shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to: (i) make
such restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall
not be entitled to reimbursement of any funds contributed by Lessee to repair
any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE-UNINSURED LOSS. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) terminate this lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee shall
have the right within ten (10) days after receipt of the termination notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage without reimbursement from Lessor. Lessee shall provide Lessor with
said funds or satisfactory assurance thereof within thirty (30) days after
making such commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate sixty (60) days
following such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee except as provided in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months
of this Lease there is damage for which the cost to repair exceeds one (1)
month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date upon which
such option expires. If Lessee duly exercises such option during such period and
provides Lessor with funds (or adequate assurance thereof) to cover any shortage
in insurance proceeds, Lessor shall, at Lessor's commercially reasonable
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during such period, then this Lease shall
terminate on the date specified in the termination notice and Lessee's option
shall be extinguished.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) ABATEMENT. In the event of Premises Partial Damage or Premises
Total Destruction or a Hazardous Substance Condition for which Lessee is not
responsible under this Lease, the Rent payable by Lessee for the period required
for the repair, remediation or restoration of such damage shall be abated in
proportion to the degree to which Lessee's use of the Premises is impaired, but
not to exceed the proceeds received from the Rental Value insurance. All other
obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall
have no liability for any such damage, destruction, remediation, repair or
restoration except as provided herein.
(b) REMEDIES. If Lessor shall be obligated to repair or restore the
Premises and does not commence, in a substantial and meaningful way, such repair
or restoration within ninety (90) days after such obligation shall accrue,
Lessee may, at any time prior to the commencement of such repair or restoration,
give written notice to Lessor and to any Lenders of which Lessee has actual
notice, of Lessee's election to terminate this Lease on a date not less than
sixty (60) days following the giving of such notice. If Lessee gives such notice
and such repair or restoration is not commenced within thirty (30) days
thereafter, this Lease shall terminate as of the date specified in said notice.
If the repair or restoration is commenced within said thirty (30) days, this
Lease shall continue in full force and effect. "COMMENCE" shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant
to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by Lessee to
Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security
Deposit as has not been, or is not then required to be, used by Lessor.
9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of assessment; real estate, general,
special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises, Lessor's right to other income therefrom, and/or Lessor's business
of leasing, by any authority having the direct or indirect power to tax and
where the funds are generated with reference to the Building address and where
the proceeds so generated are to be applied by the city, county or other local
taxing authority of a jurisdiction within which the Premises are located. The
term "Real Property Taxes" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring during
the term of this Lease, including but not limited to, a change in the ownership
of the Premises. See Addendum Paragraph 56.
10.2
(a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to Paragraph
10.2(b), all such payments shall be made at least ten (10) days prior to any
delinquency date. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes shall cover any
period of time prior to or after the expiration or
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termination of this Lease, Lessee's share of such taxes shall be prorated to
cover only that portion of the tax bill applicable to the period that this Lease
is in effect, and Lessor shall reimburse Lessee for any overpayment. If Lessee
shall fail to pay any required Real Property Taxes, Lessor shall have the right
to pay the same, and Lessee shall reimburse Lessor therefor upon demand.
(b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on any
Rent payment, Lessor may, at Lessor's option, estimate the current Real Property
Taxes, and require that such taxes be paid in advance to Lessor by Lessee,
either: (i) in a lump sum amount equal to the installment due, at least twenty
(20) days prior to the applicable delinquency date, or (ii) monthly in advance
with the payment of the Base Rent. If Lessor elects to require payment monthly
in advance, the monthly payment shall be an amount equal to the amount of the
estimated installment of taxes divided by the number of months remaining before
the month in which said installment becomes delinquent. When the actual amount
of the applicable tax bill is known, the amount of such equal monthly advance
payments shall be adjusted as required to provide the funds needed to pay the
applicable taxes. If the amount collected by Lessor is insufficient to pay such
Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such
additional sums as are necessary to pay such obligations. All moneys paid to
Lessor under this Paragraph may be intermingled with other moneys of Lessor and
shall not bear interest. In the event of a Breach by Lessee in the performance
of its obligations under this Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may at the option of Lessor, be treated
as an additional Security Deposit.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency, all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.
(d) An assignment or subletting without consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable
Breach without the necessity of any notice and grace period. If Lessor elects to
treat such unapproved assignment or subletting as a noncurable Breach, Lessor
may: (i) terminate this Lease.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall
be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. See
Addendum Paragraph 57
(a) Regardless of Lessors consent, any assignment or subletting shall
not: (i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, or (iii) alter the primary liability of Lessee for
the payment of Rent or for the performance of any other obligations to be
performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's obligations from
any person other than Lessee pending approval or disapproval of an assignment.
Neither a delay in the approval or disapproval of such assignment nor the
acceptance of Rent or performance shall constitute a waiver or estoppel of
Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefore to Lessor, or any security held by
Lessor.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together as consideration for
Lessor's considering and processing said request. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may be
reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease be deemed to have
assumed and agreed to conform and comply with each and every term, covenant,
condition and obligation herein to be observed or performed by Lessee during the
term of said assignment or sublease, other than such obligations as are contrary
to or inconsistent with provisions of an assignment or sublease to which Lessor
has specifically consented to in writing.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest
in all Rent payable on any sublease, and Lessor may collect such Rent and apply
same toward Lessee's obligations under this Lease; provided, however, that until
a Breach shall occur in the performance of Lessee's obligations, Lessee may
collect said Rent. Lessor shall not, by reason of the foregoing or any
assignment of such sublease, nor by reason of the collection of Rent, be deemed
liable to the sublessee for any failure of Lessee to perform and comply with any
of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes
and directs any such sublessee, upon receipt of a written notice from Lessor
stating that a Breach exists in the performance of Lessee's obligations under
this Lease, to pay to Lessor all Rent due and to become due under the sublease.
Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to
Lessor without any obligation or right to inquire as to whether such Breach
exists, notwithstanding any claim from Lessee to the contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its option, require
sublessee to attorn to Lessor, in which event Lessor shall undertake the
obligations of the sublessor under such sublease from the time of the exercise
of said option to the expiration of such sublease; provided, however, Lessor
shall not be liable for any prepaid rents or security deposit paid by such
sublessee to such sublessor or for any prior Defaults or Breaches of such
sublessor.
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(c) Any matter requiring the consent of the sublessor under a sublease
shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to
comply with or perform any of the terms, covenants, conditions or rules under
this Lease. A "BREACH" is defined as the occurrence of one or more of the
following Defaults, and the failure of Lessee to cure such Default within any
applicable grace period:
(a) The abandonment of the Premises; or the vacating of the Premises
without providing a commercially reasonable level of security, or where the
coverage of the property insurance described in Paragraph 8.3 is jeopardized as
a result thereof, or without providing reasonable assurances to minimize
potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any other
monetary payment required to be made by Lessee hereunder, whether to Lessor or
to a third party, when due, to provide reasonable evidence of insurance or
surety bond, or to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) business days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written evidence
of compliance with Applicable Requirements, (ii) the service contracts, (iii)
the rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42 (easements),
or (viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making of
any general arrangement or assignment for the benefit of creditors; (ii)
becoming a "DEBTOR" as defined in 11 U.S.C. /s/101 or any successor statute
thereto (unless, in the case of a petition filed against Lessee, the same is
dismissed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.
(f) The discovery that any financial statement of Lessee or of any
Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory basis, and
Lessee's failure, within sixty (60) days following written notice of any such
event, to provide written alternative assurance or security, which, when coupled
with the then existing resources of Lessee, equals or exceeds the combined
financial resources of Lessee and the Guarantors that existed at the time of
execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties or
obligations, within ten (10) days after written notice (or in case of an
emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession to the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive Lessor's right
to recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable
therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession and recover
the Rent as it becomes due, in which event Lessee may sublet or assign, subject
only to reasonable limitations. Acts of maintenance, efforts to relet, and/or
the appointment of a receiver to protect the Lessor's interests, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under the laws
or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or other
charges, or for the giving or paying by Lessor to or for Lessee of any cash or
other bonus, inducement or consideration for Lessee's entering into this Lease,
all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS,"
shall be deemed conditioned upon Lessee's full and faithful performance of all
of the terms, covenants and conditions of this Lease. Upon Breach of this Lease
by Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other charge,
bonus, inducement or consideration theretofore abated, given or paid by Lessor
under such an Inducement Provision shall be immediately due and payable by
Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee.
The acceptance by Lessor of rent or the cure of the Breach which initiated the
operation of this paragraph shall not
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be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
of Rent will cause Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not he received by Lessor within five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to ten percent (10%) of each such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such late
payment. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 INTEREST. Any monetary payment due Lessor hereunder, other than late
charges, not received by Lessor within thirty (30) days following the date on
which it was due, shall bear interest from the thirty-first (31st) day after it
was due. The interest ("INTEREST") charged shall be equal to the prime rate
charged by the largest state chartered bank in the state in which the Premises
are located plus 4%, but shall not exceed the maximum rate allowed by law.
Interest is payable in addition to the potential late charge provided for in
Paragraph 13.4.
13.6 BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and any Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are reasonably
required for its performance, then Lessor shall not be in breach if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that
neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of one month's Base
Rent or the Security Deposit, and to pay an excess of such expense under
protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall
document the cost of said cure and supply said documentation to Lessor.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "CONDEMNATION"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building, or more than
twenty-five percent (25%) of the land area not occupied by any building, is
taken by Condemnation, Lessee may, at Lessee's option, to be exercised in
writing within ten (10) days after Lessor shall have given Lessee written notice
of such taking (or in the absence of such notice, within ten (10) days after the
condemning authority shall have taken possession) terminate this Lease as of the
date the condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease shall remain
in full force and effect as to the portion of the Premises remaining, except
that the Base Rent shall be reduced in proportion to the reduction in utility of
the Premises caused by such Condemnation. Condemnation awards and/or payments
shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold, the value of the part
taken, or for severance damages; provided, however, that Lessee shall be
entitled to any compensation for Lessee's relocation expenses, loss of business
goodwill and/or Trade Fixtures, without regard to whether or not this Lease is
terminated pursuant to the provisions of this Paragraph. All Alterations and
Utility Installations made to the Premises by Lessee, for purposes of
Condemnation only, shall be considered the property of the Lessee and Lessee
shall be entitled to any and all compensation which is payable therefor. In the
event that this Lease is not terminated by reason of the Condemnation, Lessor
shall repair any damage to the Premises caused by such Condemnation.
15. BROKERS' FEE.
15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assumed Lessor's obligation
hereunder. Each Broker shall be a third party beneficiary of the provisions of
Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts
due as and for commissions pertaining to this Lease when due, then such amounts
shall accrue Interest. In addition, if Lessor fails to pay any amounts to
Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and
Lessee of such failure and if Lessor fails to pay such amounts within ten (10)
days after said notice, Lessee shall pay said monies to its Broker and offset
such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a
third party beneficiary of any commission agreement entered into by and/or
between Lessor and Lessor's Broker.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee and
Lessor each represent and warrant to the other that it has had no dealings with
any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.
16. TENANCY STATEMENT/ESTOPPEL CERTIFICATE.
16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days alter
written notice from the other party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party an estoppel certificate in
writing, in form similar to the then most current "TENANCY STATEMENT" form
published by the American Industrial Real Estate Association, plus such
additional information, confirmation and/or statements as may be reasonably
requested by the Requesting Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, or any
part thereof, Lessee and all Guarantors shall deliver to any potential lender or
purchaser designated by Lessor such financial statements as may be reasonably
required by such lender or purchaser, including but not limited to Lessee's
financial statements for the past three (3) years. All such financial statements
shall be received by Lessor and such lender or purchaser in confidence and shall
be used only for the purposes herein set forth.
17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title of interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, the original Lessor under this Lease, and
all subsequent holders of the Lessors interest in this Lease shall remain liable
and responsible with regard to the potential duties and liabilities of Lessor
pertaining to Hazardous Substances as outlined in Paragraph 6 above.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
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19. DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. LIMITATION ON LIABILITY. Except with respect to Lessor's fraud, gross
negligence or willful misconduct, the obligations of Lessor under this Lease
shall not constitute personal obligations of Lessor, the individual partners of
Lessor or its or their individual partners, directors, officers or shareholders,
and Lessee shall look to the Premises, and to no other assets of Lessor, for the
satisfaction of any liability of Lessor with respect to this Lease, and shall
not seek recourse against the individual partners of Lessor, or its or their
individual partners, directors, officers or shareholders, or any of their
personal as sets for such satisfaction.
21. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All policies required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by courier) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantee next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the Postal Service or courier. Notices transmitted by
facsimile transmission or similar means shall be deemed delivered upon
telephone confirmation of receipt, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday, Sunday or legal holiday,
it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by
Lessee may be accepted by Lessor on account of moneys or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee. See
Addendum Paragraph 58
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this
Lease to be observed or performed by Lessee are both covenants and conditions.
In construing this Lease, all headings and titles are for the convenience of the
parties only and shall not be considered a part of this Lease. Whenever required
by the context, the singular shall include the plural and vice versa. This Lease
shall not be construed as if prepared by one of the parties, but rather
according to its fair meaning as a whole, as if both parties had prepared it.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices shall have no liability or
obligation to perform any of the obligations of Lessor under this Lease. Any
Lender may elect to have this Lease and/or any Option granted hereby superior to
the lien of its Security Device by giving written notice thereof to Lessee, this
Lease and such Options shall be deemed prior to such Security Device,
notwithstanding the relative dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership; (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within sixty (60) days after the execution of this Lease,
Lessor shall use its commercially reasonable efforts to obtain a Non-
Disturbance Agreement from the holder of any pre-existing Security Device which
is secured by the Premises. In the event that Lessor is unable to provide the
Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at
Lessee's option, directly contact Lessor's lender and attempt to negotiate for
the execution and delivery of a Non-Disturbance Agreement.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or
Initials RS LM
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PAGE 10
<PAGE>
judgment. The term, "PREVAILING PARTY" shall include, without limitation, a
Party or Broker who substantially obtains or defeats the relief sought, as the
case may be, whether by compromise, settlement, judgment, or the abandonment by
the other Party or Broker of its claim or defense. The attorneys' fees award
shall not be computed in accordance with any court fee schedule, but shall be
such as to fully reimburse all attorneys' fees reasonably incurred. In addition,
Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced in connection
with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises as Lessor may deem necessary.
All such activities shall be without abatement of rent or liability to Lessee.
Lessor may at any time place on the Premises any ordinary "FOR SALE" signs and
Lessor may during the last six (6) months of the term hereof place on the
Premises any ordinary "FOR LEASE" signs. Lessee may at any time place on or
about the Premises any ordinary "FOR SUBLEASE" sign.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction
upon the Premises without Lessor's prior written consent. Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether to
permit an auction.
34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place any
sign upon the Premises without Lessor's prior written consent. All signs must
comply with all Applicable Requirements. See Addendum Paragraph 59
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs
and expenses (including but not limited to architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent, including but not limited to consents
to an assignment, a subletting or the presence or use of a Hazardous Substance,
shall be paid by Lessee upon receipt of an invoice and supporting documentation
therefor. Lessor's consent to any act, assignment or subletting shall not
constitute an acknowledgment that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent. The failure to specify herein any particular
condition to Lessor's consent shall not preclude the imposition by Lessor at
the time of consent of such further or other conditions as are then reasonable
with reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within ten (10) business days following such request.
37. GUARANTOR.
37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty in
the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.
37.2 DEFAULT. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, (b) current financial statements, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.
39. OPTIONS. See Addendum Paragraph 60
39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the term of or
renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to
extend or renew this Lease, a later Option cannot be exercised unless the prior
Options have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option: (i) during the
period commencing with the giving of any notice of Default and continuing until
said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee), (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given three (3) or more notices of Default, whether or not the Defaults are
cured, during the twelve (12) month period immediately preceding the exercise of
the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or effect,
notwithstanding Lessee's due and timely exercise of the Option, if, after such
exercise and prior to the commencement of the extended term, (ii) Lessor gives
to Lessee three (3) or more notices of separate Default during any twelve (12)
month period, whether or not the Defaults are cured, or (iii) if Lessee commits
a Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including the care and cleanliness of the
grounds and including the parking, loading and unloading of vehicles, and that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay.
44. AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each party
shall, within thirty (30) days after request, deliver to the other party
satisfactory evidence of such authority.
Page 11 Initials RS LM
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<PAGE>
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease [ ] IS [x] IS NOT attached to this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
ATTENTION; NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
- ---------
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE
PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE
PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL
INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY
OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
- -------
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
<TABLE>
<CAPTION>
<S> <C>
Executed at: Executed at:
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on: on:
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By LESSOR: By LESSEE:
KLEIN-MILLER INVESTMENT CO., JAVELIN SYSTEMS, INC.
- ------------------------------------------------------ ----------------------------------------------------------
a general partnership a Delaware corporation
- ------------------------------------------------------ ----------------------------------------------------------
By: /s/ LEO MILLER By: /s/ RICHARD STACK
-------------------------------------------------- ------------------------------------------------------
Name Printed: Leo Miller, Trustee Name Printed: Richard Stack
--------------------------------------- --------------------------------------------
Title: General Partner Title: President
--------------------------------------- ---------------------------------------------------
By: By:
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Name Printed: Leo Miller, Trustee Name Printed: Richard Stack
--------------------------------------- --------------------------------------------
Title: General Partner Title: President
--------------------------------------- ---------------------------------------------------
By: By:
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Name Printed: Name Printed:
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Title: Title:
------------------------------------------------ ---------------------------------------------------
Address: Address:
---------------------------------------------- --------------------------------------------------
---------------------------------------------- --------------------------------------------------
Telephone: ( ) Telephone: ( )
------------------------------------ --------------------------------------
Facsimile: ( ) Facsimile: ( )
------------------------------------ --------------------------------------
Federal ID No. Federal ID No.
------------------------------------ --------------------------------------
BROKER: BROKER:
- ------------------------------------------------------ ----------------------------------------------------------
Executed at: Executed at:
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on: on:
-------------------------------------------------- ------------------------------------------------------
By: By:
--------------------------------------------------- ------------------------------------------------------
Name Printed: Name Printed:
----------------------------------------- --------------------------------------------
Title: Title:
------------------------------------------------ ---------------------------------------------------
Address: Address:
---------------------------------------------- --------------------------------------------------
---------------------------------------------- --------------------------------------------------
Telephone: ( ) Telephone: ( )
------------------------------------ --------------------------------------
Facsimile: ( ) Facsimile: ( )
------------------------------------ --------------------------------------
Federal ID No. Federal ID No.
------------------------------------ --------------------------------------
</TABLE>
NOTE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So.
Flower Street, Suite 600, Los Angeles, CA 90017. (213) 687-8777. Fax No.
(213) 687-8616
PAGE 12
<PAGE>
ADDENDUM
Addendum to Standard Industrial/Commercial Single-Tenant Lease-Net by and
between KLEIN-MILLER INVESTMENT CO., a general partnership ("Lessor") and
JAVELIN SYSTEMS, INC., a Delaware corporation ("Lessee") dated, for reference
purposes only, May 5, 1997 for the property located at 1881 Langley Avenue,
Irvine, California 92714 (the "Premises"). The promises, covenants, agreements
and declarations made and set forth in this Addendum are intended to and shall
have the same force and effect as if set forth at length in the body of the
Lease. The terms herein, if defined in the Lease, shall have the same meaning as
set forth in the Lease. The parties intend and agree that the provisions of this
Addendum shall supersede any inconsistent or conflicting provisions of the
Lease, and are as follows:
50. MODIFICATION OF BASE RENT:
The Base Rent set forth in Paragraph 1.5 of the Lease shall be increased as
follows:
A. Commencing July 1, 1998, the Base Rent shall be $8,822.16 per month;
B. Commencing July 1, 1999, the Base Rent shall be $9,086.82 per month;
C. Commencing July 1, 2000, the Base Rent shall be $9,359.42; and,
D. Commencing July 1, 2001, the Base Rent shall be $9,640.20.
51. PARTIAL CREDIT OF SECURITY DEPOSIT:
Provided that Lessee has not previously been in Default under this Lease,
Lessor shall credit one-half of the initial amount of Security Deposit it holds
towards the Basic Rent due from Lessee for the month of July, 1998 and Lessee
shall only deliver to Lessor the additional sum of $256.96 as the balance of
rent due for July, 1998. Thereafter, Lessee shall only be required to maintain
on deposit with Lessor a Security Deposit equivalent to one month's Base Rent.
52. CONDITION OF PREMISES:
Except as otherwise set forth in Paragraphs 2.2, 2.3 and 61 of this Lease,
the Premises are delivered to Lessee in an "as is" condition. Notwithstanding
anything to the contrary contained in this Lease, it is expressly understood and
agreed to by Lessee that any change, modification, repair or alteration to the
Premises which is required under any Applicable Requirements, whether currently
in effect or hereafter coming into existence, triggered or arising as a result
of Lessee undertaking any Alterations, installation of Trade Fixtures or Utility
Installations shall be made by Lessee, at Lessee's sole cost and expense.
53. MAINTENANCE:
The Service Contracts required to be maintained by Lessee pursuant to
paragraph 7.2(b) for the heating, air conditioning and ventilation equipment
shall provide for monthly service of the equipment. It shall be Lessee's
obligation to insure that such monthly service occurs. Subject to Lessee's
compliance with its service and maintenance obligations as set forth in this
Lease, and notwithstanding and modifying the provisions of paragraph 2.2 and 7.1
as they relate to the HVAC equipment, Lessor shall reimburse Lessee in the
amount that any necessary repair expense payable by Lessee to a HVAC unit costs
exceeds Four Hundred Dollars ($400.00) per incident. Except as hereinafter
provided, Lessee shall be obligated to perform all such repairs. Lessor shall
reimburse Lessee within ten (10) business days of receipt from Lessee of a copy
of the invoice therefor and proof of payment. Notwithstanding the forgoing,
absent an emergence, Lessee shall not undertake any repair of a HVAC unit if the
expense is going to exceed Four Hundred Dollars ($400.00) without first giving
Lessor written notice thereof, including a copy of all written reports and
estimates concerning said repair. Lessor shall have ten (10) business days
after receipt of this written notice to investigate the nature and cost of
<PAGE>
repair. Within said time period, Lessor may notify Lessee that it will cause the
repair to be completed and Lessee shall reimburse Lessor the lesser of Four
Hundred Dollars ($400.00) or the actual cost to Lessor of said repair. Lessee
shall undertake the repair or maintenance in the event Lessor fails to give
Lessee said written notice. Nothing in the forgoing is intended to modify the
provisions of paragraph 7.1(c) of the Lease. The forgoing provisions concerning
the HVAC units shall not apply to the HVAC unit designated as Unit 6 until it is
replaced, if it is replaced. Subject to the servicing, repairs and the
maintenance which is covered under the maintenance contract required to be
obtained by Lessee, Lessor, at its sole cost and expense, shall reimburse Lessee
for all necessary maintenance or repairs of Unit 6. The provisions regarding
reimbursement and the performance of repairs, including, but not limited to,
written notice to Lessor by Lessee prior to undertaking a repair absent an
emergency, as set forth above for repairs above Four Hundred Dollars ($400.00)
shall also apply to the repairs to Unit 6 regardless of cost. If reasonably
necessary, or if it desires, Lessor, at its sole cost and expense shall replace
Unit 6. In the event Unit 6 is replaced, it shall be subject to all other
provisions of this Lease concerning HVAC units except the initial replacement
cost shall not be considered a replacement of a Basic Element.
Notwithstanding any provision to the contrary contained in this Lease, but
subject to the provisions concerning Capital Expenditures, and except for
damage, modifications, maintenance or repairs relating to, arising out of, or
caused by any negligent or intentional act or omission of Lessee, its agents,
employees, licensee, guests or contractors, in which event Lessee, at Lessee's
sole cost and expense shall undertake the maintenance, repair the damage or make
the modifications or repairs, Lessor, at its sole cost and expense, shall keep
in good order and repair the structural components of the Premises, including
the foundations, and the structural condition of the exterior walls, interior
bearing walls and exterior roof. The obligations of Lessor hereinabove set forth
are as to the structural integrity of the Premises only and do not include
cosmetic or non-structural damage items.
54. LESSEE'S COOPERATION:
Lessee agrees to cooperate with Lessor to facilitate Lessor's compliance
with its obligations under paragraphs 2.2, 2.3, 7.1(c), 9 and 14 of this Lease,
including by way of example, removal by Lessee of all items of personal
property, fixtures and trade fixtures from those portions of the Premises
designated by Lessor. If Lessee fails to remove such items from those portions
of the Premises designated by Lessor within ten (10) calendar days after written
notice is delivered to Lessee to do so, Lessor shall have the right to enter
upon the Premises to effect such removal, at Lessee's expense, and Lessor shall
not be liable to Lessee as a result of such removal or the manner of effecting
the same, except as to actual damage to said items caused by the gross
negligence or intentional misconduct of Lessor, its agents, employees or
contractors. In connection therewith, Lessor shall make all repairs and/or
replacements in a manner which, to the extent reasonable and practicable, does
not interfere with the conduct of Lessee's business. Lessor shall be able to
undertake such repairs during normal business hours. The monthly rental shall be
abated during the period of such modification or reconstruction to the same
extent as the portion of the floor area bears to the Premises as a whole. Except
for the abatement of rent set forth herein, Lessor shall not be liable in any
manner whatsoever to Lessee for damage, loss or injury resulting from the work
performed on the Premises by Lessor or Lessor's contractors provided that Lessor
uses due care to avoid damage to Lessee's personal property or bodily injury. In
no event shall Lessor be liable for Lessee's loss of business or reduction of
income by reason of such modification or reconstruction by Lessor.
55. INSURANCE AMPLIFICATION:
Paragraph 8.2 of the Lease is modified by adding the following: Lessor may
require from time to time that Lessee increase the limits of coverage provided
hereunder to an amount which is consistent either with the increased risks
attendant to the perils covered by such policy or increased levels of coverage
generally required by Lessors.
2.
<PAGE>
56. REAL PROPERTY TAXES DOES NOT INCLUDE A PORTION OF INCREASE DUE TO CHANGE IN
OWNERSHIP:
The term Real Property Taxes as defined in paragraph 10.2 of the Lease
shall not include fifty percent (50%) of any increase in any tax, levy,
assessment or charge imposed by reason of a "Change in ownership" as defined in
Part 0.5, Chapter 2 of the Revenue and Taxation Code of the State of California.
-------------------------
57. ASSIGNMENT OR SUBLETTING:
A. Paragraph 12.1(c) is replaced with the following: "Any transfer or
assignment of this Lease to (i) a parent, subsidiary or affiliate of Lessee;
(ii) to any entity with which Lessee may merge or consolidate, or (iii) to any
entity acquiring all or substantially all of the assets of Lessee shall be an
assignment requiring Lessor's consent. Notwithstanding the forgoing, in any such
event, Lessor may only withhold its consent if the assignee does not meet
Lessor's then current credit standards. Lessor agrees to be reasonable in
providing or withholding its consent and applying its credit standards, in such
circumstances. Lessor further agrees that it may not attempt to alter the terms
of this Lease in connection with providing its consent to any of the
aforementioned transfers or assignments.
B. The following sentence is added to paragraph 12.2(e). Lessee shall also
pay Lessor all costs incurred by Lessor, including a reasonable allocation for
its internal operational expenses, reasonable accountant's fees and reasonable
attorneys fees and costs, in connection with the request for consent to a
proposed assignment or sublease up to the total sum of Fifteen Hundred Dollars
($1,500.00).
C. The following paragraph is added as paragraph 12.2(g) to the Lease:
12.2(g) Any rental or other consideration agreed to by an assignee,
Sublessee, or transferee of Lessee's interest, whether or not Lessor has given
its consent, in excess of the rentals provided for in this Lease shall be for
the benefit of and shall be immediately paid to Lessor by Lessee and shall be
deemed additional rent due under this Lease. The determination of excess rent
shall be made based on a pro-rata allocation of the rents by approximate square
footage. The transfer or sale consideration paid to Lessee in connection with a
transaction described in paragraph 57(A) above shall not be considered in
calculating excess rents unless designated as rental payments, specifically
designated as payment for the assignment of the Lease or is reasonably
determined to be a disguised payment of additional rent.
58. HOLDING OVER:
Paragraph 26 of the Lease is modified as follows:
If Lessee holds over after the expiration or earlier termination of this
Lease without the written consent of Lessor, the same shall be a tenancy at will
terminable at any time, and Lessee shall be liable to Lessor for, and Lessee
shall indemnify, protect, defend and hold Lessor harmless from and against all
liabilities, losses, costs, expenses or claims suffered or incurred by such
holdover, including damages and costs related to any successor tenant of the
Premises to whom Lessor could not deliver possession of the Premises when
promised. All of the other terms and conditions of this Lease shall be
applicable during any holdover period, with or without the consent of Lessor,
except that Lessee shall pay to Lessor from time to time upon demand, as Base
Rent for the period of any holdover, an amount equal to one hundred fifty
percent (150%) of the then applicable Base Rent computed on a daily basis for
each day of the holdover period. No holding over by Lessee, whether with or
without consent of Lessor shall operate to extend this Lease. The preceding
provisions of the Paragraph 58 shall not be construed as Lessor's consent to any
holding over by Lessee.
59. SIGNS AND AWNINGS:
Paragraph 34 of the Lease is amplified as follows:
The placement of any sign, lettering, marquee or awning in, on or about the
Premises shall be at Lessee's sole cost and expense. Any
3.
<PAGE>
sign, lettering, marquee, awning or display approved by Lessor or allowed
herein without Lessor's approval shall only be installed upon the Lessee
obtaining any and all appropriate and necessary permits from the appropriate
governmental entity and/or agency and shall be otherwise in compliance with all
applicable government codes, ordinances, statutes, and regulations and shall be
subject to the provisions of Paragraph 7 of this Lease. Lessee shall remove,
repair or replace any awnings, marquees, signs, lettering, window shades or
draperies previously permitted by Lessor or allowed under this Lease without
permission whenever Lessor shall notify Lessee that such removal, repair or
replacement is advisable to promote a well-kept appearance upon the Premises.
Notwithstanding the forgoing, Lessor's right to require removal during the Lease
term of any of the items set forth in the forgoing sentence which installation
was pre-approved by Lessor shall be limited to those pre-approved items which
Lessee has failed to maintain and keep in good condition and repair. Nothing in
the forgoing is intended to limit the obligations of Lessee to remove said items
upon the expiration of the term of the Lease. Lessee shall indemnify Lessor and
hold Lessor harmless from any and all claims, losses, damages, liabilities,
costs and expenses, including reasonable attorney's fees, arising out of or
relating to any sign, awning, marquee or lettering.
60. OPTION TO EXTEND:
Subject to the provisions of paragraph 39 of the Lease, Lessor hereby
grants to Lessee one (1) Option to extend the Original Term for a period of
sixty (60) months ("Option Term") commencing on the expiration of the Original
Term. The Option to extend shall be on the same terms and conditions as the
Original Term with the exception of the monthly Base Rent which shall be
determined as set forth below, but which in no event shall be less than the Base
Rent payable by Lessee for the last month of the Original Term times one hundred
three percent (103%). The monthly Base Rent during the Option Term shall be
increased annually so that each year the monthly base rent shall be one hundred
three percent (103%) of the monthly Base Rent payable during the preceding year
of the Option Term. Lessee shall exercise its option by written notice delivered
to Lessor not earlier than February 1, 2001 nor later than August 1, 2001.
Lessee's failure to give its written notice of exercise of its option within the
time period set forth above shall terminate the option and it shall have no
force and effect. The Option set forth above may not be assigned by Lessee
separate and apart from an assignment of the Lease as a whole.
The initial monthly Base Rent payable during the Option Term shall be the
current fair market rental for comparable properties within the Irvine Business
Complex or the Base Rent payable for the last month of the Original Term of this
Lease times one hundred three percent (103%), whichever is greater. The
"current fair market rental" shall mean the applicable monthly Base Rent for
premises leased on triple net basis with terms similar to this Lease, including
a term of five (5) years, payable by tenants of comparable size and financial
strength taking into account all monetary concessions amortized over the Option
Term.
The current fair market rental shall be mutually determined by the parties.
If within thirty (30) days after Lessee gives written notice of its exercise of
its option as hereinabove set forth, the parties are unable to agree upon the
current fair market rental, said rental shall be determined by arbitration in
the following manner:
(a) Lessor and Lessee shall each appoint, within Fifteen (15) days
after the Thirty (30) day period, One (1) arbitrator who shall, by profession,
be a MAI real estate appraiser, and who shall have been active for at least
Five (5) years in the appraisal of commercial and industrial properties in the
area.
(b) The two arbitrators supplied shall agree upon and appoint, within
Fifteen (15) days of the date of the appointment of the last supplied
arbitrator, a third arbitrator who shall be similarly qualified.
(c) The Three (3) arbitrators shall reach a decision within thirty
(30) days of the appointment of the third arbitrator, and notify Lessor and
Lessee thereof.
4.
<PAGE>
(d) The decision of the majority of the three (3) arbitrators shall
be binding upon Lessor and Lessee. The failure of a majority of said arbitrators
to reach an agreement shall result in the fair market rental rate being
determined by averaging the appraisal of each arbitrator, ignoring for purposes
of such averaging any appraisal which is more than ten percent (10%) in excess
of or less than the middle appraisal.
(e) If either Lessor or Lessee fails to appoint an arbitrator within
the time period set forth in subparagraph (a), above, the arbitrator appointed
by one of them shall reach a decision, notify Lessor and Lessee thereof, and
such arbitrator's decision shall be binding upon Lessor and Lessee.
(f) If the two (2) arbitrators fail to agree upon and appoint a third
arbitrator, both arbitrators shall be dismissed and the matter to be decided
shall be forthwith submitted to arbitration under the provisions of the American
Arbitration Association.
(g) Except as set forth below, all costs of arbitration shall be paid
by Lessor and Lessee equally.
(h) Lessee shall have the lesser of thirty (30) days after the
determination of the current fair market rental or the period of time between
this determination and December 31, 2001, to notify Lessor in writing if it
continues to desire to exercise this Option and occupy the Premises under the
terms of this Option at the initial Base Rent as determined pursuant to this
paragraph 60. Lessee's failure to affirmatively notify Lessee in writing that
it continues to desire to exercise its Option at the initial Base Rent
determined pursuant to this paragraph 60 within the time period set forth above,
shall be conclusively deemed to be an election by Lessee not to exercise its
Option and its Option rights shall terminate and be of no force and effect. If
after its notice of exercise of its Option, Lessee notifies or is deemed to have
notified Lessor (as provided in this paragraph 60) that it is no longer
exercising its Option rights or if the Option rights terminate pursuant to any
provision of this Lease, all costs of arbitration shall be paid by Lessee.
(i) In the event that the initial Base Rent for the Option Term has
not be determined prior to December 31, 2001, Lessee shall have ten (10)
business days within which to notify Lessor in writing if it desires to
terminate its option. In the event that it does not so notify Lessor it shall
be conclusively presumed that it does not desire to terminate its option. In
the event its Option is not terminated pursuant to this subparagraph, Lessee
shall be conclusively deemed to have committed to exercising its option at the
Base Rent for the Option Term as determined hereunder and it shall have no
rights to terminate this option upon the determination of said Base Rent.
(j) If the initial Option Base Rent is not determined prior to the
commencement date of the Option Term and Lessee has elected not to terminate
this Option as provided above, Lessee shall pay Base Rent to Lessor in an amount
equal to the Base Rent payable by Lessee for the last month of the Original Term
of this Lease times one hundred three percent (103%) and within ten (10) days
after the determination of the initial Base Rent for the Option Term, Lessee
shall pay to Lessor any underpayment of Base Rent.
61. LESSOR'S IMPROVEMENTS:
Subject to Force Majeure, Lessor, at Lessor's cost and expense, shall
substantially complete the improvements set forth on Exhibit "B" ("Lessor
Improvements") prior to the Commencement Date. The Lessor Improvements shall be
deemed substantially completed even though there may be some minor "punch list"
type items, the completion, correction or repair of which will not materially
affect the use of the Premises by Lessee.
62. LESSEE'S IMPROVEMENTS:
Lessee shall have the right to install a dropped ceiling and air
conditioning in the warehouse area. Lessee shall also have the right to paint
an approximately 20' by 60' area with epoxy based non-toxic paint. Lessee shall
comply with all provisions of this Lease concern-
5.
<PAGE>
ing said improvements, including, but not limited to the provisions of paragraph
7.3. Lessor's consent to such improvements by the existence of this paragraph
shall not alleviate the obligation of Lessee to provide Lessor with detailed
plans as required under the provisions of paragraph 7.3. Lessor shall also
reasonably approve the location of the painted area. Lessee shall not be
required to remove the improvements set forth in this paragraph upon the
expiration or termination of this Lease. Upon receipt of copies of the paid
invoices for the painting referenced in this paragraph, Lessor shall reimburse
Lessee for the cost thereof up to Five Hundred Dollars ($500.00).
63. FORCE MAJEURE:
Except as otherwise specifically provided herein, in any case where either
party hereto is required to do any act, delays caused by or resulting from acts
of God, war, civil commotion, fire or other casualty, labor difficulties,
shortages of labor, materials or equipment, government regulations, or other
caused beyond such party's reasonable control shall not be counted in
determining the time during which work shall be completed, whether such time be
designated by a fixed date, a fixed time, or a "reasonable time".
64. SECTION/ARTICLE HEADINGS:
The Section/Article headings herein are inserted for convenience only and
form no part of this lease.
LESSEE: LESSOR:
Javelin Systems, Inc. Klein-Miller Investment Co.,
a Delaware corporation a general partnership
By: /s/ RICHARD STACK By: /s/ LEO MILLER
----------------- --------------
Richard Stack Leo Miller, Trustee
Its: President General Partner
6.
<PAGE>
EXHIBIT A
NOTICE TO OWNERS AND PROSPECTIVE TENANTS AND BUYERS OF
REAL PROPERTY REGARDING THE AMERICANS WITH DISABILITIES ACT
AND HAZARDOUS WASTE MATERIALS
Please be advised that an owner or tenant of real property may be subject
to the Americans With Disabilities Act (the ADA), a Federal law codified at 42
USC Section 12101 et seq. Among other requirements of the ADA that could apply
to your property, Title III of the ADA requires owners and tenants of "public
accommodations" to remove barriers to access by disabled persons and provide
auxiliary aids and services for hearing, vision or speech impaired persons by
January 26, 1992. The regulations under Title III of the ADA are codified at 28
CFR Part 36.
We recommend that you and your attorney review the ADA and the regulations,
and, if appropriate, your proposed lease or purchase agreement, to determine if
this law would apply to you, and the nature of the requirements. These are
legal issues. You are responsible for conducting your own independent
investigation of these issues.
Also, in any real estate transaction, it is recommended that you consult
with a professional, such as civil engineer, industrial hygienist or other
person with experience in evaluating the condition of the property, including
the possible presence of asbestos, hazardous materials and underground storage
tanks. CB Commercial cannot give you legal advice on these issues.
Please acknowledge your receipt of this notice by signing and dating it
below. Thank you.
LANDLORD
Received on 5/30 , 1997
-----------------------
Signature: /s/ LEO MILLER
-----------------------
Printed Name: LEO MILLER
---------------------
TENANT
Received on 5/29 , 1997
------------------------
Signature: /s/ RICHARD STACK
------------------------
Printed Name: Richard Stack
----------------------
<PAGE>
EXHIBIT B
LANDLORD RESPONSIBILITIES
Demolition
- ----------
Remove all carpet and rubber base.
Remove all VCT and vinyl flooring throughout.
Remove demountable partitions.
Remove abandoned wiring on walls.
Remove all shelves in warehouse.
Remove blackboard front wall.
Remove counters in front area mailroom.
Cleaning
- --------
Clean all air registers in office area prior to painting ceilings.
Clean all light lenses.
Asphalt
- -------
Asphalt patch, slurry and stripe
Fill in planters.
Concrete
- --------
Cut out and replace raised concrete at roll up Door - 2'6" x 8'
New curbs at both driveways and around small parking lot.
Steel
- -----
Steel trash enclosure
Foil Insulation
- ---------------
Warehouse area - reattach or new foil insulation.
Caulking
- --------
Caulk stitch joints on block wall.
Caulk concrete to storefront metal at entrance - approximately 20'.
Glass - Storefront
- ------------------
Replace broken glass and remove tint from entry glass.
Refurbish storefront metal and polish.
Reattach metal trim at all glass areas.
Install new tint on entry glass.
Replace right front entry door closer.
Check all storefront, reseal and align doors.
Toilet Partitions/Accessories
- -----------------------------
New partitions in large restrooms.
New accessories in large restrooms.
New accessories in small restrooms.
New FRP in large restrooms.
New FRP in small restrooms.
New paper towel dispenser at lunch sink.
Plumbing
- --------
Small restrooms - new faucets and toilet
Seats, and lavatories.
Large restrooms - new designs with
New lav, toilet & seat.
Rehab dishwasher.
Lunch room - new faucet.
Lunch room - new garbage disposal.
H.V.A.C
- -------
Do a maintenance service on all H.V.A.C. units.
New lunch room exhaust fan.
Small restrooms - new exhaust fans.
Large restrooms - new exhaust fans.
Electrical
- ----------
Replace yellow light lens covers or broken lenses.
Relamp all light to the same cool, White lamps.
Remove all power poles.
Replace burned out or missing lamps.
New light fixture in toilets.
Flooring
- --------
New sheet vinyl in all bathrooms.
New sheet vinyl or VCT in lunch room.
Replace carpeting.
Clean warehouse floor and paint, if necessary.
<PAGE>
EXHIBIT B
LANDLORD RESPONSIBILITIES
(continued)
Drywall Repair/Patch
- --------------------
Patch all holes and texture to match.
T-Bar Ceiling
- ---------------
Replace damaged ceiling tile throughout to
provide a more uniform appearance.
Painting
- --------
Paint all walls including warehouse.
Paint office and T-bar ceilings throughout.
Install trim on cabinet face on each side of dishwasher.
Paint base of steel yellow - was previously covered by shrubs.
<PAGE>
EXHIBIT 10.9
STANDARD SUBLEASE
American Industrial Real Estate Association
[LOGO of AMERICAN INDUSTRIAL]
1. PARTIES. This Sublease, dated, for reference purposes only, September 9th,
1997, is made by and between Javelin Systems, Inc., a Delaware Corporation
(herein called "Sublessor") and D. Howard Lewis & William R. Miller (herein
called "Sublessee").
2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain real property situated in the County
of Orange, State of California, commonly known as 2882-C Walnut Avenue, Tustin
and described as an approximately 3,949 square foot planned unit development
unit located in the Park Irvine Business Center. Said real property, including
the land and all improvements thereon, is hereinafter called the "Premises".
3. TERM.
3.1 TERM. The term of this Sublease shall be for Thirteen months commencing
on October 1, 1997 and ending on October 31, 1998 unless sooner terminated
pursuant to any provision hereof.
3.2 DELAY IN COMMENCEMENT. Notwithstanding said commencement date, if for
any reason Sublessor cannot deliver possession of the Premises to Sublessee on
said date, Sublessor shall not be subject to any liability therefore, nor shall
such failure affect the validity of this Lease or the obligations of Sublessee
hereunder or extend the term hereof, but in such case Sublessee shall not be
obligated to pay rent until possession of the Premises is tendered to Sublessee;
provided, however, that if Sublessor shall not have delivered possession of the
Premises within sixty (60) days from said commencement date. Sublessee may, at
Sublessee's option, by notice in writing to Sublessor within ten (10) days
thereafter, cancel this Sublease, in which event the parties shall be discharged
from all obligations thereunder. If Sublessee occupies the Premises prior to
said commencement date, such occupancy shall be subject to all provisions
hereof, such occupancy shall not advance the termination date and Sublessee
shall pay rent for such period at the initial monthly rates set forth below.
4. RENT. Sublessee shall pay to Sublessor as rent for the Premises equal
monthly payments of $2,965.00, in advance, on the 1st day of each month of the
term hereof. Sublessee shall pay Sublessor upon the execution hereof $2,965.00
as rent for October 1, 1997 through October 31, 1997. Rent for any period during
the term hereof which is for less than one month shall be a prorata portion of
the monthly installment. Rent shall be payable in lawful money of the United
States to Sublessor at the address stated herein or to such other persons or at
such other places as Sublessor may designate in writing.
5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution
hereof $3,000.00 as security for Sublessee's faithful performance of Sublessee's
obligations hereunder. If Sublessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Sublease,
Sublessor may use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default or for the payment of any other
sum to which Sublessor may become obligated by reason of Sublessee's default, or
to compensate Sublessor for any loss or damage which Sublessor may suffer
thereby. If Sublessor so uses or applies all or any portion of said deposit,
Sublessee shall within ten (10) days after written demand therefore deposit cash
with Sublessor in an amount sufficient to restore said deposit to the full
amount hereinabove stated and Sublessee's failure to do so shall be a material
breach of this Sublease. Sublessor shall not be required to keep said deposit
separate from its general accounts. If Sublessee performs all of Sublessee's
obligations hereunder, said deposit, or so much thereof as has not theretofore
been applied by Sublessor, shall be returned, without payment of interest or
other increment for its use to Sublessee (or at Sublessor's option, to the last
assignee, if any, of Sublessee's interest hereunder) at the expiration of the
term hereof, and after Sublessee has vacated the Premises. No trust relationship
is created herein between Sublessor and Sublessee with respect to said Security
Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for Design, assembly
and sales of computer components and for no other purpose.
6.2 COMPLIANCE WITH LAW.
(a) Sublessor warrants to Sublessee that the Premises, in its existing
state, but without regard to the use for which Sublessee will use the Premises,
does not violate any applicable building code regulation or ordinance at the
time that this Sublease is executed. In the event that it is determined that
this warranty has been violated, then it shall be the obligation of the
Sublessor, after written notice from Sublessee, to promptly, at Sublessor's sole
cost and expense, rectify any such violation. In the event that Sublessee does
not give to Sublessor written notice of the violation of this warranty within
1 year from the commencement of the term of this Sublease, it shall be
conclusively deemed that such violation did not exist and the correction of the
same shall be the obligation of the Sublessee.
(b) Except as provided in paragraph 6.2(a), Sublessee shall, at
Sublessee's expense, comply promptly with all applicable statutes, ordinances,
rules, regulations, orders, restrictions of record, and requirements in effect
during the term or any part of the term hereof regulating the use by Sublessee
of the Premises. Sublessee shall not use or permit the use of the Premises in
any manner that will tend to create waste or a nuisance or, if there shall be
more than one tenant of the building containing the Premises, which shall tend
to disturb such other tenants.
6.3 CONDITION OF PREMISES. Except as provided in paragraph 6.2(a) Sublessee
hereby accepts the Premises in their condition existing as of the date of the
execution hereof, subject to all applicable zoning, municipal, county and state
laws, ordinances, and regulations governing and regulating the use of the
Premises, and accepts this Sublease subject thereto and to all matters disclosed
thereby and by any exhibits attached hereto. Sublessee acknowledges that neither
Sublessor nor Sublessor's agents have made any representation or warranty as to
the suitability of the Premises for the conduct of Sublessee's business.
7. MASTER LEASE
7.1 Sublessor is the lessee of the Premises by virtue of a lease, hereinafter
referred to as the "Master Lease", a copy of which is attached hereto marked
Exhibit 1, dated 10-19, 1995 wherein Robert P. Peebles Trust, dated 4-11-79 is
the lessor, hereinafter referred to as the "Master Lessor".
7.2 This Sublease is and shall be at all times subject and subordinate to the
Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor and
Sublessee to each other under this Sublease shall be the terms and conditions of
the Master Lease except for those provisions of the Master Lease which are
directly contradicted by this Sublease in which event the terms of this Sublease
document shall control over the Master Lease. Therefore, for the purposes of
this Sublease, wherever in the Master Lease the word "Lessor" is used it shall
be deemed to mean the Sublessor herein and wherever in the Master Lease the word
"Lessee" is used it shall be deemed to mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods subsequent for
obligations which have arisen prior to the termination of this Sublease.
Sublessee does hereby expressly assume and agree to perform and comply with, for
the benefit of Sublessor and Master Lessor, each and every obligation of
Sublessor under the Master Lease except for the following paragraphs which are
excluded therefrom: none.
<PAGE>
7.5 The obligations that Sublessee has assumed under paragraph 7.4 hereof
are hereinafter referred to as the "Sublessee's Assumed Obligations". The
obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
7.6 Sublease shall hold Sublessor free and harmless of and from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the entire term of
this Sublease, subject, however, to any earlier termination of the Master Lease
without the fault of the Sublessor, and to comply with or perform Sublessor's
Remaining Obligations and to hold Sublessee free and harmless of and from all
liability, judgments, costs, damages, claims or demands arising out of
Sublessor's failure to comply with or perform Sublessor's Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in full force
and effect and that no default exists on the part of any party to the Master
Lease.
8. ASSIGNMENT OF SUBLEASE AND DEFAULT.
8.1 Sublessor hereby assigns and transfers to Master Lessor the Sublessor's
interest in this Sublease and all rentals and income arising therefrom, subject
however to terms of Paragraph 8.2 hereof.
8.2 Master Lessor, by executing this document, agrees the until a default
shall occur in the performance of Sublessor's Obligations under the Master
Lease, that Sublessor may receive, collect and enjoy the rents accruing under
this Sublease. However, if Sublessor shall default in the performance of its
obligations to Master Lessor then Master Lessor may, at its option, receive and
collect, directly from Sublessee, all rent owing and to be owed under this
Sublease. Master Lessor shall not, by reason of this assignment of the Sublease
nor by reason of the collection of the rents from the Sublessee, be deemed
liable to Sublessee for any failure of the Sublessor to perform and comply with
Sublessor's Remaining Obligations.
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee, upon
receipt of any written notice from the Master Lessor stating that a default
exists in the performance of Sublessor's obligations under the Master Lease, to
pay to Master Lessor the rents due and to become due under the Sublease.
Sublessor agrees that Sublessee shall have the right to rely upon any such
statement and request form Master Lessor, and that Sublessee shall pay such
rents to Master Lessor without any obligation or right to inquire as to whether
such default exists and notwithstanding any notice from or claim from Sublessor
to the contrary and Sublessor shall have no right or claim against Sublessee for
any such rents so paid but Sublessee.
8.4 No changes or modifications shall be made to this Sublease without the
consent of Master Lessor.
9. CONSENT OF MASTER LESSOR.
9.1 In the event that the Master Lease requires that Sublessor obtain the
consent of Master Lessor to any subletting by Sublessor then, this Sublease
shall not be effective unless, within 10 days of the date hereof, Master Lessor
signs this Sublease thereby giving its consent to this Subletting.
9.2 In the event that the obligations of the Sublessor under the Master Lease
have been guaranteed by third parties then this Sublease, nor the Master
Lessor's consent, shall not be effective unless, within 10 days of the date
hereof, said guarantors sign this Sublease thereby giving guarantors consent to
this Sublease and the terms thereof.
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent will not release Sublessor of its obligations or alter
the primary liability of Sublessor to pay the rent and perform and comply with
all of the obligations of Sublessor to be performed under the Master Lease.
(b) the acceptance of rent by Master Lessor from Sublessee or any one
else liable under the Master Lease shall not be deemed a waiver by Master
Lessor of any provisions of the Master Lease.
(c) The consent to this Sublease shall not constitute a consent to any
subsequent subletting or assignment.
(d) In the event of any default of Sublessor under the Master Lease,
Master Lessor may proceed directly against Sublessor, any guarantors or any one
else liable under the Master Lease or this Sublease without first exhausting
Master Lessor's remedies against any other person on entity liable thereon to
Master Lessor.
(e) Master Lessor may consent to subsequent sublettings and assignments
of the Master Lease or this Sublease or any amendments or modifications thereto
without notifying Sublessor nor any one else liable under the Master Lease and
without obtaining their consent and such action shall not relieve such persons
from liability.
(f) In the event that Sublessor shall default in its obligations under
the Master Lease, then Master Lessor, at its option and without being obligated
to do so, may require Sublessee to attorn to Master Lessor in which event
Master Lessor shall undertake the obligations of Sublessor under the Sublease
from the time of the exercise of said option to termination of this Sublease but
Master Lessor shall not be liable for any prepaid rents nor any security deposit
paid by Sublessee, nor shall Master Lessor be liable for any other defaults of
the Sublessor under the Sublease.
9.4 The signatures of the Master Lessor and any Guarantors of Sublessor at
the end of this document shall constitute their consent to the terms of this
Sublease.
9.5 Master Lessor acknowledges that, to the best of Master Lessor's
knowledge, no default presently exists under the Master Lease of obligations to
be performed by Sublessor and that the Master Lease is in full force and effect.
9.6 In the event the Sublessor defaults under its obligations to be performed
under the Master Lease by Sublessor, Master Lessor agrees to deliver to
Sublessee a copy of any such notice of default. Sublessee shall have the right
to cure any default of Sublessor described in any notice of default within ten
days after service of such notice to default on Sublessee. If such default is
cured by Sublessee then Sublessee shall have the right of reimbursement and
offset from and against Sublessor.
10. BROKERS FEE.
10.1 Upon execution hereof by all parties, Sublessor shall pay to The Seeley
Company, a licensed real estate broker, (herein called "Broker"), a fee as set
forth in a separate agreement between Sublessor and Broker, or in the event
there is no separate agreement between Sublessor and Broker, the sum of
$1,156.35 for brokerage services rendered by Broker to Sublessor in this
transaction.
10.2 Sublessor agrees that if Sublessee exercises any option or right of
first refusal granted by Sublessor herein, or any option or right substantially
similar thereto, either to extend the term of this Sublease, to renew this
Sublease, to purchase the Premises, or to lease or purchase adjacent property
which Sublessor may own or in which Sublessor has an interest, or if Broker is
the procuring cause of any lease, sublease, or sale pertaining to the Premises
or any adjacent property which Sublessor may own or in which Sublessor has an
interest, then as to any of said transactions Sublessor shall pay to Broker a
fee, in cash, in accordance with the schedule of Broker in effect at the time of
the execution of this Sublease. Notwithstanding the foregoing, Sublessor's
obligation under this Paragraph 10.2 is limited to a transaction in which
Sublessor is acting as a sublessor, lessor or seller.
10.3 Master Lessor agrees, by its consent to this Sublease, that if
Sublessee shall exercise any option or right of first refusal granted to
Sublessee by Master Lessor in connection with this Sublease, or any option or
right substantially similar thereto, either to extend the Master Lease, to renew
the Master Lease, to purchase the Premises or any part thereof, or to lease or
purchase adjacent property which Master Lessor may own or in which Master Lessor
has an interest, or if Broker is the procuring cause of any other lease or sale
entered into between Sublessee and Master Lessor pertaining to the Premises, any
part thereof, or any adjacent property which Master Lessor owns or in which it
has an interest, then as to any of said transactions Master Lessor shall pay to
Broker a fee, in cash, in accordance with the schedule of Broker in effect at
the time of its consent to this Sublease.
10.4 Any fee due from Sublessor or Master Lessor hereunder shall be due and
payable upon the exercise of any option to extend or renew, as to any extension
or renewal; upon the execution of any new lease, as to a new lease transaction
or the exercise of a right of first refusal to lease; or at the close of escrow,
as to the exercise of any option to purchase or other sale transaction.
10.5 Any transferee of Sublessor's interest in this Sublease, or of Master
Lessor's interest in the Master Lease, by accepting an assignment thereof,
shall be deemed to have assumed the respective obligations of Sublessor or
Master Lessor under this Paragraph 10. Broker shall be deemed to be a
third-party beneficiary of this paragraph 10.
11. ATTORNEY'S FEES. If any party or the Broker named herein brings an action to
enforce the terms hereof or to declare rights hereunder, the prevailing party in
any such action, on trial and appeal, shall be entitled to his reasonable
attorney's fees to be paid by the losing party as fixed by the Court. The
provision of this paragraph shall inure to the benefit of the Broker named
herein who seeks to enforce a right hereunder.
<PAGE>
12. ADDITIONAL PROVISIONS. [If there are no additional provisions draw a line
from this point to the next printed word after the space left here. If there are
additional provisions place the same here.]
a) Sublessor shall Paint all office and warehouse walls
b) Clean restrooms, carpets and windows
c) Deliver the premises clean, free of debris, and all mechanical,
lighting, plumbing, HVAC, and doors shall be in good working order.
d) The Sublessees hereunder are majority owners of a company they intend to
sublease the premises to. By signing below, Sublessor and Master Lessor
give consent to said sublease. The company is involved in the operations
set forth under Paragraph 6 of this document. There will be no release
from obligations of Sublessee hereunder.
IF THIS SUBLEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE TRANSACTION RELATING
THERETO.
<TABLE>
<S> <C>
Executed at______________________________ Javelin Systems, Inc., a Delaware Corporation
9-16-97 /s/ RICHARD P. STACK
on_______________________________________ By____________________________________________
Richard P. Stack, President
1881 Langley Avenue
address__________________________________
Irvine, California 92164
_________________________________________ "Sublessor" (Corporate Seal)
D Howard Lewis &
William R. Miller
Executed at______________________________ ______________________________________________
Sept. 16, 1997 /s/ D HOWARD LEWIS
on_______________________________________ by____________________________________________
D Howard Lewis
2882-C Walnut Avenue
address__________________________________
Tustin, California 92780 /s/ WILLIAM R. MILLER
_________________________________________ by____________________________________________
William R. Miller
Tustin, CA
Executed at______________________________ "Sublessee" (Corporate Seal)
Robert P. Peebles Trust,
9/17/97 dated 4-11-79
on_______________________________________
/s/ ROBERT P. PEEBLES (Trustee)
address__________________________________ by____________________________________________
Robert P. Peebles
_________________________________________ by____________________________________________
St. Helena, CA "Master Lessor" (Corporate Seal)
Executed at______________________________ ______________________________________________
on_______________________________________ ______________________________________________
1011 Greenfield Road ______________________________________________
address__________________________________ "Guarantors"
St. Helena, CA 94574-9625
_________________________________________
</TABLE>
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower
St., Ste 600, Los Angeles, CA 90017. (213) 687-8777.
<PAGE>
EXHIBIT 10.14
DISTRIBUTOR AGREEMENT
This Agreement is entered into between Javelin Systems, Inc. (hereinafter
-----------------------
referred to as "Manufacturer"), and ScanSource, Inc., 6 Logue Court, Suite G,
Greenville, South Carolina, 29615 (hereinafter referred to as "Distributor").
This Agreement is effective upon the date of the last signature, the "Effective
Date".
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Distributor desires to purchase certain products from Manufacturer
from time to time; and
WHEREAS, Manufacturer desires to sell certain products to Distributor in
accordance with the terms and conditions set forth in this Agreement; and
WHEREAS, Manufacturer desires to appoint Distributor as its non-exclusive
distributor to market products within the territory defined in Appendix B, the
"Territory";
NOW THEREFORE, in consideration of the mutual premises herein contained
and other good and valuable consideration, Distributor and Manufacturer hereby
agree as follows:
ARTICLE I.
TERM OF AGREEMENT
-----------------
1.1 Term of Agreement. During the term of the Agreement, Manufacturer will
-----------------
provide to Distributor the Products in accordance with the terms and
conditions set forth in this Agreement. The term of this Agreement shall
commence on the Effective Date and, unless terminated by either party as
set forth in this Agreement, shall remain in full force.
1.2 Definitions. The following definitions shall apply to this Agreement.
-----------
(a) "APPLICABLE SPECIFICATION" shall mean the functional performance,
operational and compatibility characteristics of a Product agreed upon
in writing by the parties or, in the absence of an agreement, as
described in applicable Documentation.
(b) "DOCUMENTATION" shall mean user manuals, training materials, product
descriptions
1
<PAGE>
and specifications, technical manuals, license agreements, supporting
materials and other printed information relating to the Products,
whether distributed in print, electronic, or video format, in effect
as of the date of the applicable Purchase Order.
(c) "PRODUCTS" shall mean, individually or collectively as appropriate,
licensed software, Documentation, developed products and hardware,
supplies, accessories, and other commodities related to any of the
foregoing, provided or to be provided by Manufacturer pursuant to
this Agreement.
(d) "STANDARD PRODUCTS" shall mean Products requiring no changes,
alterations, or additions, from those Products customarily offered
by Manufacturer.
(e) "CUSTOMIZED PRODUCTS" shall mean any Products Manufacturer must
purchase or develop requiring Manufacturer to perform changes,
alterations, assembly, additions or special packaging prior to
shipping to Distributor.
(f) "CUSTOMERS" of Distributor shall include dealers, resellers, value
added resellers and other similar customers.
(g) "END USERS" shall mean final retail purchasers or licensees who have
acquired Products for their own use and not for resale, remarketing
or redistribution.
(h) "SERVICES" means any warranty, maintenance, advertising, marketing or
technical support and any other services performed or to be performed
by Manufacturer.
1.3 Appointment as Distributor. Manufacturer hereby grants to Distributor the
--------------------------
non-exclusive right to distribute products during the term of this
Agreement within North America. Manufacturer reserves the right to appoint
other authorized distributors both within and outside of the Territory.
Distributor will use its best efforts to promote sales of the Products,
see Rider 2A. Distributor agrees to conduct business in a manner that
reflects favorably on the Products and Manufacturer.
RIDER 2A
1.4 TERRITORY. Distributor shall distribute Products only within the Territory
---------
and shall not solicit orders from any prospective purchaser with its principal
place of business located outside the Territory. If Distributor receives any
order from a prospective purchaser whose principal place of business is located
outside of the Territory, Distributor shall not accept such order and shall
immediately refer such order to Manufacturer. Distributor may not deliver or
tender (or cause to be delivered or tendered) any Product outside of the
Territory. Distributor shall not sell, directly or indirectly, Products outside
the Territory or to any person or entity in the Territory knowing or having
reason to believe that such person or entity will or intends to sell or resell
Products outside the Territory. Advertising or promotion of Products by
Distributor to any customer, retailer or dealer
2
<PAGE>
outside the Territory or distribution of Products by Distributor to any dealer
who resells or otherwise redistributes such Products for use outside the
Territory will constitute a material breach of this Agreement. If Products
originally shipped to Distributor are located or identified by manufacturer as
available for sale or distribution by any unauthorized source, whether inside or
outside the Territory, such location or identification by Manufacturer shall be
presumptive evidence of a material breach by Distributor of this Section.
1.5 GENERAL OBLIGATIONS. Distributor shall:
(a) Not obligate or purport to obligate Manufacturer by issuing or making
any affirmations, representations, warranties or guaranties with respect to the
Products to any third party, other than the warranties described in Article IV
hereof; and
(b) Use Manufacturer's trade names, trademarks and service marks on a non-
exclusive basis in the Territory only for the duration of this Agreement and
solely for displaying or advertising purposes in connection with selling and
distributing the Products in accordance with this Agreement.
3
<PAGE>
ARTICLE II.
PURCHASE ORDERS
---------------
2.1 Preparation of Purchase Orders. From time to time, or at Distributor's
------------------------------
request, Manufacturer shall inform Distributor of Products available from
Manufacturer including, but not limited to, replacement Products, new
releases, enhancements or versions of existing Products.
2.2 Issuance and Acceptance of Purchase Orders. Distributor may purchase and
------------------------------------------
Manufacturer shall sell to Distributor, Products as described below:
(a) Distributor may issue to Manufacturer one or more purchase orders
identifying the Products Distributor desires to purchase from
Manufacturer. Each Purchase Order may include other terms and
conditions which are consistent with the terms and conditions of this
Agreement or which are necessary to place a Purchase Order, such as
billing and shipping information, required delivery dates, delivery
location, and the purchase price or charges for Products, as per
Manufacturer's then existing price lists for the said products.
Purchase orders will be placed by Distributor by telephone or FAX and
followed by a written purchase order.
(b) Manufacturer shall indicate acceptance of Purchase Orders and/or
alterations to Purchase Orders by providing to Distributor a written
acceptance of such Purchase Order or alteration, or by commencing
performance pursuant to such Purchase Order or alteration.
Manufacturer shall accept a Purchase Order or alteration if (i) the
Purchase Order or alteration does not establish new or conflicting
terms and conditions from those set forth in this Agreement or as set
forth on the Price List referenced as Exhibit A attached hereto, or
(ii) the terms and conditions set forth in the Purchase Order or
alteration have been separately agreed upon in writing by the parties.
Purchase Orders and altered Purchase Orders accepted in accordance
with this subsection are referred to herein as "Purchase Orders". A
Purchase Order shall be deemed accepted by Manufacturer unless
Manufacturer notifies Distributor within three (3) days after
receiving the Purchase Order and giving specific reasons therefor.
(c) After the expiration of this Agreement, Manufacturer shall accept
Purchase Orders from Distributor for additional Products which
Distributor is then contractually obligated to furnish to its
customers and does not have in its inventory upon the termination
of this Agreement; provided Distributor notifies Manufacturer of any
and all such transactions in writing within thirty (30) days of the
termination date of this Agreement.
2.3 Purchase Order Alteration. Prior to shipment of Standard Products,
-------------------------
Manufacturer shall accept an alteration to a Purchase Order in order to:
(i) change a location for delivery,
4
<PAGE>
(ii) modify the quantity or type of Products to be delivered or (iii)
correct typographical or clerical errors. Distributor may not alter any
Purchase Order for Customized Products after such time as the Manufacturer
has commenced the manufacturing, development or purchase of the Products.
2.4 Cancellation of Purchase Orders. Except as otherwise agreed upon by the
-------------------------------
parties, Distributor may cancel a Purchase Order for Standard Products
without charge or penalty with 7 day notice prior to shipment of the
Products specified in such Purchase Order. Distributor may not cancel any
Purchase Order for Customized or Special Order Products after such time as
the Manufacturer has commenced the manufacturing, development or purchase
of the Products.
2.5 Evaluation Purchase Orders. Distributor may issue Purchase Orders in order
--------------------------
to evaluate newly developed Products by Manufacturer at no charge. After
evaluation, Distributor shall have the option to purchase the Products or
to return such products to Manufacturer at Distributor's expense within 30
days.
2.6 Product Shortages. If for any reason Manufacturer's production is not on
-----------------
schedule, Manufacturer agrees to allocate Product to Distributor's orders
based upon a percentage equal to the same percentage as Manufacturer's like
customers purchasing like volume.
ARTICLE III.
DELIVERY AND ACCEPTANCE OF PRODUCTS
-----------------------------------
3.1 Acceptance of Products. Distributor shall inspect each shipment, and within
----------------------
5 days after receipt of shipment accept each Product on the date (the
"Acceptance Date") when such Products and all necessary documentation are
delivered to Distributor in accordance with the Purchase Order and the
Product specifications.
3.2 Defective Products. In the event any Products are received in a defective
------------------
condition or not in accordance with Manufacturer's published specifications
or the documentation relating to such Products, Distributor may return the
Products for full credit. Products shall be deemed defective if the
Product, or any portion of the Product, fails to operate properly when the
system is booted or used as applicable. Distributor shall have the right to
return any such Products that are returned to Distributor from its
customers or end users within thirty (30) days of the Products' initial
delivery date to the end user. In such event, Manufacturer shall issue a
Return Authorization to Distributor for all such defective
5
<PAGE>
Products; and Distributor shall return defective products to Manufacturer
for full credit.
3.3 Transportation of Products. Manufacturer shall deliver the Products to
--------------------------
Distributor at the location shown and on the delivery date set forth in the
applicable Purchase Order. Charges for transportation of the Products,
including freight, insurance, shipping and taxes, shall be paid by the
Distributor.
3.4 Title and Risk of Loss. Title to Products shall pass to Distributor at the
----------------------
time that the Products are delivered to the carrier. All risk of loss or
damage to the Products shall be borne by Manufacturer until delivery of
such Products to the carrier.
3.5 In Warranty Products. Manufacturer shall provide warranty service direct to
--------------------
resellers based upon Manufacturer's then current standard warranty policy.
The reseller must provide proof - of - purchase to validate the warranty
and obtain an RMA from the manufacturer. Manufacturer will bear all
processing costs to return product back to the reseller.
3.6 Resale of Products by Distributor. During the term of this Agreement,
---------------------------------
Distributor may market, promote, distribute and resell Products to
customers of Distributor, in accordance with the following terms and
conditions:
(a) Manufacturer shall extend to Distributor and each customer of
Distributor Manufacturer's then current warranties with respect to
Products purchased and resold hereunder.
(b) Manufacturer shall extend to Distributor and each customer of
Distributor the same warranties and indemnifications, with respect to
Products purchased and resold hereunder as Manufacturer extends to its
end-user customers.
(c) The term of warranties extended by Manufacturer to an end user shall
commence upon delivery of the Product to the end user.
(d) Manufacturer shall make available at no charge to Distributor
reasonable training, technical support and other services related to
the Products that are currently offered or that may be offered by
Manufacturer. Manufacturer also agrees to provide Distributor with
telephone support at no charge during Manufacturer's normal business
hours.
(e) Distributor may refer to itself as Manufacturer's authorized
distributor of the Products and Distributor may obtain written
permission from Manufacturer to use trademarks and trade names of
Manufacturer. Distributor is not authorized to use Manufacturer's name
or any trademarks or trade name of Manufacturer other than in
connection with the sale of Products in accordance with this
Agreement, and all such permitted uses shall be subject to a prior
written approval of Manufacturer. Distributor recognizes
6
<PAGE>
Manufacturer may have rights and/or ownership of certain trademarks,
trade names and patents associated with the Products. Distributor
will act consistently with such rights, and Distributor shall comply
with any reasonable, written guidelines when provided by Manufacturer
relating to such trademark or trade name usage. Distributor is not
authorized and shall not be required to instigate legal action on
behalf of Manufacturer against third parties for infringement.
Distributor will notify Manufacturer of any infringement if which
Distributor has actual knowledge. Distributor shall discontinue use
of Manufacturer's trademarks or trade names upon termination of this
Agreement.
3.7 Inventory Adjustment. Manufacturer agrees to accept, on a quarterly basis
--------------------
commencing with the end of the first calendar quarter following the
effective date of this agreement, a shipment of current nondiscontinued
Products in factory sealed cartons returned by Distributor for full credit,
provided that distributor complies with each of the following conditions:
(a) Distributor obtains a Return Authorization from Manufacturer prior to
any such return;
(b) Distributor pays all return freight charges;
(c) Distributor places an offsetting order of equal or greater value.
(d) Maximum return on any given quarter will be limited to 15% of the
prior quarter's net sales.
For purposes of determining whether Products are eligible for rotation pursuant
to this section, Products shall be deemed to be "Current Nondiscontinued
Products" if they are listed on Manufacturer's current price sheet, or if
Manufacturer announces the discontinuance of such Products within the ninety
(90) days preceding the claim for inventory adjustment. Customized Products
shall not be eligible for repurchase pursuant to this section.
In addition, Distributor shall have the right to return for full credit, without
limitation as to the dollar amount, all Products that become obsolete or are
removed from Manufacturer's current price list; provided Distributor returns
such Products within thirty (30) days after Distributor receives notice that
such Products are obsolete.
7
<PAGE>
ARTICLE IV.
WARRANTIES, INDEMNITIES AND LIABILITIES
---------------------------------------
4.1 Warranty. Manufacturer warrants that:
--------
(a) Manufacturer is the exclusive, legal owner of products defined on the
Price List referenced as Appendix A and has full power and authority
to license said products to Distributor and convey all other rights
and licenses granted to Distributor under this Agreement;
(b) Manufacturer knows of no instance where Products infringe upon the
proprietary rights of any other person;
(c) Manufacturer's warranty with respect to the Products is set forth in
Manufacturer's standard warranty card. Manufacturer does not make any
express or implied representation nor warranty as to the
merchantability or fitness for particular purpose of its Products to
Distributor applications.
4.3 Limitation of Liability. Neither party shall be liable to the other
-----------------------
pursuant to this Agreement for any amounts representing loss of profits,
loss of business or indirect, incidental, special, consequential, or
punitive damages of the other party.
4.4 Unauthorized Representations. Distributor shall have no authority to alter
----------------------------
or extend any of the warranties of Manufacturer expressly contained or
referred to in this Agreement without prior written approval of
Manufacturer.
4.5 Disclaimer of Warranties. Manufacturer has made expressed warranties in
------------------------
this Agreement and in documentation, promotional and advertising materials.
EXCEPT AS SET FORTH THEREIN, MANUFACTURER DISCLAIMS ALL WARRANTIES WITH
REGARD TO THE PRODUCTS, INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE, see Rider 7B.
RIDER 7A
4.6 INDEMNIFICATION. Distributor and Manufacturer shall indemnify, protect and
save its affiliates, successors and assigns and all officers, directors,
employees and agents thereof (collectively, the "Indemnitees") harmless from and
against all claims, damages, losses, costs, expenses, demands, suits or actions
(including attorneys' fees incurred in connection therewith)
8
<PAGE>
which may be asserted against the Distributor or Manufacturer for any kind of
damages, including but without limitation, damage or injury to property or
persons which may be sustained by any third party or any of the Indemnitees
occurring out of or incident to the sale by Distributor or Manufacturer of any
Products.
RIDER 7B
4.7 MANUFACTURER'S LIABILITY ARISING OUT OF THE MANUFACTURE, SALE OR SUPPLYING
OF THE PRODUCTS OR THEIR USE OR DISPOSITION, WHETHER BASED UPON WARRANTY,
CONTRACT, TORT OR OTHERWISE, SHALL NOT EXCEED THE ACTUAL PURCHASE PRICE PAID BY
DISTRIBUTOR FOR THE PRODUCTS.
IN NO EVENT SHALL MANUFACTURER BE LIABLE TO DISTRIBUTOR OR ANY OTHER PERSON
OR ENTITY FOR PUNITIVE, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING,
BUT NOT LIMITED TO, LOSS OF PROFITS OR LOSS OF SE DAMAGES) ARISING OUT OF THE
MANUFACTURE, SALE OR SUPPLYING OF THE PRODUCTS, EVEN IF MANUFACTURER HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR LOSS.
9
<PAGE>
ARTICLE V.
PAYMENT TO MANUFACTURER
-----------------------
5.1 Charges, Prices and Fees for Products. Charges, prices, quantities and
-------------------------------------
discounts, if any, for Products shall be determined as set forth in
Manufacturer's Price List referenced in Exhibit A, or as otherwise agreed
upon by the parties, and may be confirmed at the time of order.
Manufacturer shall have the right to increase prices from time to time,
upon written notice to Distributor not less than thirty (30) days prior to
the effective date of such increase. All orders placed prior to the
effective date of the increase, for shipment within thirty (30) days after
the effective date, shall be at the old price.
5.2 Payment. Except as otherwise set forth herein, any undisputed sum due to
-------
Manufacturer pursuant to this Agreement shall be payable within 30 days
after the invoice date. Manufacturer shall invoice Distributor no earlier
than the applicable shipping date for the Products covered by such invoice.
5.3 Price Protection. Manufacturer shall grant to Distributor a retroactive
----------------
price credit for the full amount of any Manufacturer price decrease on all
Products on order, in transit and in its inventory on the effective date of
such price decrease. Distributor shall supply to Manufacturer, within ten
(10) days of a price decrease, an inventory list specifying the number of
units within the current inventory which qualifies for the price decrease.
Manufacturer may elect to audit such claims at their expense. All orders
scheduled for shipment or in transit to Distributor at the time of notice
of the price decrease shall be adjusted to the decreased price.
5.4 Monthly Shipment Reports. Manufacturer shall, if requested, render monthly
------------------------
reports to Distributor setting forth the separate Products, dollars
invoiced for each product, and total dollars invoiced to Distributor for
the month, and such other information as Distributor may reasonably
request. POS reports will also be sent monthly.
5.5 Inventory. Distributor will submit to Manufacturer a quarterly, non-
---------
binding forecast for the upcoming quarter, fifteen (15) days after
completion of previous quarter. The forecasted quarters will coincide with
the calendar year.
10
<PAGE>
ARTICLE VI.
TERMINATION
-----------
6.1 Termination Without Cause. Either party may terminate this agreement, with
-------------------------
or without cause, upon giving the other party thirty (30) days prior
written notice.
6.2 Termination for Cause. In the event that either party materially or
---------------------
repeatedly defaults in their performance of any of its duties or
obligations set forth in this Agreement, and such default is not
substantially cured within thirty (30) days after the written notice,
specified below, is given to the defaulting party specifying the default,
then the party not in default may, by giving written notice thereof to the
defaulting party, terminate this Agreement or the applicable Purchase Order
relating to such default as of the date specified in such notice of
termination.
6.3 Termination for Insolvency or Bankruptcy. This Agreement and any Purchase
----------------------------------------
Order shall be automatically terminated without act of or notice from any
party in the event of (i) the liquidation or insolvency of either party,
(ii) the appointment of a receiver or similar officer for any party, (iii)
an assignment by any party for the benefit of all or substantially all of
its creditors, (iv) entry by any party into an agreement for the
composition, extension, or readjustment of all or substantially all of its
obligations, or (v) the filing of a meritorious petition in bankruptcy by
or against any party under any bankruptcy or debtors' law for its relief of
reorganization.
6.4 Termination for Non-Payment. Manufacturer may terminate a Purchase Order,
---------------------------
or any portion thereof, terminate this Agreement, or suspend delivery of
any Products if Distributor fails to pay any amounts due and such failure
continues for a period of thirty (30) days after the day payment is due.
6.5 Rights Upon Termination. Termination of any Purchase Order or this
-----------------------
Agreement shall not affect Manufacturer's right to be paid for invoices
for Products already shipped. The termination of this Agreement shall not
affect any of Manufacturer's warranties, indemnifications or obligations
relating to returns, credits or any other matters set forth in this
Agreement that specifically state that they are to survive termination.
Upon termination of this Agreement, Distributor shall discontinue holding
itself out as a distributor of Manufacturer's Products. The expiration of
the term of this Agreement shall not affect the obligations of either party
to the other party pursuant to any Purchase Order previously forwarded to
Manufacturer, provided that such Purchase Order is reasonable and
consistent in quantity and time of requested delivery.
6.6 Inventory Adjustments. If this Agreement is terminated by Manufacturer, the
---------------------
Manufacturer, with or without cause, will repurchase Distributor's
inventory under the
11
<PAGE>
following conditions:
(a) There price to be paid for the repurchase of said inventory shall be
at the Distributor's net cost at time of purchase.
(b) All Products shall be in good merchantable condition.
(c) All Products shall be shipped to Manufacturer's designated facility,
freight prepaid.
If this Agreement is terminated by Distributor, with or without cause,
Manufacturer shall, at its option, thirty (30) days of such termination
repurchase all unsold Products that are in excess of Distributor's contractual
obligations to Manufacturer subject to the following:
(a) The price to be paid for the repurchase of said inventory shall be at
the Distributor's net cost at the time of purchase, less any price
protection allowance.
(b) All Products shall be in good and merchantable condition.
(c) All Products shall be shipped to Manufacturer's designated facility,
freight prepaid.
12
<PAGE>
ARTICLE VII.
MISCELLANEOUS
-------------
7.1 Binding Nature, Assignment, and Subcontracting. This Agreement shall be
----------------------------------------------
binding on the parties and their respective successors and permitted
assigns, but neither party shall have the power to assign this Agreement
without the prior written consent of the other party.
7.2 Counterparts. This Agreement may be executed in several counterparts, all
------------
of which taken together shall constitute one single agreement between the
parties.
7.3 Heading. The Article and Section heading used in this Agreement are for
-------
reference and convenience only and shall not enter into the interpretation
hereof.
7.4 Relationship of Parties. Distributor is performing pursuant to this
-----------------------
Agreement only as an independent contractor. Distributor has the sole
obligation to supervise, manage, contract, direct, procure, perform or
cause to be performed its obligations set forth in this Agreement, except
as otherwise agreed upon by the parties. Nothing set forth in this
Agreement shall be construed to create the relationship of principal and
agent between Distributor and Manufacturer. Neither party shall act or
represent itself, directly or by implication, as an agent of the other
party or its affiliates or in any manner assume or create any obligation on
behalf of, or in the name of, the other party or its affiliates.
7.5 Confidentiality. Each party acknowledges that in the course of performance
---------------
of its obligations pursuant to this Agreement, it may obtain certain
confidential and/or proprietary information of the other party. Each party
hereby agrees that all such information communicated to it by the other
party, its affiliates, or customers, whether before or after the Effective
Date, shall be and was received in strict confidence, shall be used only
for purposes of this Agreement, and shall not be disclosed without the
prior written consent of the other party, except as may be necessary by
reason of legal or regulatory requirements beyond either party's reasonable
control. The provisions of this Section shall survive the term or
termination of this Agreement for any reason.
7.6 Media Releases. Except for any announcement intended solely for internal
--------------
distribution or any disclosure required by legal or regulatory requirements
beyond the reasonable control of either party, and except for catalogs,
advertising and marketing materials customarily used by Distributor in the
normal course of business, all media releases, public announcements or
public disclosures relating to this Agreement or its subject matter, or
including the name of either party, shall be approved in writing (within 48
hours of submission) by the other party prior to the release thereof.
13
<PAGE>
7.7 Disputes Resolution. In the event of any disagreement regarding performance
-------------------
under or interpretation of this Agreement, prior to the commencement of any
formal proceedings, the parties shall continue performance as set forth in
this Agreement and shall attempt in good faith to reach a negotiated
resolution by designating an officer or authorized representative of the
party to resolve the dispute.
7.8 Arbitration. Should Manufacturer and Distributor disagree on any
-----------
performance hereunder, the shall be decided by binding arbitration.
Arbitration shall be conducted in Greenville, South Carolina in accordance
with the then existing rules of the American Arbitration Association. There
are to be three (3) mutually agreed upon arbitrators. Judgement upon any
award by the arbitrators may be entered by the state or federal court
having jurisdiction. The parties intend that this Agreement to arbitrate
the aforementioned issue contained in this Paragraph 7.8 be irrevocable and
limited to said issue.
7.9 Compliance with Laws. In supplying the Products pursuant to this Agreement,
--------------------
Distributor and Manufacturer shall comply with the requirements of all
applicable laws, ordinances and regulations of the United States or any
state, country or other governmental entity.
7.10 Notices. Wherever one party is required or permitted to give notice to the
-------
other pursuant to this Agreement, such notice shall be deemed given when
delivered in hand, by telex, cable, facsimile, or when mailed by registered
or certified mail, return receipt requested, postage prepaid, and addressed
as follows:
In the case of Manufacturer: In the case of Distributor:
---------------------------- ---------------------------
Javelin Systems, Inc. ScanSource, Inc.
2882C Walnut Ave. 6 Logue Ct.
Tustin, CA 92780 Suite G
Att: President Greenville, SC 29615
Fax #: 714-734-1599 Fax #: 864-288-5515
Either party may from time to time change its address for notification
purposes by giving the other party written notice of the new address and
the date upon which it will become effective.
7.11 Force Majeure. If the performance of this Agreement, or any obligations
-------------
hereunder, is prevented, restricted, or interfered with by reason of fire
or other casualty or accidents; strikes or labor disputes; inability to
provide raw materials, power, or supplies; declarations of war or other
violence; any law, order, proclamation, regulation, ordinance, demand or
other requirement of any governmental authority; the parties so affected,
upon giving prompt notice to the other party, will be excused from
performance to the extent of the prevention, restriction, or interference,
provided that the party so affected uses its best
14
<PAGE>
efforts to avoid or remove the causes of non-performance and continues
performance hereunder whenever those causes are removed.
7.12 Severability. Whenever possible, each provision of this Agreement shall
------------
be interpreted in such a manner as to be effective and valid under the
applicable law. In the event that any provision(s) contained in this
Agreement is held to be unenforceable, this Agreement shall be construed
without such provision(s).
7.13 Waiver. No delay or omission by either party to exercise any right or
------
power shall impair any such right or power or be construed to be a waiver
thereof. A waiver by either of the parties of any covenants, conditions or
agreements to be performed by the other or any breach thereof shall not
be construed to be a waiver of any succeeding breach thereof or of any
other covenant, condition or agreement herein contained. No change,
waiver, or discharge hereof shall be valid unless presented in writing to
all interested parties and signed by an authorized representative of the
party against which such change, waiver, or discharge is sought to be
enforced.
7.14 Remedies. All remedies set forth in this Agreement shall be cumulative
--------
and in addition to and not in lieu of any other remedies available to
either party at law, in equity or otherwise, and may be enforced
concurrently or from time to time.
7.15 Survival of Terms. Termination or expiration of this Agreement for any
-----------------
reason shall not release either party from any liabilities or obligations
set forth in this Agreement which (i) the parties have expressly agreed
shall survive any such termination or expiration, or (ii) remain to be
performed or by their nature would be intended to be applicable following
any such termination or expiration.
7.16 Nonexclusive Market and Purchase Rights. It is expressly understood and
---------------------------------------
agreed that this Agreement does not grant to Manufacturer or Distributor
an exclusive right to purchase or sell Products and shall not prevent
either party from developing or acquiring other suppliers or customers.
7.17 Entire Agreement. This Agreement, including any Exhibits and documents
----------------
referred to in this Agreement or attached hereto, constitutes the entire
and exclusive statement of Agreement between the parties with respect to
its subject matters and there are no oral or written representations,
understandings or agreements relating to this Agreement which are not
fully expressed herein.
7.18 Governing law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of South Carolina.
15
<PAGE>
7.19 Attorneys' Fees. The prevailing party in any proceedings (including,
---------------
without limitation any arbitration proceedings) arising in connection with
this Agreement shall be entitled to reimbursement for its reasonable costs
incurred in connection therewith, including reasonable attorneys' fees.
IN WITNESS WHEREOF, the parties have each caused this Agreement to be
signed and delivered by its duly authorized officer or representative as of the
Effective Date.
<TABLE>
<CAPTION>
DISTRIBUTOR MANUFACTURER
<S> <C>
/s/ MICHAEL L. BAUR /s/ RICHARD STACK
- ------------------------------------ ---------------------------------
Signature Signature
MICHAEL L. BAUR RICHARD STACK
- ------------------------------------ ---------------------------------
Printed or Typed Name Printed or Typed Name
PRESIDENT PRESIDENT
- ------------------------------------ ---------------------------------
Title Title
3-14-97 2-27-97
- ------------------------------------ ---------------------------------
Date Date
</TABLE>
16
<PAGE>
EXHIBIT 11.1
CALCULATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Period from
September 19, 1995
Year ended to
June 30, 1997 June 30, 1996
------------------ ------------------
<S> <C> <C>
PRIMARY
Net loss $ (826,886) $ (54,342)
================== ==================
Weighted average number of common shares
outstanding during the period 2,726,510 2,086,260
Incremental common shares attributable to exercise
of outstanding options and warrants 56,025 -
------------------ ------------------
Total shares 2,782,535 2,086,260
================== ==================
Net loss per share $ (0.30) $ (0.03)
================== ==================
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the 1996 Stock Incentive Award Plan of Javelin Systems,
Inc. of our report dated August 1, 1997, with respect to the financial
statements and schedule of Javelin Systems, Inc. included in the Annual Report
(Form 10-KSB) for the year ended June 30, 1997.
ERNST & YOUNG LLP
Orange County, California
September 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF THE COMPANY AS OF AND FOR THE YEAR ENDED JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 686,167
<SECURITIES> 0
<RECEIVABLES> 2,511,591
<ALLOWANCES> 41,000
<INVENTORY> 1,674,097
<CURRENT-ASSETS> 4,877,390
<PP&E> 336,327
<DEPRECIATION> 40,808
<TOTAL-ASSETS> 5,203,010
<CURRENT-LIABILITIES> 1,848,557
<BONDS> 0
0
0
<COMMON> 31,193
<OTHER-SE> 3,323,260
<TOTAL-LIABILITY-AND-EQUITY> 5,203,010
<SALES> 7,014,571
<TOTAL-REVENUES> 7,014,571
<CGS> 5,499,490
<TOTAL-COSTS> 5,499,490
<OTHER-EXPENSES> 1,647,062
<LOSS-PROVISION> 41,000
<INTEREST-EXPENSE> 709,447
<INCOME-PRETAX> (826,886)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (826,886)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
