AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 9, 1998
REGISTRATION NO. 333-41499
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
FASHION MAG APPAREL, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 2339 95-4654808
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification
Incorporation or Classification Code Number)
Organization) Number)
---------------
3745 OVERLAND AVENUE
LOS ANGELES, CALIFORNIA 90034
(310) 836-8200
(Address and Telephone Number of principal executive offices)
---------------
LAWRENCE A. DEAR
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
FASHION MAG APPAREL, INC.
3745 OVERLAND AVENUE
LOS ANGELES, CALIFORNIA 90034
(310) 836-8200
(Name, address and telephone number of agent for service)
---------------
COPIES TO:
RICHARD S. FORMAN MORRIS YAMNER
GLENN D. SMITH Sills, Cummis, Zuckerman, Radin,
Stroock & Stroock & Lavan LLP Tischman, Epstein & Gross
2029 Century Park East, Suite 1800 One Riverfront Plaza
Los Angeles, California 90067 Newark, New Jersey 07102
(310) 556-5800 (201) 643-7000
---------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
---------------
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING PURSUANT
TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX AND LIST
THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. / / _____________
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C) UNDER
THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. / / _____________
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. / /
---------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR
AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, Dated March 9, 1998
PROSPECTUS
[LOGO]
FASHION MAG APPAREL, INC.
1,000,000 SHARES OF COMMON STOCK
($0.01 PAR VALUE)
Fashion Mag Apparel, Inc., a Delaware corporation (the "Company"), is
offering (the "Offering") for sale 1,000,000 shares of common stock, par value
$0.01 per share (the "Common Stock"). Prior to the Offering, there has been no
public market for the Common Stock and no assurances can be given that a public
market will develop following the completion of the Offering or, if developed,
that it will be sustained. Application has been made for the Common Stock to be
included in The Nasdaq SmallCap Market (the "SmallCap Market") under the symbol
"FMAI." The initial public offering price (the "Offering Price") has been
negotiated by the Company and Strasbourger Pearson Tulcin Wolff Incorporated, as
underwriter (the "Underwriter"), and is not related to asset value, net worth or
any other established criteria of value. See "Risk Factors" and "Underwriting"
for a discussion of the factors considered in determining the Offering Price. It
currently is anticipated that the Offering Price will be $5.00 per share.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE COMMON STOCK FROM THE INITIAL
PUBLIC OFFERING PRICE. ACCORDINGLY, THE SECURITIES OFFERED HEREBY SHOULD NOT BE
PURCHASED BY ANYONE WHO CANNOT AFFORD A LOSS OF HIS ENTIRE INVESTMENT. SEE "RISK
FACTORS" COMMENCING ON PAGE 7 OF THIS PROSPECTUS AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
========================================================================
Price to Underwriting Proceeds
Public Discounts and to Company(2)
Commissions(1)
- ------------------------------------------------------------------------
Per Share....... $ $ $
- ------------------------------------------------------------------------
Total(3)........ $ $ $
========================================================================
(1) Does not reflect additional compensation to the
Underwriter, including (a) a non-accountable expense
allowance of $________; and (b) Underwriter's Warrants
entitling the Underwriter to purchase up to 100,000 shares
of Common Stock at a price per share of $___ per share for
a period of up to four years commencing one year from the
effective date of the Registration Statement of which this
Prospectus forms a part (the "Underwriter's Warrants").
In addition, the Company and the Underwriter have agreed to
indemnify each other against certain civil liabilities.
See "Underwriting."
(2) Before deducting estimated expenses of the Offering payable by the
Company of approximately $______________.
(3) The Company has granted the Underwriter a 30-day option to
purchase up to an additional 150,000 shares of Common Stock
to cover over-allotments, if any. If the option is
exercised in full, the Total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be
increased to $____________, $__________ and $___________,
respectively.
The shares of Common Stock are offered by the Underwriter on a "firm
commitment" basis, when, as, and if delivered to and accepted by the
Underwriter, and subject to approval of certain legal matters by counsel for the
Underwriter. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders either in whole or in part. It is expected that
delivery of the certificates evidencing the shares of Common Stock offered
hereby will be made in New York, New York, on or about __________, 1998.
----------------------------------
STRASBOURGER PEARSON TULCIN WOLFF INCORPORATED
THE DATE OF THIS PROSPECTUS IS ___________, 1998
<PAGE>
[PHOTO OF MODEL LISA STROTHARD WEARING WHITE PANTS AND NAVY BLUE
TOP, SHOT ON WHITE BACKGROUND]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED
HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITER AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company currently is not a "reporting company" subject to the information
and reporting requirements of Sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
ELLE REGISTERED TRADEMARK is a registered trademark of Hachette Filipacchi
Presse ("ELLE").
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS
PROSPECTUS TO THE "COMPANY" REFER TO FASHION MAG APPAREL, INC., AND ITS
PREDECESSORS AND SUBSIDIARY. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION AND CAUTIONARY STATEMENTS SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS BEFORE INVESTING IN THE SECURITIES BEING OFFERED
HEREBY. THE INFORMATION IN THIS PROSPECTUS, UNLESS OTHERWISE INDICATED, (I)
ASSUMES THAT THE INITIAL OFFERING PRICE PER SHARE OF COMMON STOCK WILL BE $5.00,
(II) GIVES EFFECT TO A 1,500 FOR ONE STOCK SPLIT TO BE CONSUMMATED IN CONNECTION
WITH THE COMPANY'S REINCORPORATION IN DELAWARE, AND (III) DOES NOT GIVE EFFECT
TO THE EXERCISE OF THE UNDERWRITER'S OVERALLOTMENT OPTION.
THE COMPANY
The Company designs, sources, markets and distributes women's
activewear and, to a lesser extent, swimwear in the United States and Canada
under an exclusive license using the ELLE trademark ("ELLE Products") and, to a
lesser extent, under private labeling arrangements. The Company conducts
substantially all of its business through its wholly owned subsidiary, T.K. MAB,
Inc. The Company also has produced licensed and private labeled swimwear and
other apparel using the Hard Rock Cafe, Harley-Davidson, Everlast and B.U.M.
Equipment trademarks. The Company believes its ELLE Products are uniquely
positioned between high-end designer labels and mid-range labels. Industry
sources indicate that an identifiable label is an essential element of popular
activewear. The Company believes the ELLE Products have earned a reputation as a
stylish and high quality, yet affordable brand.
Activewear is a popular and rapidly growing segment of the apparel
industry. The popularity of activewear is largely attributed to more active,
casual lifestyles. Activewear combines casualwear and exercisewear that is
designed for more informal settings, including casual social gathering, shopping
and leisure time activities. ELLE Products are designed to be both sporty and
elegant, offering a sophisticated and chic appearance. The Company's line of
activewear consists of highly comfortable fashion-forward cotton knit shorts and
tops, long and short tunics, coverups, leggings and fleece tops and bottoms. The
Company's swimwear product line includes bathing suits, cover-ups, robes and
tote bags that are designed to be fashionable and flattering. In the women's
swimwear market, consumer's buying decisions tend to be based primarily on
styling and appearance.
The Company's strategy is to expand the Company's operations and to
become a leading brand name supplier of women's activewear and swimwear. Key
elements of this strategy include (i) expanding products, styles and price
ranges; (ii) implementing an advertising and marketing program; and (iii)
expanding the distribution system for the Company's products through
relationships with a broad network of retailers in the United States, Canada and
(subject to expanding the territories in which the ELLE Products and future
products are permitted to be sold) elsewhere.
Although historically directing its advertising efforts to retailers, the
Company recently commenced a consumer advertising program, including national
magazine advertisements. The Company intends to use a portion of the net
proceeds of the Offering to support and expand its advertising and marketing
programs. The Company is working closely with ELLE to develop focused marketing
programs directed to ELLE's subscribers. The Company has also established an
online promotional website on the WorldWide Web at www.elleactive.com to promote
its products. The Company intends to expand its current website to allow
customers to purchase directly from the Company a complete selection of ELLE
Products. Additionally, the Company is developing "store within a store" concept
shops ("Concept Shops") for placement in certain major department stores and
clothing retailers. Concept Shops are expected to consist of Company owned,
in-store display environments closely grouped to attract customers to ELLE
Products.
Substantially all of the Company's products are manufactured in the United
States by third party, independent manufacturers. The Company distributes ELLE
Products through a combination of independent and employed sales representatives
to a variety of major department stores, specialty stores, sporting goods
stores, catalog operations, and better mass merchandisers representing
approximately 300 separate customers throughout the United States and Canada.
Additionally, the Company has licensed or sold certain of its designs to ELLE
licensees in Asia and Europe.
The Company was organized as a partnership in 1992, incorporated in
California in 1995 and reincorporated in Delaware in 1997 and has its principal
executive offices located at 3745 Overland Avenue, Los Angeles, California
90034, and its telephone number is (310) 836-8200.
<PAGE>
THE OFFERING
Common Stock offered hereby.......... 1,000,000 Shares
Common Stock to be outstanding
after the Offering................... 2,500,000 Shares (1)
Use of Proceeds...................... Repayment of outstanding
indebtedness, payment of
S Corporation dividends, payment of
accrued salaries to officers and
to provide working capital to
support the growth and expansion
of the Company's product lines.
Proposed NASDAQ SmallCap Market
Symbol.............................. FMAI
- ------------------------
(1) Excludes (i) 250,000 shares of Common Stock reserved for issuance
under the Company's employee and director stock option plans, under
which no options have been granted, and (ii) 100,000 shares of Common
Stock issuable upon exercise of the Underwriter's Warrants. See
"Management," "Principal Stockholders," "Certain Transactions" and
"Underwriting."
<PAGE>
<TABLE>
<CAPTION>
SUMMARY FINANCIAL INFORMATION
YEAR ENDED Nine Months Ended
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales.................................. $ 2,016,930 $ 3,072,108 2,650,425 $2,448,336
Cost of sales ............................. 1,435,718 1,846,862 1,603,041 1,362,765
Gross profit .............................. 581,212 1,225,246 1,047,384 1,085,571
Total operating 721,130 998,858 730,916 937,792
expenses..................................
Pro forma net income (loss)................ (140,718) 199,087 277,683 98,512
Pro forma earnings (0.09) 0.13 0.19 0.07
(loss) per share (1).........................
Weighted average 1,500,000 1,500,000 1,500,000 1,500,000
shares outstanding...........................
AS OF AS OF
DECEMBER SEPTEMBER 30, 1997
31, 1996
ACTUAL AS ADJUSTED (2)
Balance Sheet Data:
Cash..................................... $ 925 $ 7,785 $3,134,717
Total assets............................. 941,952 1,297,047 4,423,979
Total current 499,177 686,125 424,618
liabilities................................ 275,261 246,671 9,361
Long-term debt (less 167,514 364,251 3,990,000
current portion)...........................
Stockholders' equity.....................
..................
(1) Adjusted to reflect a pro forma provision for income taxes as if the
Company had always been a C Corporation.
(2) Adjusted to reflect the sale by the Company of 1,000,000
shares of Common Stock offered hereby at an assumed
offering price of $5.00 per share and the application of
the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
</TABLE>
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements. All statements
other than statements of historical fact included in this Prospectus, including,
without limitation, the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" regarding the Company's strategies, plans, objectives
and expectations, the Company's ability to design, develop, outsource and market
its activewear and swimwear, the ability of the Company's activewear and
swimwear to gain and maintain commercial acceptance, the Company's ability to
establish Concept Shops in major department stores and clothing retailers (See
"Business"), the anticipated growth of its established and target markets, its
future operating results, and other matters are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable at this time, there can be no
assurance that such expectations will prove to be correct. Important factors
that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are set forth in "Risk Factors" as well
as elsewhere in this Prospectus. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements.
<PAGE>
RISK FACTORS
IN ADDITION TO THE CAUTIONARY STATEMENTS AND OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED
CAREFULLY IN EVALUATING AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
SUBSTANTIAL DEPENDENCE UPON ELLE LICENSE
Net sales of ELLE Products accounted for approximately 80%, 66% and 70%
of the Company's net sales in 1995, 1996 and for the nine months ended September
30, 1997, respectively. The Company sources ELLE Products through an exclusive
license with ELLE originally entered into in 1995. The Company's license with
ELLE (the "ELLE License") terminates in 1999, but may be renewed by the Company
through 2002 so long as the Company is not in breach of the ELLE License and has
produced aggregate net sales through 1999 sufficient to generate aggregate
minimum royalties to ELLE of $1 million. ELLE may terminate the license before
its term expires if (i) the Company is in material breach of the license
agreement, (ii) there is a change in control of the Company, (iii) the Company
fails to pay to ELLE minimum royalties in any year or (iv) the Company becomes
bankrupt or insolvent. In order to avoid early termination of the ELLE License,
the Company must pay to ELLE aggregate annual minimum royalties of $150,000,
$185,000 and $245,000 for 1997, 1998 and 1999, respectively. The termination of
the ELLE License would have a material adverse effect on the Company. See
"BusinessBLicense Agreement with ELLE."
DEPENDENCE ON MAJOR CUSTOMERS
During the year ended December 31, 1996, 13% and 12% of the Company's
net sales were made to IJC By Germaine and Cache, Inc., respectively. During the
nine months ended September 30, 1997, approximately 22% of the Company's net
sales were made to Loehmann's Inc. As a result of the Company's dependence on
these customers, they may have the ability to influence the Company's business
decisions. The loss of or significant decrease in business from any of its major
customers would have a material adverse effect on the Company. See
"BusinessBCustomers" and "BusinessBSales and Marketing."
APPROVAL REQUIREMENTS OF ELLE; NEW PRODUCT INTRODUCTIONS
The Company's business predominantly is based on its relationship with
ELLE. The Company's growth will depend upon its ability to design and deliver
new ELLE Products. ELLE has final approval over all new ELLE Products,
advertising and marketing, which must meet ELLE's general design and quality
standards. Consequently, ELLE may, in the exercise of its approval rights, delay
or prohibit the distribution of ELLE Products. As is typical with new products,
demand for and market acceptance of new products introduced by the Company are
subject to uncertainty. Achieving market acceptance for new ELLE Products, in
general, may require substantial marketing and other efforts and the expenditure
of significant funds to create customer demand. There can be no assurance that
the Company's efforts will be successful. In addition, the failure of new
products to gain sufficient acceptance could adversely affect retailers' demand
for other ELLE Products.
FUTURE FINANCING REQUIREMENTS
The Company's business plan requires the availability of sufficient
cash flow and borrowing capacity to finance its existing product lines and to
develop and market its additional ELLE Products. The Company expects to satisfy
such requirements through cash flow from operations, proceeds of the Offering,
existing credit arrangements and additional borrowings, as necessary.
Historically, the Company has financed its operations through loans from
shareholders, a Small Business Administration loan due May 2002 (the "SBA Loan")
with The Money Store Investment Corporation, a wholly owned subsidiary of The
Money Store, and a factoring agreement. There can be no assurance that
additional capital will be available to the Company or available on terms
acceptable to the Company. Failure to obtain additional capital would have an
adverse effect on the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations C Liquidity and Capital
Resources."
ABILITY TO ACHIEVE AND MANAGE POTENTIAL FUTURE GROWTH
The Company has grown since its inception in 1992, with net sales
increasing from $744,000 in 1992 to over $3,000,000 in 1996. The Company's
growth has placed substantial burdens on its management and financial resources.
The Company's ability to manage its growth effectively will require it to
continue to improve its operational, financial and management information
systems and controls. The Company's future profitability is critically dependent
on its ability to achieve and manage potential future growth effectively. There
can be no assurance that the Company will be successful in increasing net sales
or that the rate of period-to-period net sales growth, if any, will not decline.
If the Company's operations were to continue to grow, of which there can be no
assurance, there could be increasing strain on the Company's management,
financial, product design, marketing, distribution and other resources and the
Company may experience operating difficulties, including difficulties in hiring,
training and managing an increasing number of employees, difficulties in
obtaining sufficient materials and manufacturing capacity to produce its
products, problems in upgrading its management information systems and delays in
production and shipments. There can be no assurance that the Company will be
able to manage future growth effectively. Any failure to manage growth
effectively could have an adverse effect on the Company.
DEPENDENCE UPON THIRD PARTY MANUFACTURERS
The Company is dependent on independent contractors for the
manufacturing of its products. The Company's products, including ELLE Products,
are manufactured to its specifications by both domestic and, to a limited
extent, international manufacturers, with whom the Company has no long-term
arrangements. The inability of a manufacturer to ship the Company's products in
a timely manner could result in the Company missing certain retailing seasons
and opportunities with respect to some or all of its products. The Company's
dependence on independent contractors includes additional risks,
such as limited control over costs and quality standards. The inability of a
manufacturer to perform according to the Company's expectations or the Company's
inability to maintain good relations with its manufacturers could have a
material adverse effect on the Company's business. See "BusinessBSourcing and
Manufacturing."
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's sales and operating results fluctuate by
quarter, with the greatest sales occurring in the Company's first and second
quarters. It is in these quarters that the Company's Spring-Summer product
lines, which traditionally have had the highest volume of net sales, are shipped
to customers, with revenues generally being recognized at the time of shipment.
As a result, the Company experiences significant variability in its quarterly
results and working capital requirements. Moreover, delays in shipping can cause
revenues to be recognized in a later quarter, resulting in further variability
in such quarterly results. See "Management's Discussion & Analysis of Financial
Condition and Results of Operations."
TRADE CREDIT RISK
Historically, the Company has sold its trade accounts receivable to a
factor which assumes the credit risk with respect to collection of such
accounts. The factor pays the Company the receivable amount after the factor
receives payment from the Company's customer, shortly following the bankruptcy
or insolvency of the customer or when the receivable becomes 120 days past due.
The factor approves the credit of the Company's customers prior to sale. If the
factor disapproves a sale to a customer and the Company decides to proceed with
the sale, the Company bears the credit risk. The factoring agreement can be
terminated at any time by the factor upon 60 days prior notice. Such termination
could have a material adverse effect on the Company's financial condition and
results of operations if the Company could not replace the factoring agreement
within such period. Additionally, the Company may elect in the future to
discontinue its use of the factor and manage its credit and collection
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations C Liquidity and Capital Resources."
MANAGEMENT'S DISCRETION AS TO USE OF PROCEEDS
The Company's management will have broad discretion as to the
application of the net proceeds of the Offering. The net proceeds to the Company
are estimated to be approximately $3,975,000. The Company expects to use
approximately $250,000 of the net proceeds to repay outstanding indebtedness at
the closing of the Offering, approximately $350,000 to pay declared but unpaid
dividends, $181,000 to pay accrued salaries to officers, $80,000 to repay
existing loans from the current shareholders and the balance for working capital
and general corporate purposes, including an estimated $490,000 of the net
proceeds to fund the Company's advertising and marketing programs and up to an
estimated $1,500,000 for the development and placement of up to 60 Concept Shops
featuring ELLE Products in major department stores and clothing retailers.
Additionally, the Company is developing "store within a store" concept shops
("Concept Shops") for placement in certain major department stores and clothing
retailers. Concept Shops are expected to consist of Company owned, in-store
display environments closely grouped to attract customers to ELLE Products. The
Company may change the allocation of these proceeds in response to changes in
the apparel industry and the Company's business. See "Use of Proceeds."
UNCERTAINTIES IN APPAREL INDUSTRY
The apparel industry historically has been subject to substantial
cyclical variations. The Company and other apparel manufacturers rely on the
expenditure of discretionary income for sales of their products. Accordingly,
any downturn in the general economy or uncertainties regarding future economic
prospects that affect consumer spending habits could have a material adverse
effect on the Company. During the past several years, various retailers,
including some of the Company's customers, have experienced financial
difficulties, which increases the risk of extending credit to such retailers.
Financial problems of a retailer could cause the Company's factor to limit the
amount of receivables of such retailer that the factor would approve, which
could cause the Company to curtail business with such retailer or require the
Company to assume more credit risk relating to such customer's receivables.
Additionally, over the past several years, the retail industry has experienced
significant changes, including consolidation of ownership, increased
centralization of buying decisions and restructurings. If such changes continue,
the Company's customer base may be reduced either because customers may be
consolidated with or acquired by other entities or because purchasing decisions
for products may shift to individuals with whom the Company has not had prior
selling relationships. There can be no assurance that the Company will be able
to maintain relationships with its customers following such consolidations or
other changes. Any significant reduction in the Company's customer base could
have an adverse effect on the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of OperationsBLiquidity and Capital
Resources."
The Company sells to major retailers, some of whom have engaged in
leveraged buyouts or transactions in which such retailers incurred significant
amounts of debt, and some of whom have recently emerged from the protection of
the federal bankruptcy laws. At any time, a retail customer may experience a
downturn in its business which may weaken its financial condition and result in
the non-payment of shipped orders, reduction or elimination of new orders, or
the customer seeking protection under the bankruptcy laws. A majority of the
Company's net sales are to single store or local retailers whose financial
condition may be more susceptible to business downturns. It is not clear to what
extent, if any, the current financial condition of such retailers will affect
the financial condition of the Company. Any material financial difficulties
encountered by such accounts could have an adverse effect on the Company.
CHANGES IN FASHION TRENDS
The Company typically designs and arranges for the manufacture and sale
of its apparel and accessories several months in advance of the time when
consumer acceptance of such products is known. The Company's success is largely
dependent on its ability to anticipate the changing fashion trends of its
customers and to provide activewear that appeals to their preferences in a
timely manner. There can be no assurance that the Company will be successful in
this regard. If the Company misjudges the market for its products or is
unsuccessful in responding to changes in fashion trends or in market demand, the
Company could experience, among other things, excess inventories and higher
markdowns, lower gross margins due to the necessity of providing discounts to
retailers or conversely, insufficient inventory and missed market opportunities,
any of which could have an adverse effect on the Company.
COMPETITION
There is intense competition in the sectors of the apparel industry in
which the Company participates. The Company competes with many other apparel
companies, some of which are larger and have better established brand names and
greater resources than the Company. In some cases, the Company also competes
with private-label brands of its department store customers. The Company
believes that in order to be successful in its industry, it must be able to
evaluate and respond to changing consumer demand and taste and to remain
competitive in the areas of style, quality and price while operating within the
significant production and delivery constraints of the industry. Furthermore,
the Company's traditional department store customers, which account for a
substantial portion of the Company's business, encounter intense competition
from so-called "off-price" and discount retailers, mass merchandisers and
specialty stores. The Company believes that its ability to increase its present
levels of sales will depend on such customers' ability to maintain their
competitive position. See "BusinessCCompetition."
DEPENDENCE UPON KEY PERSONNEL
The success of the Company is dependent upon the personal efforts and
abilities of its senior management, including Lawrence A. Dear, its President,
Chief Executive Officer and Chief Financial Officer; Lori Dorough Eisenberg,
Vice President of Design and Merchandising; and Jon Eisenberg, Vice President of
Purchasing/National Sales. See "BusinessCLicense Agreement with ELLE." The
Company believes that the loss of the services of one or more of such
individuals would likely have an adverse effect on the Company. Other than a
$250,000 policy on Ms. Eisenberg (the "Key Man Policy"), the Company does not
maintain key man life insurance on any of its executives. In addition, the
Company believes that its future success depends in part upon its ability to
attract and retain qualified personnel. The Company intends to make additions to
its core management team, however, competition to attract and retain such
personnel is intense. There can be no assurance that the Company will be
successful in attracting and retaining such personnel in the future. See
"Management."
POSSIBLE DELISTING OF SECURITIES; PENNY STOCK RULES; UNDERWRITER'S POTENTIAL
INFLUENCE ON THE MARKET
Application has been made for the Common Stock to be listed on the
SmallCap Market under the symbol "FMAI." While the Company will meet the
required standards for continued listing on the SmallCap Market following the
consummation of the Offering, there can be no assurance that it will continue to
be able to do so. If the Company should fail to meet one or more of such
standards, the Common Stock would be subject to delisting from the SmallCap
Market. If this should occur, trading, if any, in the Common Stock would then
continue to be conducted in the over-the-counter market on the Electronic
Bulletin Board, a National Association of Securities Dealers, Inc. ("NASD")
sponsored inter-dealer quotation system, or in what are commonly referred to as
"pink sheets." As a result, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the market value of, the Common
Stock. In addition, if the Common Stock ceases to be listed on the SmallCap
Market and the Company fails to meet certain other criteria, trading in the
Common Stock would be subject to Securities and Exchange Commission (the
"Commission") rules regulating broker-dealer practices in connection with
transactions in "penny stock." If the Common Stock became subject to the penny
stock rules, many brokers may be unwilling to engage in transactions in the
Common Stock because of the added disclosure requirements under Section 15(g) of
the Exchange Act, thereby making it more difficult for purchasers of Common
Stock in this Offering to dispose of their securities.
Assuming the Common Stock is accepted for listing on the SmallCap
Market, the Underwriter may from time to time following the completion of this
Offering act as a market-maker and otherwise effect transactions in the Common
Stock. The Underwriter is not legally obligated by law or by contract to
continue such trading, which may be discontinued at any time. See
"Underwriting." Any such cessation could have a material adverse effect upon the
price and liquidity of the Common Stock. The Underwriter is subject to the
supervision of various governmental and self-regulatory organizations, as well
as certain capital requirements. Such regulatory authorities periodically
investigate and audit the activities of broker-dealers, such as the Underwriter.
In the event the Underwriter is required to curtail or cease operations as a
result of administrative actions instituted by the regulatory authorities or
because of lack of capital, the price and liquidity of the Common Stock may be
materially adversely affected by the reduced participation or complete absence
of the Underwriter from the market.
NO DIVIDENDS ANTICIPATED
After the consummation of the Offering, the Company does not intend to
declare or pay any cash dividends on its Common Stock in the foreseeable future.
See "Termination of S Corporation Status."
CONTROL BY PRINCIPAL STOCKHOLDERS; ANTITAKEOVER CONSIDERATIONS; STAGGERED BOARD
Following the completion of the Offering, existing stockholders,
including Lawrence A. Dear, Lori Dorough Eisenberg and Jon Eisenberg and other
members of management, will beneficially own approximately 60% of the
outstanding shares of Common Stock. See "Principal Stockholders." As a result of
this stock ownership, management has sufficient voting power to determine the
direction and policies of the Company, the election of the directors of the
Company, the outcome of any other matter submitted to a vote of stockholders,
and to prevent or cause a change in control of the Company.
The Company's Board of Directors has the authority, without action of
the shareholders, to issue up to 15,000,000 shares of Common Stock and 1,000,000
shares of Preferred Stock and to fix the rights and preferences of the Preferred
Stock. This authority may have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from attempting to
acquire, control of the Company. The Company is authorized to issue Preferred
Stock, without shareholder approval, with rights senior to those of the Common
Stock. See "Description of Capital Stock."
Following the Offering, the Board of Directors of the Company will
have three classes of directors. The terms of the first, second and third
classes will expire in 1998, 1999 and 2000, respectively. Directors for each
class will be chosen for a three-year term upon the expiration of the current
class term, beginning in 1998. The staggered terms for directors may effect the
stockholders' ability to change control of the Company even where a change in
control is in the interest of the stockholders.
POTENTIAL CONFLICTS OF INTEREST; RELATED PARTY TRANSACTIONS
In December 1995, the Company sold $40,000 of finished goods not
bearing the ELLE trademark to Lawrence Dear, who later resold the swimwear and
remitted the net profits of $36,000 to the Company. This amount was treated as
an additional capital contribution to the Company by Mr. Dear.
The Company has funded its operations, in part, from borrowings from
directors, officers and their affiliates. The Company, as of September 30, 1997,
had borrowed approximately $237,000 from The Money Store, Inc. ("The Money
Store") under the SBA Loan. Lawrence Dear, the Company's President, Chief
Executive Officer and Chief Financial Officer, was formerly employed by The
Money Store; his father, Morton Dear, who will become the Company's Chairman
following the Offering, is Vice Chairman and Senior Executive Vice President of
The Money Store. See "Certain Transactions."
From time to time the Company's shareholders have loaned money to the
Company. As of September 30, 1997, the amount outstanding was $80,402; such
loans generally are due on demand. Interest of $18,951, $10,526, and $12,100 was
paid during the years ended December 31, 1995 and 1996, and the nine months
ended September 30, 1997, respectively. The loans are subordinated to all other
indebtedness of the Company.
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; ARBITRARY
DETERMINATION OF OFFERING PRICE
Prior to the Offering there has been no public market for the Common
Stock. Although the Company has applied to have the Common Stock listed on the
SmallCap Market, there can be no assurance that an active trading market will
develop or, if it does develop, will continue. The market price of the Company's
Common Stock could be highly volatile. Factors such as quarterly variations in
the Company's results of operations and changes in general market conditions
could cause the market price of the Company's Common Stock to fluctuate
significantly. The Offering Price has been determined by negotiations between
the Company and the Underwriter and does not necessarily bear any relationship
to the Company's book value, operating results, financial condition or other
established criteria of value. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
The Company currently has 1,500,000 shares of Common Stock outstanding
and, upon the completion of the Offering, will have 2,500,000 shares of Common
Stock outstanding. Of such shares, the shares sold in the Offering (other than
shares which may be purchased by "affiliates" of the Company) will be freely
tradeable without restriction or further registration under the Securities Act.
All of the remaining outstanding shares are "restricted securities," as that
term is defined under Rule 144 promulgated under the Securities Act ("Rule
144"), and may only be sold pursuant to a registration statement under the
Securities Act or an applicable exemption from the registration requirements of
the Securities Act, including Rule 144 thereunder. Certain of the Company's
executive officers, directors and shareholders have agreed not to offer, sell,
or otherwise dispose of their shares for a period of __ days after the date of
the Offering without the prior written consent of the Underwriters. No
predictions can be made as to the effect, if any, that market sales of shares by
existing stockholders (including shares issuable upon the exercise of such
warrants and options) or the availability of such shares for future sale will
have on the market price of shares of Common Stock prevailing from time to time.
The prevailing market price of the Common Stock after the Offering could be
adversely affected by future sales of substantial amounts of Common Stock by
existing stockholders. See "Principal Stockholders," "Shares Eligible for Future
Sale" and "Underwriting."
DILUTION
Investors will experience immediate and substantial dilution of $3.40
in the net tangible book value per share of the Common Stock. See "Dilution."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus includes forward-looking statements. All statements
other than statements of historical fact included in this Prospectus, including,
without limitation, the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" regarding the Company's strategies, plans, objectives
and expectations, the Company's ability to design, develop, manufacture and
market products, the ability of the Company's products to maintain commercial
acceptance, the Company's ability to achieve new product commercialization, the
anticipated growth of its target markets, its future operating results, and
other matters are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable at
this time, there can be no assurance that such expectations will prove to be
correct. Cautionary Statements are set forth in these "Risk Factors" as well as
elsewhere in this Prospectus. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements.
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered
hereby, after deducting underwriting discounts and commissions and the estimated
expenses of the Offering, are estimated to be $3,975,000 ($4,650,000 if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $5.00 per share.
Of such net proceeds, the Company anticipates that it will use
approximately $250,000 of the net proceeds to repay existing indebtedness at the
closing of the Offering. As of September 30, 1997, approximately $237,000 was
outstanding under the SBA Loan from The Money Store Investment Corporation, a
wholly owned subsidiary of The Money Store, which matures in May 2002 and
accrues interest at a rate of prime plus 1.75%. Repayment of the loan is
personally guaranteed by each of Lawrence A. Dear, Lori Dorough Eisenberg and
Jon Eisenberg (the "Shareholders"). The Company will also use approximately
$350,000 to pay to the Shareholders declared dividends as described in
"Termination of S Corporation Status", $181,000 to pay accrued salaries to
officers, and $80,000 to repay existing loans from the Shareholders. The Company
expects to use the remaining proceeds to provide working capital to support the
growth of the Company's existing product lines and to add additional product
lines, including approximately $490,000 to fund the increased advertising and
marketing programs of the Company. The Company anticipates developing and
placing up to 60 Concept Shops featuring ELLE Products within several of its key
major department store and retail clothing customers over the next 18 months at
an estimated average cost of $25,000 per shop, funded in part with the proceeds
of the Offering. From time to time the Company evaluates the acquisition of
licenses, businesses and operations complementary to those of the Company,
however, the Company currently has no commitments or agreements relating to any
such acquisition. Pending such uses, the proceeds of the Offering will be
invested in investment grade, interest-bearing securities.
TERMINATION OF S CORPORATION STATUS
The Company has been treated as an S Corporation since 1995. As a
result, through the date immediately preceding the termination of its S
Corporation status (the "Termination Date"), its earnings have been and will be
taxed for federal income tax purposes directly to the holders of the Common
Stock rather than to the Company. Other than a tax imposed on S Corporations by
the State of California (currently 1.5% of taxable income), state income taxes
on earnings have also been the responsibility of the Company's shareholders. The
Termination Date will occur immediately before the closing of the Offering. On
the Termination Date, the Company will become subject to federal and state
corporate income taxes. See Note 1 of "Notes to Financial StatementsCBusiness
Activity and Summary of Significant Accounting PoliciesCIncome Taxes."
The Company paid an aggregate of $64,256 in dividends to the
Shareholders from January 1, 1995 through September 30, 1997. Those dividends
were paid to the Shareholders to pay their income taxes and as a return of their
investment. Before the closing of the Offering, the Company intends to declare
dividends to the Shareholders equal to approximately $350,000 plus an amount
equal to the Company's net income from October 1, 1997 through the Termination
Date. Following the Termination Date and the payment of any dividends declared
prior to the Termination Date that have not been paid, the Company intends to
retain future earnings, if any, to finance the operations and expansion of the
Company's business. Therefore, the payment of any cash dividends on the Common
Stock is unlikely for the foreseeable future.
<PAGE>
DILUTION
As of September 30, 1997, the net tangible book value of the Company
was approximately $263,000 or $.17 per share of Common Stock outstanding. Net
tangible book value per share is determined by dividing the net tangible book
value of the Company (the excess of tangible assets over liabilities) by the
number of shares of Common Stock outstanding. After giving effect to the
completion of the Offering at an assumed Offering Price of $5.00 per share
(after deducting underwriting discounts and commissions and the estimated
expenses of the Offering and declared dividends), the pro forma net tangible
book value of the Company as of September 30, 1997 would have been approximately
$3,990,000 or approximately $1.60 per share (approximately $4,665,000 or
approximately $1.76 per share, respectively, if the Underwriter's over-allotment
option is exercised in full). This represents an immediate increase in pro forma
net tangible book value of $1.66 per share to current stockholders and an
immediate dilution of $3.40 per share to new investors purchasing shares of
Common Stock. The increase in the net tangible book value per share of Common
Stock held by the current stockholders would be solely attributable to the cash
paid by purchasers of the shares of Common Stock offered by the Company.
The following table summarizes the per share dilutive effect of the
Offering if the Underwriter's over-allotment option is exercised in full and the
proposed shareholder distribution is made:
Assumed initial public Offering Price per share (1)....... $5.00
Net tangible book value per share before the Offering... $ .17
Decrease attributable to dividends(2)................... (.23)
Increase attributable to shares offered hereby(3)....... 1.66
----
Pro forma net tangible book value per share after the
Offering................................................ 1.60
----
Dilution to new investors (4)............................. 3.40
====
- --------------------
(1) Before deduction of underwriting discounts and commissions and the
estimated expenses of the Offering.
(2) Based on a proposed shareholder dividend of $349,251. Does not include
additional dividends which will be paid before the closing of the
Offering in an amount equal to the net income of the Company from
October 1, 1997 through the closing of the Offering. See "Termination
of S Corporation Status."
(3) After deduction of underwriting discounts and commissions and estimated
expenses of the Offering.
(4) Dilution represents the difference between the Offering Price per share
and the pro forma net tangible book value per share after giving effect
to the Offering.
The following table summarizes, as of September 30, 1997, the differences in the
number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share by existing
and new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION Average Price
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 1,500,000 60% $200,000 (1) 4% $.13
New investors...................... 1,000,000 40% $5,000,000 96% 5.00
---- ---------
Total 2,500,000 100% $5,200,000 100%
========= ===== ========= ====
(1) Does not reflect the dividend to the existing shareholders of $349,251 of
undistributed income previously taxed to the shareholders or additional
dividends in an amount equal to undistributed net income from October 1, 1997
through the closing of the Offering.
</TABLE>
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 and as adjusted to give effect to the consummation of the
Offering and the application of the net proceeds therefrom at an assumed
Offering Price of $5.00 per share. This information should be read in
conjunction with the financial statements and the notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
ACTUAL PRO FORMA (1) AS ADJUSTED(2)
<S> <C> <C> <C>
Long-term debt, net of current portion $ 246,671 246,671 $ --
Stockholders' equity:
Preferred stock, par value $0.01 per -- -- --
share, 1,000,000 shares authorized,
no shares issued and outstanding and as
adjusted
Common stock, par value $0.01 per share, 15,000,000 $ 15,000 $ 15,000 $ 25,000
shares authorized, 1,500,000 shares
issued and outstanding; 2,500,000 shares
as adjusted
Additional paid-in capital 185,126 -- 3,965,000
Retained earnings 164,125 -- 0
-------- -------- --------
Total Stockholders' Equity $ 364,251 15,000 $3,990,000
--------- -------- --------
Total Capitalization $ 610,922 $ 261,671 $3,990,000
========= ========= ========
(1) Adjusted to reflect (i) the conversion of the Company from
an S Corporation to a C Corporation and (ii) payment of an
S Corporation dividend representing previously undistributed income
taxed to the shareholders of $349,251 (the Company intends to pay
additional dividends before the closing of the Offering in an amount
equal to the net income of the Company from October 1, 1997 through
the closing of the Offering). See "Termination of S Corporation
Status."
(2) Adjusted to reflect the sale by the Company of 1,000,000 shares of
Common Stock offered hereby at an assumed offering price of $5.00 per
share and the application of the estimated net proceeds therefrom.
See "Use of Proceeds."
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data were derived from the financial
statements of the Company. The selected financial data for the years ended
December 31, 1996 and 1995 and for the years then ended have been derived from
the Company's financial statements included elsewhere in this Prospectus which
have been audited by Grobstein, Horwath & Company LLP, independent auditors
whose report thereon is also included elsewhere in this Prospectus. The selected
financial data for the nine month periods ended September 30, 1997 and 1996, and
the balance sheet data as of September 30, 1997, are derived from the unaudited
financial statements of the Company prepared on the same basis as the audited
financial statements and, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments necessary for a fair presentation of
the Company's financial position and results of operations. The results for an
interim period are not necessarily indicative of results to be expected for a
full year. The following data below should be read in conjunction with the
financial statements of the Company and the notes thereto included elsewhere in
this Prospectus and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED Nine Months Ended
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
INCOME STATEMENT
DATA:
<S> <C> <C> <C> <C>
Net sales...................... 2,016,930 3,072,108 2,650,425 2,448,336
Cost of sales.................. 1,435,718 1,846,862 1,603,041 1,362,765
Gross profit................... 581,212 1,225,246 1,047,384 1,085,571
Total operating expenses....... 721,130 998,858 730,916 937,792
Pro forma net income (loss).... (140,718) 199,087 277,683 98,512
Weighted average shares
outstanding................... 1,500,000 1,500,000 1,500,000 1,500,000
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1996 1997
---- -----------------
ACTUAL AS ADJUSTED
(2)
BALANCE SHEET DATA:
Cash............................................. $ 925 $ 7,785 $3,134,717
Total assets..................................... 941,952 1,297,047 4,423,979
Total current liabilities........................ 499,177 686,125 424,618
Long-term debt (less current portion............. 275,261 246,671 9,361
Stockholders' equity............................. 167,514 364,251 3,990,000
- ---------------------
(1) Adjusted to reflect a pro forma provision for income taxes as if the
Company had always been a C Corporation.
(2) Adjusted to reflect the sale by the Company of 1,000,000 shares of
Common Stock offered hereby at an assumed offering price of $5.00 per
share and the application of the estimated net proceeds therefrom.
See "Use of Proceeds" and "Capitalization."
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING IS A DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY FOR THE YEARS ENDED DECEMBER 31, 1995 AND L996 AND THE
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND 1997. THIS DISCUSSION SHOULD BE
READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS, THE NOTES RELATED
THERETO, AND THE OTHER FINANCIAL DATA INCLUDED ELSEWHERE IN THIS PROSPECTUS. ALL
INFORMATION WITH RESPECT TO THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND
1997 IS UNAUDITED. THE MATTERS DISCUSSED IN THIS SECTION THAT ARE NOT HISTORICAL
OR CURRENT FACTS DEAL WITH POTENTIAL FUTURE CIRCUMSTANCES AND DEVELOPMENTS. SUCH
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE DEVELOPMENT AND
MARKET ACCEPTANCE FOR PRODUCTS, TRENDS IN THE RESULTS OF THE COMPANY'S
OPERATIONS AND THE COMPANY'S ANTICIPATED CAPITAL REQUIREMENTS AND CAPITAL
RESOURCES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW AS WELL AS THOSE
DISCUSSED UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company designs, sources, markets and distributes women's
activewear and to a lesser extent swimwear in the United States and Canada under
an exclusive license using the ELLE trademark. The Company believes its ELLE
products are uniquely positioned between high-end designer labels and mid-range
labels. The Company was incorporated in Delaware on September 30, 1997, and
acquired all of the stock of T.K. Mab, Inc., a California corporation, which
commenced operations in January, 1995. The Company conducts substantially all of
its business through T.K. MAB, Inc., its wholly owned subsidiary. T.K. Mab, Inc.
was the successor to T.K. Mab, a California general partnership, which commenced
operations on January 1, 1992.
Prior to the Offering, the Company's stockholders elected to be taxed
as an S Corporation. Accordingly, no provision for federal income taxes was
provided for the years ended December 31, 1995 and 1996, since the stockholders
reported the earnings of the Company on their individual income tax returns.
However, the Company was subject to minimum California franchise taxes, based on
income. The Company's S Corporation status will be terminated upon the effective
date of the Offering and, thereafter, the Company will be taxed as a regular
corporation. The pro forma provision for income taxes in the statement of income
data included elsewhere in this Prospectus shows the effects of net income and
earnings per share had the Company been taxable as a regular corporation since
its inception in January, 1995.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain items in the Company's
statements of operations for the periods shown below:
<TABLE>
<CAPTION>
YEAR ENDED Nine Months Ended
DECEMBER 31, SEPTEMBER 30,
------------ -----------------
1995 1996 1996 1997
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 71.2 60.1 60.5 55.7
Gross profit 28.8 39.9 39.5 44.3
Selling & 15.1 16.2 14.7 16.5
shipping expense
General & administrative 18.1 14.4 10.9 19.3
expense
Interest expense 2.6 1.9 2.1 2.5
Pro forma income (loss) from
operations (7.0) 6.5 10.6 4.0
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996.
NET SALES. Net sales for the nine month period ended September 30, 1997 (the
"1997 Nine Month Period") were $2,448,336, a decrease of 7.6% over net sales of
$2,650,425 for the nine months ended September 30, 1996 (the "1996 Nine Month
Period"). The decrease in net sales was primarily attributable to the Company's
decision to eliminate certain accounts due to their higher credit risk and to
focus marketing efforts on developing sales at higher end retailers.
COST OF SALES. Cost of sales in the 1997 Nine Month Period was $1,362,765 , or
55.7% of sales, a decrease in cost of sales of $240,276 from $1,603,041, or
60.5% of net sales, in the 1996 Nine Month Period. The decrease in the cost of
sales was attributable to tightened controls of purchasing activity and contract
manufacturers, which resulted from greater experience in manufacturing ELLE
Products. Additionally, a lower average cost per unit was obtained by reducing
the number of styles offered and increasing the number of units produced for
each style.
GROSS PROFIT. Gross profit was $1,085,571 for the 1997 Nine Month Period, an
increase of $38,187 from the 1996 Nine Month Period gross profit of $1,047,384.
As a percentage of net sales, gross profit for the 1997 Nine Month Period was
44.3%, an increase of 4.8% from 1996 Nine Month Period gross profits of 39.5% of
net sales.
SELLING AND SHIPPING EXPENSE. Selling and shipping expense for the 1997 Nine
Month period reflected a cost of $403,295, or 16.5% of net sales, an increase of
$14,509 from selling and shipping expenses for the 1996 Nine Month Period of
$388,786, or 14.7% of net sales. The increase in selling and shipping expense
was primarily the result of an increase in trade advertising and costs
associated with implementing new marketing programs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$472,737, or 16.5% of net sales, for the 1997 Nine Month Period, an increase of
$184,995 from general and administrative expenses for the 1996 Nine Month Period
of $287,742, or 10.9% of net sales. This includes growth of $117,140 of
administrative payroll relating to four additional employees hired for customer
service and office management. In addition, the factor charges a commission on
all invoices sold to the factor for providing credit insurance and account
administration. Factor commission expenses were $41,746 or 1.7% of net sales,
for the 1997 Nine Month Period, an increase of $19,329 from $22,417 or 0.8% of
net sales for the 1996 Nine Month Period. The increase was due to selling to
more credit-worthy accounts in the apparel industry. The Company expects general
and administrative expenses to continue to increase as a result of pursuing long
term growth strategies of the Company and the payment of the salaries of the
officers pursuant to new employment contracts entered into in connection with
the Company's public offering and termination of the Company's S Corporation
status.
INTEREST EXPENSE. Interest expense was $61,760, or 2.5% of net sales, in the
1997 Nine Month Period, an increase of $7,372 from interest expense for the 1996
Nine Month Period of $54,383 or 2.1% of net sales. The increase in interest
expense is primarily attributable to increased factor borrowings and new SBA
Loan. Factor interest expense was $27,891 or 1.1% of net sales in the 1997
Nine Month Period, an increase of $14,167 from $13,724, or 0.5% of net sales, in
the 1996 nine month period. As a result of factoring more credit-worthy invoices
the Company was allowed to borrow addtional funds against those invoices.
PRO FORMA PROVISION FOR INCOME TAXES. The pro forma provision for income taxes
was $49,267 in the 1997 Nine Month Period and $38,785 in the 1996 Nine Month
Period, respectively. The Company has historically operated as an S Corporation
and not paid income taxes. The Company's pro forma effective tax rate had the
Company been taxable as a regular corporation was 33% in the 1997 Nine Month
Period, as compared to 12% in the 1996 Nine Month Period. The increase in the
pro forma provision for income tax primarily was attributable to the effect of
net operating losses carried forward from the year ended December 31, 1995,
which offset taxable income in the 1996 Nine Month Period.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales for the year ended December 31, 1996 ("1996") were
$3,072,108, which represented an increase of $1,055,178, or 52.3%, over the year
ended December 31, 1995 ("1995") net sales of $2,016,930. The growth in net
sales was primarily attributable to the growth in unit sales of ELLE Products
including the introduction of activewear which emphasize higher priced products.
COST OF SALES. Cost of sales was $1,846,862, or 60.1% of net sales in 1996, an
increase of $411,144 from $1,435,718 or 71.2% of net sales in 1995. The decrease
in the percentage of cost of sales was a result of increased unit sales and an
improved sales mix favoring higher-priced activewear over swimwear.
Additionally, increased volume reduced the cost to the Company from fabric
suppliers and manufactures.
GROSS PROFITS. Gross profits were $1,225,246 in 1996, an increase of $644,034,
or 110.8%, from gross profits of $581,212 in 1995. As a percentage of net sales
gross profits increased by 11.1% from 1996 to 1995.
SELLING AND SHIPPING EXPENSE. Selling and shipping expense increased to
$497,183, or 16.2% of net sales in 1996, an increase of $194,291 from $302,892
or 15.1% of sales in 1995. The increase in selling expense was primarily related
to new trade advertising campaigns to promote ELLE Products, including the new
activewear styles.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $443,837 or 14.4% of net sales in 1996, an increase of $78,620 from
$365,217, or 18.1% of net sales, in 1995. The increase in general and
administrative expenses reflects an increase in officers' compensation of
$66,500 and additional office employee salary of $10,574. The increase in salary
was in part to bring compensation in line with the Company's growth experienced
between 1995 and 1996. As a percent of net sales, general and administrative
expenses decreased by 3.7%. Factor commissions expense in 1996 was $30,842 or
1.0% of net sales as compared to $31,260 or 1.5% of net sales for 1995.
INTEREST EXPENSE. Interest expense in 1996 was $57,838 or 1.9% of net sales, as
compared to $53,021 or 2.6% of net sales in 1995. The decrease was the result of
reduced utilization of the Company's credit facilities, partially offset by
additional financing costs associated with the acquisition of the Company's
computer system. Factor Interest expense in 1996 was $19,381 or 0.6% of net
sales as compared to $22,574 or 1.1% of net sales for 1995.
PRO FORMA PROVISIONS FOR INCOME TAXES. The pro forma provision for income taxes
was $27,301 and $800 in 1996 and 1995, respectively. The Company experienced a
loss in 1995 and would only pay the minimum California state franchise tax. The
Company's pro forma effective tax rate was 12% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's main sources of liquidity have historically been cash
flows from operations, an SBA loan, short term advances from its factor and
shareholder loans. The Company's capital requirements primarily result from
working capital needs and investing activities.
Net cash provided by operating activities in the 1997 Nine Month
Period decreased to $110,437 from a use of $189,881 in the 1996 Nine Month
Period, primarily as a result of an increase in inventory and due from factor.
This net cash provided by operations was partially offset by increases in
accrued salaries and accounts payable. Working capital at September 30, 1997 was
$525,823 and available cash and amounts due from factor were $142,837. For the
1996 Nine Month Period and the 1997 Nine Month Period the Company's inventory
turnover was 2.6 and 1.3 times, respectively. For the periods ended December 31,
1995 and December 31, 1996 the Company's inventory turnover was 3.2 times and to
2.2 times respectively. Industry averages for similar size companies were
approximately 4.1 times in 1996 and 6.7 times in 1997. The Company has been
stocking inventory in order to meet the quick response currently demanded of the
Company by retailers. The Company merchandises many items known as "basics"
thereby eliminating the risk associated with the creation of inventory.
Net cash used in investing activities in the 1997 Nine Month Period
and 1996 Nine Month Period was ($13,256) and ($56,904,) respectively. The
primary investing activity related to acquisitions of computer systems, software
and hardware. The Company has not committed to any contracts for capital
expenditures in 1998, but anticipates that it will make such expenditures in the
normal course of business. Since the Company typically uses independent
contractors for manufacturing its products and intends to continue this
practice, the Company has not had high levels of capital expenditures.
Under the terms of the ELLE License, the Company is required to make
royalty payments to ELLE of six percent of net sales, subject to minimum annual
payments, which increase over the term (as extended) of the ELLE License. The
minimum annual royalty payments under the ELLE License aggregate $150,000,
$185,000 and $245,000 for 1997, 1998 and 1999, respectively. To date, all
required levels have been met or exceeded.
The Company historically has sold a substantial portion of its accounts
receivable to a factor which assumes the credit risk with respect to the
collection of such accounts. The Company periodically receives cash advances
from the factor by pledging its accounts receivable and other assets to the
factor as collateral. In cases where the factor approves the credit, the account
is sold without recourse and the factor assumes all credit risk. In those cases
where the factor does not approve the credit, the Company bears the credit risk.
the Company is contingently liable to the factor for merchandise disputes,
customer claims and other charge backs on receivables sold to the factor. All
trade accounts receivable are collateral for factor advances. The factoring
relationship allows the Company to ship goods without bearing the credit risk of
their customers. The factoring relationship also provides the Company with
working capital by allowing the Company to borrow against eligible accounts
receivable. The factor advances the Company approximately 70% of the Company's
eligible accounts receivable. Subsequent to September 30, 1997, the factor
advance rate was increased to 80%. The factor charges interest at a rate equal
to 2 1/2 % over the Republic National Bank of New York reference rate. As of
February 27, 1998, the advances accrued interest at the rate of 10.75%.
The Company also has funded its operations from the SBA Loan, which is
payable monthly at a rate equal to prime plus 1.75% and is due in May 2002. This
loan is secured by an assignment of a stockholder's interest in the Key Man
Policy, of which The Money Store is a named beneficiary, and substantially all
of the assets of the Company. The Company intends to use the proceeds of the
Offering to repay this loan in full.
As a result of the Company's treatment as an S Corporation for federal
and state income tax purposes, the Company periodically has provided the
Shareholders, through dividends, with funds for the payment of income taxes on
the earnings of the Company which have been included in the taxable income of
the Shareholders. The Company paid a dividend of $64,256 in 1996. The Company
also intends to pay the Shareholders dividends equal to $350,000, plus the
Company's net income from October 1, 1997 through the Termination Date. These
dividends will be paid upon the closing of the Offering.
The Company believes that the cash provided by operations, together
with the net proceeds from the Offering, will be sufficient to fund its
operations and planned expansion for at least the next twelve months. The
Company may be required to seek additional sources of funds for accelerated
growth after that point, and there can be no assurance that such funds will be
available on satisfactory terms. Failure to obtain such financing could delay or
prevent the Company's planned growth, which could adversely affect the Company's
business, financial condition and results of operations.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's business is affected by seasonal trends, with higher
levels of wholesale sales in the first and second quarters. These trends result
primarily from the timing of seasonal wholesale shipments to retail customers
and key vacation travel and holiday shopping periods in the retail industry.
Fluctuations in sales and operating income in any fiscal quarter may be affected
by the timing of seasonal wholesale shipments and other events affecting retail.
<PAGE>
BUSINESS
OVERVIEW
The Company designs, sources, markets and distributes women's
activewear and, to a lesser extent, swimwear in the United States and Canada
under an exclusive license using the ELLE trademark and, to a lesser extent,
under private labeling arrangements. The Company conducts substantially all of
its business operations through its wholly owned subsidiary, T.K. MAB, Inc. The
Company also has produced licensed and private labeled swimwear and other
apparel using the Hard Rock Cafe, Harley-Davidson, Everlast and B.U.M. Equipment
trademarks. The Company believes its ELLE Products are uniquely positioned
between high-end designer labels and mid-range labels. Industry sources indicate
that an identifiable label is an essential element of popular activewear. The
Company believes the ELLE Products have earned a reputation as a stylish and
high quality, yet affordable brand.
Activewear is a popular and rapidly growing segment of the apparel
industry. The popularity of activewear is largely attributed to more active,
casual lifestyles. Activewear combines casualwear and exercisewear that is
designed for more informal settings, including casual social gathering, shopping
and leisure time activities. ELLE Products are designed to be both sporty and
elegant, offering a sophisticated and chic appearance. The Company's line of
activewear consists of highly comfortable fashion-forward cotton knit shorts and
tops, long and short tunics, coverups, leggings and fleece tops and bottoms. The
Company's swimwear product line includes bathing suits, cover-ups, robes and
tote bags that are designed to be fashionable and flattering. In the women's
swimwear market, consumer's buying decisions tend to be based primarily on
styling and appearance.
The Company's strategy is to expand the Company's operations and to
become a leading brand name supplier of women's activewear and swimwear. Key
elements of this strategy include (i) expanding products, styles and price
ranges; (ii) implementing an advertising and marketing program; and (iii)
expanding the distribution system for the Company's products through
relationships with a broad network of retailers in the United States, Canada and
(subject to expanding the territories in which the ELLE Products and future
products are permitted to be sold) elsewhere.
Although historically directing its advertising efforts to retailers,
the Company recently commenced a consumer advertising program, including
national magazine advertisements. The Company intends to use a portion of the
net proceeds of the Offering to support and expand its advertising and marketing
programs. The Company is working closely with ELLE to develop focused marketing
programs directed to ELLE's subscribers. The Company has also established an
online promotional website on the Worldwide Web at www.elleactive.com to promote
its products. The Company intends to expand its current website to allow
customers to purchase directly from the Company a complete selection of ELLE
Products from the Company's lines. Additionally, the Company is developing
Concept Shops for placement in certain major department stores and clothing
retailers. The Concept Shops are expected to consist of Company-owned, closely
clustered custom displays and fixtures featuring ELLE Products. The Company does
not anticipate that the Concept Shops will require the Company to enter into any
leases or similar long-term commitments with the retailers.
Substantially all of the Company's products are manufactured in the
United States by third party, independent manufacturers. The Company distributes
ELLE Products through a combination of independent and employed sales
representatives to a variety of major department stores, specialty stores,
sporting goods stores, and catalog operations, and better mass merchandisers
representing approximately 300 separate customers throughout the United States
and Canada. Additionally, the Company has licensed or sold certain of its
designs to ELLE licensees in Asia and Europe.
ELLE Magazine has been published for more than 50 years and is one of
the best selling fashion magazines in the world. ELLE Magazine is currently
published in 28 editions worldwide with an estimated paid circulation of over
900,000 in the United States.
<PAGE>
PRODUCTS
The Company's line of products consists of activewear and, to a lesser
extent, swimwear that is targeted towards women with a youthful attitude and
active lifestyle. In particular, the Company's ELLE Products are designed and
marketed with a goal of achieving a high level of brand name recognition and
satisfying consumer desires for a high quality, fairly priced product. The
Company performs extensive market research in attempting to provide its retail
customers and consumers with functionality along with the most desirable styles,
color schemes and fabrics. The Company also designs, sources and distributes
high-quality private label lifestyle apparel, including activewear, and
swimwear. The Company offers three seasons of activewear (Spring-Summer, Fall
and Holiday Resort). The Company is actively pursuing a strategy of developing a
balanced and diversified mix of products in order to maximize the brand name
recognition of the ELLE Products and appeal to various demographic groups and
geographic areas. The Company believes that the target consumers for its
products are women aged 25 to 55. The Company's product lines include:
ELLE ACTIVEWEAR. The Company designs, sources and sells women's
activewear for today's active lifestyle under the ELLE7 trademark and
logo. The ELLE Products recognize that the active woman has particular
demands regarding quality, comfort and style in activewear. The ELLE
Products consist of approximately 300 separate products with varying
styles and functions. These include fitness apparel and sportswear made
of bouclet, nylon, fleece, cotton, Lycra, spandex, and other polyester
fabrics with moisture management properties. The ELLE activewear
products are designed to feature the ELLE7 trademark and logo, and to
focus on the use of appropriate fabric blends to maximize comfort and
performance. The retail prices for the ELLE Products generally range
from $20 to $95.
ELLE SWIMWEAR FOR WOMEN. The Company designs, sources and sells women's
and girls' swimwear and coverups under the ELLE trademark and logo.
The ELLE swimwear for women offers fashion oriented swimwear and
coverups designed to complement its swimwear. The collection is
designed to feature the ELLE trademark when appropriate and to focus on
the use of appropriate fabric blends, including those with moisture
management, to maximize comfort. The retail prices for the ELLE
swimwear products generally range from $24 to $80.
LICENSE AGREEMENT WITH ELLE
In January 1997, the Company entered into the current ELLE License
Agreement under which the Company will have an exclusive license to manufacture,
market, distribute and sell licensed products for women under the ELLE trademark
in the United States and Canada. The Company's ELLE Products will continue to be
distributed in major department and specialty stores, and through new
Company-designed Concept Shops which the Company anticipates will be located in
major department stores and clothing retailers. The Concept Shops are expected
to consist of Company-owned, closely clustered custom displays and fixtures
featuring ELLE Products. The Company does not anticipate that the Concept Shops
will require the Company to enter into any leases or similar long-term
commitments with the retailers.
The Company's license from ELLE is limited to women's swimwear,
swimwear coverups, and activewear collections including clothing suitable for
exercising and bearing the ELLE trademark. The ELLE License excludes shoes,
scarves, socks, stockings or accessories for ladies bearing the ELLE trademark.
In 1996, the Company entered into agreements with ELLE (i) to provide the
Company's ELLE Product designs to ELLE's Asian licensing program in exchange for
a 0.5% royalty on sales of ELLE Products in Asia and (ii) sold the Company's
designs for a fixed fee to ELLE's European licensee. The Company is not
obligated to pay royalties to ELLE on these sales.
The term of the ELLE License ends on December 31, 1999, but is
renewable at the option of the Company for three years commencing January 1,
2000, if the Company is not in default under the ELLE License and if the Company
has achieved net sales of ELLE Products producing earned royalties to ELLE
aggregating at least $1,000,000 for the exercise of the option. The ELLE License
may be terminated in whole, or only as to certain ELLE Products, if the Company
fails to fulfill its material obligations thereunder (including payments of
royalties or other amounts due), fails (beyond the cure period) to use diligent
efforts to promote, advertise, manufacture, sell or ship any ELLE Product, or to
fill accepted orders for ELLE Products to financially secure purchasers. The
ELLE License may also be terminated at ELLE's option if net sales of ELLE
Products do not exceed certain minimum levels, or if the Company voluntarily or
involuntarily enters into a bankruptcy or similar proceeding. The Company is in
compliance with the ELLE License.
Under the ELLE License, the Company is required to make royalty
payments to ELLE of six percent of net sales, subject to minimum annual
payments, which increase over the term (as extended) of the ELLE License. The
minimum annual royalty payments under the ELLE License aggregate $150,000,
$185,000 and $245,000 for 1997, 1998 and 1999, respectively. To date, all
required levels have been met or exceeded. Royalty payments are not required
with respect to any sales of ELLE Products to ELLE. The Company is also
obligated to maintain product quality control, obtain prior approval of designs
and standards, and marketing, advertising and distribution programs, and may be
required to indemnify ELLE against any losses resulting from alleged defects in
the ELLE Products arising out of the Company's performance under the ELLE
License or the manufacture, promotion or sale of such products in violation of
applicable laws or third-party rights. The ELLE License requires that the
Company secure and maintain product liability insurance, which the Company has
done. Under and subject to the terms of the ELLE License, ELLE is required to
indemnify the Company against any losses arising out of the use of the ELLE7
trademark or the exercise by the Company of its rights under the ELLE License.
ELLE also is required, generally, to defend the Company's rights to use the
ELLE7 trademark pursuant to the ELLE License. The ELLE License also requires the
Company to maintain, during the term thereof, letters of credit in favor of ELLE
for an amount equal to the minimum annual amounts due to ELLE under the ELLE
License from time to time. The Company is in compliance with this requirement.
CUSTOMERS
The Company's products are distributed through department stores,
specialty stores, sporting goods stores, catalog operations and better mass
merchandisers. The Company distributes its products to approximately 300
separate customers in approximately 500 retail locations throughout the United
States and Canada. The Company's products are sold in the United States by
retailers such as Bloomingdale's, Nordstrom, Cache, Liberty House, and through
catalog operations such as Victoria's Secret and specialty retailers such as
Ritz Carlton Hotels. During the year ended December 31, 1996, 13% of the
Company's net sales were made to IJC By Germaine and 12% of the Company's net
sales were made to Cache, Inc. During the nine months ended September 30, 1997,
approximately 22%, of the Company's net sales were made to Loehmann's Inc., its
largest customer. Additionally, the Company contracts with clothing
manufacturers and distributors in Canada to produce and distribute ELLE Products
in Canada. The Company is paid the greater of a percentage of the sales
generated in Canada or a minimum guaranteed royalty. The percentage of the
Company's net sales made in Canada was 0% for the year ended December 31, 1996
and 2.2% for the nine months ended September 31, 1997. The Company's strategy is
to expand its network of retailers carrying the Company's products, and is
focused on department stores, specialty stores and catalog operations; the terms
of the ELLE License prohibit sales to mass merchandisers and outlets without the
prior written consent of ELLE.
SALES AND MARKETING
The Company has implemented a selling strategy that consists of
supporting the marketing efforts of senior management with a combination of five
in-house personnel and a network of commission-based independent sales
representatives. Representatives are provided an exclusive geographical
territory, and are responsible for servicing customers located in that
territory, in many instances assisted by the Company's sales personnel. The
Company believes that its present independent sales force is adequate, and does
not intend to add any additional sales representatives at the present time. The
Company works closely with its sales representatives to ensure that a consistent
and unified image of the Company is projected to its customers. The Company
maintains a database of approximately 6,000 prospective retailers who are
periodically sent the Company's Activewear and Swimwear catalogs. Since the
Company's catalogs do not contain pricing data, store buyers are encouraged to
show them to their consumers. The Company cooperates with its customers to gauge
promptly which styles are the most popular and to track consumer preferences
regarding the Company's products. The Company's products are presented at
industry trade shows, including the Women's Wear Daily/Men's Apparel Guild in
California ("MAGIC") and the Supershow in Atlanta. The Company usually receives
a substantial number of customer orders at or immediately following each of
these trade shows. These trade shows also provide the Company with feedback
concerning its designs and styles for the upcoming seasons. The Company intends
to increase the number of its booths and personnel at trade shows and increase
the number of trade shows attended by the Company. The Company periodically
advertises its product line directly to consumers in ELLE and other magazines
such as Shape and In-Style magazines. The Company also advertises in trade
magazines, including Women's Wear Daily and Fashion Reporter. In addition, the
Company has developed a promotional website on the Worldwide Web at
www.elleactive.com to promote its products. The Company intends to expand its
current website to allow customers to click on icons for each piece of clothing
in the line and view the garment on a fashion model from multiple angles. It
currently is anticipated that every screen will have an "order now" icon that
enables the website visitor to immediately purchase the item via a secured
credit card service.
DESIGN
The Company's past, current and future success results in large part
from its ability to design products which embody the fashion-forward active
lifestyle. The Company's products are designed to feature a coordinated look
through incorporating complementary designs in both the activewear and swimwear
product lines, as well as through making designs available in a variety of
colors. The Company's products and certain of the fabrics from which they are
made are designed by an in-house staff of fashion designers. The six person
design staff, headed by Lori Dorough Eisenberg, monitors current fashion trends
and changes in consumer preferences. Other members of management who are
instrumental in the design function meet regularly with the design staff to
create, develop and coordinate the seasonal collections. The Company believes
that its design staff is known for its distinctive yet casual styling.
SOURCING AND MANUFACTURING
The Company sources each of its product lines separately based on the
individual design, styling and quality specifications of such products. The
Company generally arranges through sourcing agents to provide fabric to outside
contractors for cutting, assembly and finishing. The Company believes that
outsourcing allows it to enhance production flexibility and capacity while
substantially reducing capital expenditures and avoiding the costs of managing a
large production workforce. During 1996, approximately 98% of the Company's
apparel products (as measured by net sales), were manufactured by domestic
contractors and approximately 2% of the Company's apparel products were
manufactured by foreign contractors, primarily in China. The Company is
exploring the possibility of bringing certain functions in-house. However, there
can be no assurance that such efforts will be successful.
The Company employs its own sourcing agents who assist in selecting and
overseeing third party contractors, sourcing of fabric and monitoring quotas and
other trade regulations. The Company's production staff, including its sourcing
agents, oversees all aspects of purchasing and production. The Company
separately negotiates with suppliers for the purchase of fabrics, trim and
finished goods.
The Company arranges for the production of its products primarily based
on a combination of past sales history, management judgment and orders received.
The Company utilizes these factors to estimate production requirements in order
to secure necessary fabrics and manufacturing capacity. Because of the greater
geographic distances of the Company's foreign manufacturers, the Company
generally is required to allow greater lead time for foreign orders than
domestic orders.
As is typical in the apparel industry, the Company does not have any
long-term formal arrangements with its contractors or suppliers. The Company
believes that its relationships with its contractors and suppliers are good. The
Company has experienced only limited difficulty in satisfying its raw materials
and finished goods requirements. Although the loss of one or more such
contractors or suppliers could have a significant effect on the Company's
immediate operating results, the Company believes it could replace such
contractors and suppliers without a material adverse effect on the Company.
COMPETITION
The activewear and swimwear segments of the women's apparel industry
are highly competitive. The Company competes with many apparel companies, many
of which are larger, more diversified, and have better established brand names
and greater resources for designing, developing and marketing their products
than the Company. The Company also competes with private-label brands of
department stores, including some of the Company's major retail customers, which
have increased in recent years.
Furthermore, the Company's traditional department store customers,
which account for a substantial portion of the Company's business, encounter
intense competition from so-called "off-price" and discount retailers, mass
merchandisers and specialty stores. The Company believes that its ability to
increase its present levels of sales will depend on such department stores'
ability to maintain their competitive position and the Company's ability to
increase its market share of sales to department stores.
PROPERTIES
The Company's principal executive offices are located in Los Angeles,
California, where the Company leases approximately 10,000 square feet. This
facility also houses the Company's design, production and merchandising staffs.
This space is occupied under a lease expiring in June 1999. The base rental for
this lease is $5,250 per month ($6.30 per square foot on an annual basis). The
Company also leases a 600 square foot showroom in Los Angeles, California under
a lease expiring in May 1999. The base rental for this lease is $1,100 per month
($24.72 per square foot on an annual basis). The Company subleases a 715 square
foot showroom in New York City, New York on a month to month basis at a base
rental of $3,200.00 per month ($53.71 per square foot on an annual basis). The
Company is looking to expand its facilities and is exploring a new lease for
20,000 square feet in Los Angeles and an additional 2,000 square feet of space
in New York, although the Company has not entered into any formal agreements for
the lease of such facilities.
EMPLOYEES
As of December 31, 1997, the Company employed 28 full-time employees.
None of the Company's employees are covered by a collective bargaining
agreement. The Company believes its relationships with its employees to be good.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or to which any of its properties is subject.
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Upon completion of the Offering, the Board of Directors will consist of
[3] members. Within 30 days of the completion of the Offering, the Board of
Directors will consist of six directors divided into three classes serving
staggered three-year terms. The first annual meeting of stockholders of the
Company after the Offering will be held in 1998. Subject to rights pursuant to
any employment agreements, officers of the Company serve at the pleasure of the
Board of Directors.
The following table sets forth certain information concerning the
directors, director nominees and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION TERM EXPIRES
<S> <C> <C> <C>
Morton Dear(1)(2) 59 Chairman of the Board of Directors nominee 2000
Lawrence A. Dear 33 Chief Executive Officer, Chief Financial
Officer, President and Director 1998
Jon Eisenberg 31 Vice President of Purchasing/National
Sales and Director 1999
Lori Dorough 35 Vice President of Design and
Eisenberg Merchandising and Director 2000
Irving B. Kroll(1)(2) 67 Director nominee 1998
Maurice Schoenholz (1)(2) 74 Director nominee 1999
- ---------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
</TABLE>
MORTON DEAR. Effective with the consummation of the Offering, Mr. Dear
will become Chairman of the Board of Directors of the Company. Mr. Dear is the
Vice Chairman and Senior Executive Vice President of The Money Store, Inc., a
national financial services company (NYSE symbol: MON). From 1983 to August
1997, Mr. Dear was an Executive Vice President, Chief Financial Officer,
Secretary and a Director of The Money Store, which he joined in 1973. Mr. Dear
is a Certified Public Accountant, a licensed real estate broker and a licensed
mortgage banker. He is past Chairman of the Board of Directors of the Easter
Seal Society of New Jersey and is on the Advisory Board of Valley National Bank.
Mr. Dear is the father of Lawrence A. Dear, the Company's Chief Executive
Officer, Chief Financial Officer and President.
LAWRENCE A. DEAR. Mr. Dear has served as the Chief Executive Officer,
Chief Financial Officer and President of the Company since its incorporation in
1995 and was a general partner in the Company's predecessor from 1992 to 1995.
From 1989 to 1992, Mr. Dear served in the legal department at The Money Store.
Mr. Dear received his J.D. from the University of Miami School of Law in 1989
and his bachelors degree in management from Tulane University in 1986. Mr. Dear
is the son of Morton Dear, Chairman of the Board of Directors of the Company.
JON EISENBERG. Mr. Eisenberg, a co-founder of the Company's
predecessor, has served as Vice President of Purchasing/National Sales and a
Director of the Company since its incorporation. Mr. Eisenberg received his
bachelors degree from Tulane University in 1988. Mr. Eisenberg is the
brother-in-law of Lori Dorough Eisenberg, Vice President of Design and
Merchandising for the Company.
LORI DOROUGH EISENBERG. Ms. Eisenberg has been Vice President of
Design and Merchandising and a Director of the Company since its incorporation
and served in a similar capacity for the Company's predecessor from 1992. Prior
to joining the Company, Ms. Eisenberg was a co-founder and owner of Bellafiga, a
private label manufacturer of swimwear and sportswear. Ms. Eisenberg is the
sister-in-law of Jon Eisenberg, Vice President of Purchasing/National Sales of
the Company.
IRVING B. KROLL. Effective with the consummation of the offering, Mr.
Kroll will become a Director of the Company. Mr. Kroll retired as a partner with
Kenneth Leventhal & Company (now Ernst & Young LLP), where he was managing
partner of the Los Angeles office from 1976 through 1984. He also served as a
director of Yes Clothing Co. from February 1995 through October 1996. Mr. Kroll
is a certified public accountant.
MAURICE SCHOENHOLZ. Effective with the consummation of the offering,
Mr. Schoenholz will become a Director of the Company. Mr. Schoenholz served as
Chairman of the Board of Republic Factors, a subsidiary of Republic New York
Corp., from 1978 until his retirement in 1982. Prior to 1977, Mr. Schoenholz was
Executive Vice President of United Factors, which was acquired by Crocker Bank
in 1977, at which time he became President of Crocker United Factors. Mr.
Schoenholz is currently a consultant to Republic Factors and several garment
manufacturers.
BOARD OF DIRECTORS
The Company's Bylaws provide that the Company shall have between three
and nine directors with the current number set at six directors. Following the
Offering, the Board of Directors of the Company will have three classes of
directors. The terms of the first, second and third classes will expire in 1998,
1999 and 2000, respectively. Directors for each class will be chosen for a
three-year term upon the expiration of the current class term, beginning in
1998. The staggered terms for directors may effect the stockholders' ability to
change control of the Company even where a change in control is in the interest
of the stockholders. Directors are elected at the annual meeting of shareholders
to serve a three-year term or until a successor is duly elected and qualified.
Officers are elected by and serve at the discretion of the Board of Directors.
Upon the consummation of the Offering, the Board of Directors will
establish an Audit Committee consisting of Messrs. Morton Dear, Kroll and
Schoenholz, all of whom are independent directors. The Audit Committee is
responsible for recommending to the Board of Directors the engagement of the
independent auditors of the Company and reviewing with the independent auditors
the scope and results of the audits, the internal accounting controls of the
Company, audit practices and the professional services furnished by the
independent auditors.
Upon the consummation of the Offering, the Board of Directors will
establish a Compensation Committee consisting of Messrs. Morton Dear, Kroll and
Schoenholz, all of whom are independent directors. The Compensation Committee is
responsible for reviewing and approving all compensation arrangements for
officers of the Company, and is also responsible for administering the 1998
Stock Incentive Plan.
The Board of Directors does not have a nominating committee. The
selection of nominees for the Board of Directors is made by the entire Board of
Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1997, the Board of Directors
did not have a compensation committee. Compensation was determined by the entire
Board of Directors, each of whom also served as an executive officer of the
Company during the 1997 fiscal year. No member of the Board of Directors of the
Company or its Compensation Committee serves as a member of the board of
directors or compensation committee of an entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no compensation for
serving on the Board of Directors. Directors who are not employees of the
Company receive a fee of approximately $500 per meeting attended for their
services. All directors are reimbursed for expenses incurred in connection with
attendance at board or committee meetings. In addition, each director not
employed by the Company, upon joining the Board of Directors, receives an option
to purchase 10,000 shares of Common Stock and an option to purchase an
additional 10,000 shares if also elected as Chairman of the Board. These options
vest after the first year of service on the Board.
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid or accrued by
the Company to its Chief Executive Officer and other executive officers for the
fiscal year ended December 31, 1997. No executive officer received compensation
exceeding $100,000 during the 1997 fiscal year.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
Fiscal Otehr Annual All Other
NAME AND PRINCIPAL YEAR SALARY BONUS COMPENSATION COMPENSATION
POSITION
<S> <C> <C> <C> <C> <C>
Lawrence A. Dear............... 1997 $54,000 $0 $0 $0
Chief Executive Officer,
Chief Financial Officer
and President
Jon Eisenberg..................... 1997 $54,000 $0 $0 $0
Vice President of
Purchasing/National Sales
Lori Dorough Eisenberg............ 1997 $54,000 $0 $0 $0
Vice President of Design
and Merchandising
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
EMPLOYMENT AGREEMENTS
Effective with the closing of the Offering, each of Lawrence A. Dear,
Jon Eisenberg and Lori Dorough Eisenberg will enter into an employment agreement
with the Company, for terms of five years. Under the terms of the respective
employment agreements, the Company will pay Mr. Dear a minimum annual salary of
$110,000, Mr. Eisenberg a minimum annual salary of $82,000 and Ms. Dorough
Eisenberg a minimum salary of $82,000. Each of the agreements contain non-
competition and non-solicitation provisions applicable during the term of
employment under the respective agreement and until two years after termination
of employment.
Each of the executive officers of the Company is eligible to receive an
incentive under the Company's executive bonus pool. Such cash bonuses will be
made at the discretion of the Company based on subjective performance criteria.
1998 STOCK INCENTIVE PLAN
In ________ 1998, the Board of Directors and the shareholders of the
Company approved the 1998 Stock Incentive Plan (the "Stock Incentive Plan")
which permits the Company to grant incentive and non-qualified stock options to
purchase an aggregate of up to 250,000 shares of Common Stock. The purpose of
the Stock Incentive Plan is to foster and promote the financial success of the
Company by, among other things, enabling key employees to participate in the
long-term growth and financial success of the Company. The Stock Incentive Plan
is administered by the Compensation Committee of the Board of Directors, which
is composed of three independent directors. Any employee or director of the
Company is eligible to receive grants of stock options under the Stock Incentive
Plan.
All stock options granted under the Stock Incentive Plan will have an
exercise price per share to be determined by the Compensation Committee,
provided that the exercise price per share under each stock option shall not be
less than the fair market value of the Common Stock at the time the stock option
is granted (110% of such fair market value in the case of incentive stock
options granted to a shareholder who owns 10% or more of the Company's Common
Stock). The maximum term for all stock options granted under the Stock Incentive
Plan is 10 years (5 years in the case of an incentive stock option granted to a
shareholder who owns 10% or more of the Company's Common Stock). Stock options
granted to the non-employee directors are not intended to qualify as "incentive
stock options" within the meaning of Section 422A of the Internal Revenue Code
of 1986, as amended.
The Board of Directors may at any time terminate, amend or modify the
Stock Incentive Plan; provided, however, that no such action of the Board of
Directors, without the approval of the shareholders of the Company, may increase
the total number of shares of Common Stock which may be issued under the Stock
Incentive Plan, decrease the minimum incentive stock option exercise price,
extend the period during which options may be granted pursuant to the Stock
Incentive Plan, or change the class of individuals eligible to be granted
options. No amendment to the Stock Incentive Plan shall, without the consent of
an optionee, affect such optionee's rights under an option previously granted.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate of Incorporation which provide
that directors of the Company shall not personally be liable for monetary
damages to the Company or its stockholders for a breach of fiduciary duty as a
director, except for liability as a result of (i) a breach of the director's
duty of loyalty to the Company or its stockholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) an act related to the unlawful stock repurchase or payment of a
dividend under Section 174 of the Delaware General Corporation Law, and (iv)
transactions from which the director derived an improper personal benefit. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its
directors and officers to the full extent permitted by Delaware law. The Bylaws
also authorize the Company to indemnify its employees and agents to the full
extent permitted by Delaware law, at the discretion of the Company's Board of
Directors. The Company intends to enter into indemnification agreements with its
directors and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Delaware General Corporation Law.
The indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
<PAGE>
CERTAIN TRANSACTIONS
In May 1995, the Company entered into the SBA Loan with The Money
Store Investment Corporation, a wholly-owned subsidiary of The Money Store, in
the principal amount of $250,000. The loan bears interest at the prime rate plus
1.75%, payable monthly. Principal is payable monthly with the balance due in May
2002. The loan is secured by the Company's inventory, property and equipment, an
assignment of a stockholder's interest in the Key Man Policy , and the personal
guarantees of Lawrence A. Dear, Jon Eisenberg and Lori Dorough Eisenberg.
Lawrence Dear, the Company's Chief Executive Officer, Chief Financial Officer
and President, was employed by The Money Store prior to joining the Company in
1992; Morton Dear, the Company's Chairman nominee, is Vice Chairman and Senior
Executive Vice President of The Money Store. Repayment of the loan is personally
guaranteed by each of Lawrence Dear, Lori Dorough Eisenberg and Jon Eisenberg.
In addition, the Company maintains the Key Man Policy on Ms. Eisenberg, under
which The Money Store is named as beneficiary. The Company believes that the
terms of the loan are no less favorable to the Company than could have been
obtained from third parties.
In December 1995, the Company sold $40,000 of finished goods not
bearing the ELLE trademark to Lawrence Dear, who later resold the swimwear and
remitted the net profits of $36,000 to the Company. This amount was treated as
an additional capital contribution to the Company by Lawrence Dear. The Company
believes that the amount paid by Lawrence Dear was no less favorable to the
Company than could have been obtained from third parties.
From time to time, the Shareholders have loaned money to the Company.
As of September 30, 1997, the amount outstanding was $80,402; such loans (the
"Shareholder Loans") generally are due on demand and bear interest at rates
ranging from 5.9% to 22.15% per annum. The Company pays the minimum payments due
from the Shareholders in connection with the Shareholder Loans. Interest of
$18,951, $10,526, and $12,100 was paid during the years ended December 31, 1995
and 1996, and the nine months ended September 30, 1997, respectively. The loans
are not subordinated to all other indebtedness of the Company. The Company
believes that the terms of the loans are no less favorable to the Company than
could have been obtained from third parties.
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of December 31,
1997 with respect to the beneficial ownership of the Common Stock, and after
giving effect to the Offering, by (a) each of the directors of the Company
individually, (b) all of the executive officers and directors of the Company as
a group and (c) each person known by the Company to be the beneficial owner of
more than five percent of the outstanding shares of Common Stock. Except as
otherwise indicated below, the persons referenced below have advised the Company
that they have sole voting and investment power with respect to the securities
listed as owned by them.
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percentage of Percentage of
BENEFICIAL OWNER(1) BENEFICIALLY Shares Shares
OWNED Owned Prior to Owned After the
THE OFFERING OFFERING
OFFICERS, DIRECTORS
AND DIRECTOR NOMINEES
<S> <C> <C> <C>
Morton Dear -- * *
Lawrence A. Dear 750,000 50.0% 30.0%
Jon Eisenberg 375,000 25.0 15.0
Lori Dorough Eisenberg 375,000 25.0 15.0
Irving B. Kroll -- * *
Maurice Schoenholz -- * *
All directors and executive 1,500,000 100.0% 60.0%
officers as a group (6 persons)
- -----------------------------
(1) Unless otherwise indicated, the business address of all officers and
directors is 3745 Overland Avenue, Los Angeles, California 90034.
* less than 1%.
</TABLE>
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 15,000,000 shares of Common Stock. As of
December 31, 1997, 1,500,000 shares of Common Stock were outstanding.
COMMON STOCK
Each outstanding share of Common Stock entitles the holder to one vote
on all matters requiring a vote of stockholders. Since the Common Stock does not
have cumulative voting rights, the holders of shares having more than 50% of the
voting power, if they choose to do so, may elect all the directors of the
Company and the holders of the remaining shares would not be able to elect any
directors.
Subject to the rights of holders of any series of preferred stock that
may be issued in the future, the holders of the Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." In the event of a
voluntary or involuntary liquidation of the Company, all stockholders are
entitled to a pro rata distribution of the assets of the Company remaining after
payment of claims of creditors and liquidation preferences of any preferred
stock. Holders of the Common Stock have no conversion, redemption or sinking
fund rights.
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of preferred stock
(the "Preferred Stock"). The Board of Directors is authorized to fix the
relative rights and preferences of the shares of Preferred Stock, including
voting powers, dividend rights, liquidation preferences, redemption rights and
conversion privileges. As of the date of this Prospectus, the Board of Directors
has not authorized any series of Preferred Stock, and there are no agreements or
understandings for the issuance of any shares of Preferred Stock. Because of its
broad discretion with respect to the creation and issuance of Preferred Stock
without stockholder approval, the Board of Directors could adversely affect the
voting power of the holders of Common Stock and, by issuing shares of Preferred
Stock with certain voting, conversion and/or redemption rights, could discourage
any attempt to obtain control of the Company.
TRANSFER AGENT
The transfer agent for the Common Stock is U.S. Stock Transfer
Corporation, Glendale, California.
SHARES ELIGIBLE FOR FUTURE SALE
The Company currently has 1,500,000 shares of Common Stock outstanding
and, upon the completion of the Offering will have 2,500,000 shares of Common
Stock outstanding. Of such shares, the shares sold in the Offering (other than
shares which may be purchased by "affiliates" of the Company) will be freely
tradeable without restriction or further registration under the Securities Act.
All of the remaining outstanding shares of Common Stock are "restricted
securities," as that term is defined under Rule 144 promulgated under the
Securities Act ("Rule 144"), and may only be sold pursuant to a registration
statement under the Securities Act or an applicable exemption from the
registration requirements of the Securities Act, including Rule 144. The
Company's executive officers, directors and the Shareholders have agreed not to
offer, sell, or otherwise dispose of their shares, with certain limited
exceptions, for a period of ____ days after the date of the Offering without the
prior written consent of the Underwriter. All of the shares owned by the
Shareholders will be freely tradable in the public market upon expiration of
such ___ day Underwriter's lockup period, subject to restrictions on the volume,
time and manner of sale applicable to affiliates of the Company pursuant to Rule
144.
In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated), including an affiliate, who has
beneficially owned restricted shares for at least one year from the later of the
date such restricted shares were acquired from the Company and (if applicable)
the date they were acquired from an affiliate, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock (25,000 shares based on the number
of shares to be outstanding immediately after the Offering) or the average
weekly trading volume in the public market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 also are subject to certain requirements as to the manner
and notice of sale and the availability of public information concerning the
Company.
Affiliates may sell shares not constituting restricted shares in
accordance with the foregoing volume limitations and other restrictions, but
without regard to the one-year holding period. Restricted shares held by
affiliates of the Company eligible for sale in the public market under Rule 144
are subject to the foregoing volume limitations and other restrictions.
Further, under Rule 144(k), if a period of at least two years has
elapsed between the later of the date restricted shares were acquired from the
Company and the date they were acquired from an affiliate of the Company, and
the person was not an affiliate for at least three months prior to the sale,
such person would be entitled to sell the shares immediately without regard to
volume limitations and the other conditions described above.
An aggregate of 250,000 shares of Common Stock are available for
future option grants and other awards under the 1998 Stock Plan. See "Management
C 1998 Stock Incentive Plan." The Company intends to file a registration
statement under the Securities Act to register all of the shares of Common Stock
reserved for issuance, including shares subject to previously granted options,
under the 1998 Stock Plan. Such registration statement is expected to be filed
as soon as practicable after the date of this Prospectus and will automatically
become effective upon filing. Shares issued under the 1998 Stock Plan after the
registration statement is filed may thereafter be sold in the open market,
subject, in the case of the various holders, to the Rule 144 volume limitations
applicable to affiliates.
No predictions can be made as to the effect, if any, that open market
sales of shares of existing stockholders or the availability of such shares for
future sale will have on the market price of shares of Common Stock prevailing
from time to time. The prevailing market price of Common Stock after the
Offering could be adversely affected by future sales of substantial amounts of
Common Stock by existing stockholders.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell 1,000,000 shares of Common Stock to
the Underwriter. The Underwriter will be obligated to purchase all of such
shares of Common Stock if any are purchased.
The Company has agreed to sell the Common Stock to the Underwriter at
a discount of __% of the public Offering Price. The Company has also agreed to
pay the Underwriter a non-accountable expense allowance of __% of the gross
proceeds of the Offering to be paid at closing, $_____ of which has been
advanced to the Underwriter. In the event the Offering is not completed because
the Company prevents such completion or breaches any covenant, representation or
warranty contained in the Underwriting Agreement, the Underwriter shall be
reimbursed for all actual accountable out-of-pocket costs and expenses incident
to the performance of the Company's obligations set forth in the Underwriting
Agreement, including the accountable expenses of the Underwriter, including
legal fees, but in no event to exceed the sum of $_________, less a credit for
any amounts previously paid to the Underwriter. In the event the Offering is not
completed because the Underwriter prevents its completion (unless such
prevention is based upon a breach by the Company of any covenant, representation
or warranty contained in the Underwriting Agreement), the Company shall not be
liable for the Underwriter's expenses, except that the Underwriter may retain
the $______ to the extent that the Underwriter has incurred accountable costs
previously paid to it.
The Common Stock being offered by the Company to the public is being
offered at a price of $____ per share as set forth on the cover page of this
Prospectus. The Common Stock is offered by the Underwriter subject to receipt
and acceptance by it, to the right to reject any order, in whole or in part.
The Company has granted to the Underwriter an option, exercisable for
30 days from the date of this Prospectus, to purchase up to 150,000 additional
shares of Common Stock at the public Offering Price set forth on the cover page
of this Prospectus, less the underwriting discounts and commissions. The
Underwriter may exercise this option in whole or, from time to time, in part,
solely for the purpose of covering over-allotments, if any, made in connection
with the sale of the shares of Common Stock offered hereby.
The Underwriter has advised that sales to certain dealers may be made
at the public Offering Price less a concession not in excess of __% or $___ per
share. After the Offering, the public Offering Price and other selling terms may
be changed by the Underwriter. The Underwriter does not intend to confirm sales
of more than one percent of the shares of Common Stock offered hereby to any
accounts over which it exercises discretionary authority.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the Offering Price has been determined by negotiations
between the Company and the Underwriter. The major factors considered by the
Company and the Underwriter in determining the public Offering Price of the
Common Stock, in addition to prevailing market conditions, were the Company's
historical performance and growth rates; the history of, and prospects for, the
industry in which the Company operates; an assessment of the Company's
management, business potential and earning prospects; the market prices of
publicly traded common stocks of comparable companies; and the present state of
the Company's development. Based upon their analysis of these factors, all of
which are applicable to the Company, the Company and the Underwriter believe
that the public Offering Price bears a relationship to the assets, book value
and other criteria of value applicable to the Company.
Although it has no legal obligation to do so, the Underwriter may from
time to time act as a marketmaker and otherwise effect transactions in the
Company's securities. The Underwriter, if it participates in the market, may be
a dominating influence in any market that might develop for any of the Company's
securities, and the price and liquidity of the securities may be affected by the
degree, if any, of the Underwriter's participation in the market. Such
activities, if commenced, may be discontinued at any time or from time to time.
See "Risk Factors."
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act arising out of, or
based upon, any untrue statement or alleged untrue statement of any material
fact contained in this Prospectus or the Registration Statement on Form SB-2 of
which this Prospectus is a part. Insofar as indemnification for liabilities
arising under the Securities Act may be provided to officers, directors or
persons controlling the Company, the Company has been informed that, in the
opinion of the Commission, such indemnification is against public policy and
therefore unenforceable.
As part of the consideration to the Underwriter for its services in
connection with the Offering, the Company has agreed to grant to the Underwriter
warrants (the "Underwriter's Warrants") to purchase 100,000 shares of Common
Stock exercisable for a period of four years, commencing 12 months after the
date of the Offering, at an exercise price of $____ per share, subject to
certain adjustments. The exercise price of the Underwriter's Warrants was
determined by negotiation between the Company and the Underwriter and should not
be deemed to reflect any estimate of the intrinsic value of either the
Underwriter's Warrants or the underlying Common Stock. The Underwriter's
Warrants will contain anti-dilution provisions in the event of any
recapitalization, split-ups of shares or certain stock dividends, as well as
certain registration rights. The Underwriter's Warrants shall not be
transferred, sold, assigned or hypothecated, in part or in whole (other than by
will or pursuant to the laws of descent and distribution) except to officers of
the Underwriter. Furthermore, if any of the Underwriter's Warrants are
transferred after one year following the effective date of the Registration
Statement of which this Prospectus forms a part, such warrants shall be
exercised immediately upon transfer, and if not exercised immediately upon
transfer, and if not exercised immediately upon transfer, such warrants shall
lapse. The Company has agreed that, upon the request of the then holder(s) of a
majority of the Underwriter's Warrants and the underlying securities, if issued,
which were originally issued to the Underwriter or its designees, made at any
time within the period commencing one year and ending four years after the
effective date of the Registration Statement of which this Prospectus forms a
part, the Company will file, at its sole expense, not more than once, a
registration statement under the Securities Act, registering or qualifying the
shares underlying the Underwriter's Warrants for public sale. The Company has
also agreed, with certain limitations, that if at any time within the period
commencing one year and ending four years after such effective date, it should
file a registration statement with the Commission pursuant to the Securities
Act, the Company, at its own expense (other than seller's commissions and the
expenses of seller's counsel or others hired by seller), will offer to said
holder(s) the opportunity to register or qualify the shares underlying the
Underwriter's Warrants. In addition, the Company has agreed to cooperate with
the holders of the Underwriter's Warrants and the underlying securities in
preparing and signing any other registration statement at the holder's expense
not more than once.
For the life of the Underwriter's Warrants, the holders thereof are
given the opportunity to profit from a rise in the market price of the Common
Stock which may result in a dilution of the interest of the stockholders. The
Company may find it more difficult to raise additional equity capital if it
should be needed for the business of the Company while the Underwriter's
Warrants are outstanding. At any time when the holders thereof might be expected
to exercise them, the Company would probably be able to obtain additional equity
capital on terms more favorable than those provided by the Underwriter's
Warrants. Any profit realized on the sale of the securities issuable upon the
exercise of the Underwriter's Warrants may be deemed additional underwriting
compensation. As described above, the Company has granted to the Underwriter
certain registration rights with respect to the Underwriter's Warrants and the
securities issuable thereunder.
The Company, its executive officers, directors and present
stockholders have agreed with the Underwriter that such stockholders will not
publicly sell or otherwise dispose of any of their shares of Common Stock (nor
any shares which may be issued upon exercise of options granted to the
stockholder) for a period of ___ days from the closing of the Offering without
the prior written consent of the Underwriter, which shall not be unreasonably
withheld.
The foregoing is a summary of certain terms of the Underwriting
Agreement and Warrant Agreement relating to the Underwriter's Warrants, copies
of which were filed with the Commission as exhibits to the Company's
Registration Statement on Form SB-2. Reference is hereby made to such exhibits
for a detailed description of the provisions thereof as summarized above. See
"Additional Information."
In connection with the Offering, the Underwriter and selling group
members (if any) and its affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Common Stock. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase
Common Stock for the purpose of stabilizing its market price. The Underwriter
also may create a short position for the account of the Underwriter by selling
more Common Stock in connection with the Offering than it is committed to
purchase from the Company, and in such case may purchase Common Stock in the
open market following completion of the Offering to cover all or a portion of
such short position. In addition, the Underwriter may impose "penalty bids"
under contractual arrangements whereby it may reclaim from a dealer
participating in the Offering for its account, the selling concession with
respect to the Common Stock that is distributed in the Offering but subsequently
purchased for its account in the open market. Any of the transactions described
in this paragraph may result in the maintenance of the price of the Common Stock
at a level above that which might otherwise prevail in the open market. None of
the transactions described in this paragraph is required, and, if any is
undertaken, may be discontinued at any time.
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed
on for the Company by Stroock & Stroock & Lavan LLP, Los Angeles, California and
for the Underwriters by Sills, Cummis, Zuckerman, Radin, Tischman, Epstein &
Gross, Newark, New Jersey.
EXPERTS
The financial statements as of December 31, 1996 and for each of the
two years in the period then ended included in this Prospectus have been audited
by Grobstein, Horwath & Company LLP independent auditors, as stated in their
reports, which are included and incorporated by reference herein and have been
so included and incorporated in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
registration statement on Form SB-2 under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus does not contain all the
information set forth in such registration statement and the exhibits and
schedules thereto. For further information with respect to the Company or such
Common Stock, reference is made to such registration statement and the schedules
and exhibits filed as part thereof. Statements contained in this Prospectus
regarding the contents of any contract or other document are not necessarily
complete and, in each instance, reference is hereby made to the copy of such
contract or other document filed as an exhibit to such registration statement.
Such registration statement, including exhibits thereto, may be inspected
without charge at the Securities and Exchange Commission's principal office at
450 Fifth Street, N.W., Washington D.C. 20549, and at the regional offices of
the Commission located at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and at Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of all or any part of such registration statement may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fees prescribed by the Commission.
The Commission also maintains a site on the World Wide Web at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company currently is not a "reporting company" subject to the
information and reporting requirements of Sections 13(a) or 15(d) of the
Exchange Act.
As a result of this Offering, the Company will become subject to the
information and periodic reporting requirements of the Exchange Act and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the Commission. Such periodic reports, proxy statements, and
other information will be available for inspection and copying at the public
reference facilities and regional offices referred to above.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent certified public
accountants and with quarterly reports containing unaudited financial
information for each of the first three quarters of each fiscal year.
<PAGE>
FASHION MAG APPAREL, INC.
INDEX TO FINANCIAL STATEMENTS
Pages
INDEPENDENT AUDITORS' REPORT F-2
BALANCE SHEETS F-3
STATEMENTS OF OPERATIONS F-4
STATEMENTS OF STOCKHOLDERS' EQUITY F-5
STATEMENTS OF CASH FLOWS F-6
NOTES TO FINANCIAL STATEMENTS F-7 through F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Fashion Mag Apparel, Inc.
We have audited the accompanying balance sheet of Fashion Mag Apparel, Inc. as
of December 31, 1996, and the related statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fashion Mag Apparel, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
GROBSTEIN, HORWATH & COMPANY LLP
Sherman Oaks, California
October 28, 1997
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FASHION MAG APPAREL, INC.
BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
December 31, September 30, Pro Forma Adjustment Pro Forma Equity
1996 1997 Adjustment September 30, 1997
(Unaudited) (Unaudited Note 1) (Unaudited
<S> <C> <C> <C> <C>
Current Assets
Cash $ 925 $ 7,785
Due from factor -- 135,052
Accounts receivable, non-factored, net of 13,425 61,554
allowance for doubtful accounts
Inventories 839,838 905,959
Deferred offering costs -- 101,598
--------- ---------
Total Current Assets 854,188 1,211,948
PROPERTY AND EQUIPMENT, at cost,
net of accumulated depreciation 76,853 74,188
OTHER ASSETS 10,911 10,911
------- ---------
TOTAL ASSETS $ 941,952 $ 1,297,047
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 226,006 $ 293,517
Accrued salaries 61,113 181,105
Accrued royalties 18,455 19,089
Due to factor 6,853 --
Customer deposits 37,826 74,682
Income taxes payable 1,268 2,200
Current portion of notes and contracts payable 20,259 35,130
Loans payable to stockholders 127,397 80,402
------- -------
Total Current Liabilities 499,177 686,125
------- -------
LONG-TERM DEBT
Notes and contracts payable, net of current 275,261 246,671
------- -------
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred Stock, Par value $0.01 per share; -- --
1,000,000 shares authorized;
no shares issued and outstanding
Common stock, par value $0.01 per share;
15,000,000 shares authorized; 15,000 15,000 15,000
1,500,000 shares issued and outstanding
Additional paid-in capital 133,168 185,126 185,126
Retained Earnings 19,346 164,125 164,125
--------- ---------- ------- --------
Total Stockholders' Equity 167,514 364,251 $349,251 $ 15,000
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 941,952 $1,297,047
========== ==========
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FASHION MAG APPAREL, INC.
STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED Nine Months Ended
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES $2,016,930 $3,072,108 $2,650,425 $2,448,336
COST OF SALES 1,435,718 1,846,862 1,603,041 1,362,765
--------- --------- --------- ---------
GROSS PROFIT 581,212 1,225,246 1,047,384 1,085,571
---------- --------- ---------- ---------
OPERATING EXPENSES
Selling & shipping 302,892 497,183 388,786 403,295
General & administrative 365,217 443,837 287,742 472,737
Interest 53,021 57,838 54,388 61,760
---------- ---------- ---------- ----------
TOTAL OPERATING 721,130 998,858 730,916 937,792
---------- ---------- ----------
EXPENSES
INCOME (LOSS) (139,918) 226,388 316,468 147,779
BEFORE PROVISION
FOR INCOME TAXES ROVISION FOR 800 2,068 2,068 3,000
---------- ---------- ---------- ----------
INCOME TAXES
NET INCOME (LOSS) $ (140,718) $ 224,320 $ 314,400 $ 144,779
=========== ========= ========= =========
PRO FORMA EFFECTS ON NET INCOME
(LOSS) AND EARNINGS
(LOSS) PER SHARE
HAD THE COMPANY BEEN TAXABLE AS A
REGULAR CORPORATION
PRO FORMA NET $ (140,718) $ 199,087 $ 277,683 $ 98,512
INCOME (LOSS) ========== ========= ========= =========
PRO FORMA EARNINGS $ (0.09) $ 0.13 $ 0.19 $ 0.07
(LOSS) PER SHARE ============ ========= ========= =========
WEIGHTED AVERAGE 1,500,000 1,500,000 1,500,000 1,500,000
NUMBER OF SHARES ========= ========= ========= =========
OUTSTANDING
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FASHION MAG APPAREL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (unaudited)
- -------------------------------------------------------------------------------------------------------------------
COMMON STOCK Paid-In Retained
SHARES AMOUNT CAPITAL EARNING TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995 1,500,000 $ 15,000 $83,168 $ -- $98,168
Capital contribution -- -- 50,000 -- 50,000
Net loss - year
ended December 31, 1995 -- -- -- (140,718) (140,718)
------------ ------------ ------------ --------- ---------
BALANCE, December 31, 1995 1,500,000 15,000 133,168 (140,718) 7,450
Dividend distribution -- -- -- (64,256) (64,256)
Net income - year
ended December 31, 1996 -- -- -- 244,320 244,320
------------ ------------ ------------ ------- -------
BALANCE, December 31, 1996 1,500,000 15,000 133,168 19,346 167,514
Capital contribution (unaudited) -- -- 51,958 -- 51,958
Net income - nine months
ended September 30, 1997
(unaudited) -- -- -- 144,779 144,779
------------ ------------ ------------ ------- -------
BALANCE, September 30,1997 (unaudited) 1,500,000 $ 15,000 $ 185,126 $ 164,125 $ 364,251
========= ====== ======= ======= =======
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FASHION MAG APPAREL, INC.
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
Years Ended Nine Months Ended
December 31, September 30,
1995 1996 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (140,718) $ 224,320 $ 314,400 $ 144,779
Adjustments to reconcile net income (loss)
to net cash provided by (used in) -- --
operating activities:
Allowance for doubtful accounts 10,090 62,555 10,910 (19,645)
and open credits
Depreciation 7,316 13,426 10,069 15,921
Sources (uses) of cash from changes in
operating assets and liabilities:
Factor and other accounts receivable (99,856) 88,708 30,706 (190,442)
Inventories 109,673 (393,815) (172,472) (66,121)
Prepaid expenses -- -- (10,911) --
Accrued salaries 42,405 6,256 (37,889) 120,992
Accrued royalties (41,608) (14,937) (2,698) 634
Customer Deposits -- 37,826 38,396 36,856
Income taxes payable -- 1,268 1,268 932
-------------- ---------- -------- --------
NET CASH PROVIDED BY (USED IN) (223,771) 108,381 189,881 110,437
OPERATING ACTIVITIES ------------ ----------- -------- ----------
INVESTING ACTIVITIES
Expenditures for property and equipment (5,580) (64,163) (63,606) (13,256)
(Increase) decrease in other assets 1,398 (4,209) 6,702 --
------------- ---------- ------- ------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (4,182) (68,372) (56,904) (13,256)
------------- ---------- --------- ---------
FINANCING ACTIVITIES
Increase (decrease) in cash overdraft 36,036 (36,036) (36,036) --
Proceeds from (payment to) factor 24,471 (33,666) (106,128) 20,033
Proceeds from (payments on) loans
payable to stockholders (81,441) 48,241 (39,622) 4,963
Proceeds from notes and contracts payable 250,000 53,916 50,633 --
Payments on notes and contracts payable (1,113) (7,283) -- (13,719)
Deferred offering costs -- -- -- (101,598)
Dividend distribution -- (64,256) -- --
------------- ---------- ---------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 227,953 (39,084) 65,892 (15,609)
----------- ------------- ---------- ---------
INCREASE IN CASH -- 925 1,824 6,860
BEGINNING CASH -- -- -- 925
-------------- ----------- ----------- ---------
ENDING CASH $ -- $ 925 $ 1,824 $ 7,785
============= ========== ========== =========
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
- -----------------------------------------------------------------------------
FASHION MAG APPAREL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Business Activity and Summary of Significant Accounting Policies
FORMATION AND BUSINESS ACTIVITY
Fashion Mag Apparel, Inc. (the Company), was incorporated in Delaware
on September 30, 1997, as the successor to T.K. Mab, Inc., (a
California Corporation), which commenced operations on January 1, 1995.
T.K. Mab, Inc. was the successor to T.K. Mab (a California General
Partnership), which commenced operations on January 1, 1992.
The Company designs, sources, markets and distributes women's
activewear and swimwear in the United States and Canada under an
exclusive license using the ELLE7 trademark and, to a lesser extent,
under private labeling arrangements.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS In the opinion of management,
the unaudited interim financial statements as of September 30, 1997 and
for the nine month period ended September 30, 1996 and 1997 are
presented on a basis consistent with the audited annual financial
statements and reflect all adjustments, consisting only of normal
recurring accruals, necessary for fair presentation of the results of
such periods. The results of operations for the interim period ended
September 30, 1997 are not necessarily indicative of the results to be
expected for the year ending December 31, 1997.
FINANCIAL INSTRUMENTS AND RISK CONCENTRATION Financial instruments
include cash, receivables and debt instruments. The Company considers
the carrying amounts in the financial statements to approximate fair
value for these financial instruments and their expected realization.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FINANCIAL INSTRUMENTS AND RISK CONCENTRATION (CONTINUED) Financial
instruments which potentially subject the Company to concentrations of
credit risk consist of accounts receivable. Concentrations of credit
risk with respect to receivables are limited due to the use of a
factor. In addition, the Company maintains an allowance for doubtful
accounts with respect to non-factored accounts receivable which, when
realized, have been within the range of management's expectations.
INVENTORIES
Inventories are stated at the lower of cost, (first-in, first-out
method) or market.
DEPRECIATION
Depreciation is provided by straight-line and accelerated methods over
the estimated useful lives of the related assets, which ranges from
five to seven years.
Based upon management's assessment, the carrying values of property and
equipment at December 31, 1996 were not impaired.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of merchandise upon
shipment. The Company accrues for estimated sales returns and
allowances in the period in which the related revenue is recognized.
INCOME TAXES
Prior to the planned initial public offering, the Company's
stockholders elected to be taxed as an S-corporation. Accordingly, no
provision for federal income taxes was provided for the years ended
December 31, 1995 and 1996, since the stockholders reported the
earnings of the Company on their individual income tax returns.
However, the Company was subject to minimum California franchise taxes,
based on income.
The Company's S-corporation status will be terminated upon the
effective date of the planned initial public offering and, thereafter,
the Company will be taxed as a regular corporation. The pro forma
effects on net income and earnings per share had the Company been
taxable as a regular corporation since its inception on January 1, 1995
is presented as supplemental information on the Statements of
Operations.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
Deferred income taxes have not been material from the Company's
inception through September 30, 1997. At the date the Company's income
tax status reverts to that of a regular corporation, the Company
intends to account for income taxes using an asset and liability
approach. Deferred income taxes will be provided for temporary
differences between the financial reporting and the tax basis of the
Company's assets and liabilities.
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares of
common stock outstanding during each period.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." This
standard will become effective for the quarter ending December 31,
1997, with earlier application not permitted. Management believes the
effect of the new accounting standard will not be significant.
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation." Under SFAS 123, a fair value method is used
to determine compensation cost for stock options or similar equity
instruments. Compensation is measured at the grant date and is
recognized over the service or vesting period. The Company intends to
adopt this method of accounting for any stock option plans established
in conjunction with the Offering.
PRO FORMA ADJUSTMENT
The unaudited pro forma equity as of September 30, 1997 gives effect
to the proposed distribution to stockholders of $349,251 discussed in
Note 15. Any adjustment to the proposed distribution for earnings from
October 1 through the date of S-Corporation termination has not been
reflected.
NOTE 2 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts was $22,000 at December 31, 1996
and $22,000 at September 30, 1997 (unaudited).
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - DUE TO/FROM FACTOR
The Company sells substantially all accounts receivable to a factor
under a continuing contract, cancelable upon written notice. In cases
where the factor approves the credit, the account is sold without
recourse and the factor assumes all credit risk. In those cases where
the factor does not approve the credit, the Company bears the credit
risk. The factored receivables for which the Company was at risk were
approximately $9,806 and $13,578 at December 31, 1996 and September
30, 1997, (unaudited), respectively. The Company is contingently
liable to the factor for merchandise disputes, customer claims and
other chargebacks on receivables sold to the factor. All trade
accounts receivable are collateral for factor advances.
Due to/from factor consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997,
(Unaudited)
<S> <C> <C>
Outstanding accounts receivable $ 259,615 $ 401,908
Advances (214,823) (234,856)
Open credit memos (51,645) (32,000)
-------- --------
$ (6,853) $ 135,052
======== ========
Maximum amount of month-end
factor advances outstanding $ 233,000 $ 280,000
======= ========
Average advances based upon
month-end balances $ 131,000 $ 197,000
======= ========
NOTE 4 - INVENTORIES
Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30,
1996 1997
(Unaudited)
Piece goods $ 140,673 $ 21,913
Work in process 104,311 64,784
Finished goods 594,854 819,262
------- -------
$ 839,838 $ 905,959
======= =======
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - DEFERRED OFFERING COSTS
Costs incurred in connection with the Company's current anticipated
public offering are deferred and will be charged against stockholders'
equity upon the successful completion of the Offering or charged to
expense if the Offering is not consummated.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
(Unaudited)
<S> <C> <C>
Office and computer equipment (including
$53,916 under capitalized lease) $ 75,364 $ 82,902
Furniture and fixtures 20,231 25,949
Machinery and equipment 10,322 10,322
Automobile 3,500 3,500
------- ---------
109,417 122,673
Less accumulated depreciation (including
$3,594 in 1996 and $11,681 in 1997
under capitalized lease) (32,564) (48,485)
------- -------
$76,853 $ 74,188
====== ======
</TABLE>
Depreciation expense of property and equipment was $7,316, $13,426,
$10,070 and $15,921 for the years ended December 31, 1995 and 1996 and
for the nine months ended September 30, 1996 (unaudited) and 1997
(unaudited), respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - NOTES AND CONTRACTS PAYABLE
Notes and contracts payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
(Unaudited)
<S> <C> <C>
Note payable, guaranteed by the Small Business
Administration, secured by inventory, property and equipment,
assignment of a stockholder's interest in a life insurance
policy, and the principal stockholder's personal guarantees.
Interest is payable at prime plus 1.75% per annum (10.0% and
10.25% at December 31, 1996 and September 30, 1997). Monthly
payments of interest and principal vary with the interest
rate and are payable through July 2002 $ 244,770 $ 237,310
Equipment lease agreement, accounted for as a capital lease,
secured by computer equipment. Payable in aggregate monthly
installments of $1,209, including interest at approximately
12.83% per annum, through July 2001 50,750 44,491
------- -------
295,520 281,801
Less current portion (20,259) (35,130)
------- -------
$ 275,261 $ 246,671
======= =======
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - NOTES AND CONTRACTS PAYABLE (CONTINUED)
Maturities of notes and contracts payable are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
(Unaudited)
<S> <C> <C>
1997 $ 27,236 $ 8,895
1998 47,087 47,087
1999 65,432 65,432
2000 70,070 70,070
2001 70,309 70,309
Thereafter 32,353 32,353
------ ------
312,487 294,146
Less amount representing interest under
capital lease obligation (16,967) (12,345)
------- -------
$ 295,520 281,801
======= =======
</TABLE>
NOTE 8 - PAYABLE TO STOCKHOLDERS
In January 1995, the Company assumed $210,597 of the predecessor
partnership's obligations to individuals who became stockholders of the
Company, as well as to relatives of the stockholders. These amounts
were due on demand and bore interest of approximately 10% per annum.
During the year ended December 31, 1995 and the nine month period ended
September 30, 1997 (unaudited), one of the stockholders contributed
$50,000 and $51,958, respectively, of indebtedness to capital.
During the years ended December 31, 1995 and 1996, and the nine months
ended September 30, 1997 (unaudited), certain stockholders made
additional advances to the Company or paid for fabric and other
manufacturing costs on behalf of the Company. These advances and costs
were due on demand and bore varying interest rates.
During the years ended December 31, 1995 and 1996, and the nine months
ended September 30, 1996 and 1997 (unaudited), interest expense on
amounts payable to stockholders or relatives of the stockholders were
$18,951, $10,526, $7,895 and $12,100, respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMITMENTS LEASES
The Company leases office, warehouse and showroom facilities under two
operating leases that require aggregate monthly payments of
approximately $6,350. The leases expire on May 31, 1999.
The Company's principal facility lease contains a three year renewal
option. The Company's future minimum lease payments required under
noncancelable operating leases with initial or remaining terms in
excess of one year were as follows:
DECEMBER 31, SEPTEMBER 30,
1996 1997
(Unaudited)
1997 $ 76,205 $ 19,051
1998 76,431 76,431
1999 31,915 31,915
------------- -------
$ 184,551 $ 127,397
======= =======
Lease expense was $56,408, $76,994, $44,158, and $69,731 for the years
ended December 31, 1995 and 1996 and for the nine months ended
September 30, 1996 (unaudited) and 1997 (unaudited), respectively.
LICENSING AGREEMENT
In July 1994, the Company entered into a two-year licensing agreement
to produce and distribute apparel under the trade name ELLE7. The
licensing agreement was subsequently extended through December 31,
1999, defined as the First Renewal Period. The licensing agreement will
be automatically renewed through December 31, 2002, the Second Renewal
Period, provided the licensor has earned royalties totaling $1,000,000
during the First Renewal Period. In order to earn those royalties, the
Company would need to generate $16,700,000 in net sales during the
First Renewal Period. The Company has incurred approximately $8,500,000
of net sales from July 1, 1994 through September 30, 1997. If this goal
is not achieved, the licensor will consider a renewal no later than 90
days prior to the conclusion of the First Renewal Period.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMITMENTS (CONTINUED) LICENSING AGREEMENT (CONTINUED)
The Company's future minimum royalty payments required under the
licensing agreement were as follows:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -----------
(Unaudited)
1997 $150,000 $ 47,000
1998 185,000 185,000
1999 245,000 245,000
------- -------
$580,000 $477,000
======= =======
Royalty expense was $100,924 and $130,390, $100,230, and $102,526 for
the years ended December 31, 1995 and 1996 and for the nine months
ended September 30, 1996 (unaudited) and 1997 (unaudited),
respectively.
NOTE 10 - CAPITAL STRUCTURE
In anticipation of the Company's initial public offering, the
accompanying financial statements retroactively present the capital
structure as it appears upon the Company's reincorporation in Delaware,
giving effect to a 1,500 for 1 stock split, as if it occurred on
January 1, 1995.
The Company is authorized to issue 1,000,000 shares of preferred stock.
The rights and privileges of the preferred stock have not been
established.
In anticipation of the Company's initial public offering, the Company
intends to establish the 1998 Stock Incentive Plan which permits the
Company to grant incentive and non-qualified stock options to purchase
an aggregate of up to 10% of the outstanding shares of common stock. No
options were granted as of December 31, 1996 or September 30, 1997.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure." This standard will become effective for the
quarter ended December 31, 1997. Management believes the effect of the
new disclosure standard will not be significant, as the Company is
already required to provide such disclosures.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - MAJOR PRODUCTS AND CUSTOMERS
Net sales of ELLE trademark products accounted for approximately 80%,
66%, 66% and 70% of the Company's net sales for the years ended
December 31, 1995 and 1996 and for the nine months ended September 30,
1996 (unaudited) and 1997 (unaudited), respectively.
Customers comprising 10% or greater of the Company's net sales are
summarized as follows:
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
(Unaudited) (Unaudited)
Ross Stores Inc. 12% -- -- --
IJC By Germaine -- 13% 13% --
Cache, Inc. -- 12% 12% --
Loehmann's Inc. -- -- -- 22%
NOTE 12 - MAJOR SUPPLIERS
Fabric suppliers comprising 10% or greater of the Company's purchases
are summarized as follows:
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
(Unaudited) (Unaudited)
Knitex, Inc. 35% 39% 39% 52%
Classic Textiles -- -- -- 25%
C.I.A., Inc. 17% -- -- --
NOTE 13 - RELATED PARTY TRANSACTIONS
In December 1995, the Company sold $40,000 of finished goods to
Lawrence Dear, one of the stockholders. Lawrence Dear later resold the finished
goods and remitted the net profits of $36,000 to the Company as additional
paid-in Capital.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NONCASH
INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED Nine Months Ended
DECEMBER 31 SEPTEMBER 30
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash paid for interest $ 89,390 $ 79,218 $ 75,768 $ 59,064
====== ====== ====== ======
Cash paid for income taxes $ 800 $ 800 $ 800 $ 2,068
=== === === =====
Upon the formation of the Company on January
1, 1995, the following net assets were
contributed by the stockholders in
exchange for common stock:
Accounts receivable, net $ 3,498
of $1,000 allowance for
doubtful account
Due from factor 55,376
Inventories 555,696
Other assets 35,953
Accounts payable and (341,758)
accrued expenses
Due to stockholders and (210,597)
related parties --------
Net Assets $ 98,168
======
Contribution to capital $ 50,000 -- -- $ 51,958
====== ======
of amounts due to stockholders
</TABLE>
NOTE 15 - PROPOSED PUBLIC OFFERING
The Company has entered into a letter of intent with an
underwriter to sell the Company's Common Stock in a public offering. Upon a
registration statement being declared effective, 1,000,000 shares are
anticipated to be sold.
Before the closing of the Company's initial public offering, the
Company intends to declare and pay dividends to the stockholders equal to
$349,251 plus an amount equal to the Company's net income from October 1, 1997
through the date the Company's election to be taxed as an S Corporation is
terminated.
<PAGE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations in connection with this offering
other than those contained in this Prospectus and, if given or made, such
information or representations must not be relied on as having been authorized
by the Company or by the Underwriter. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any security other than the
securities offered by this Prospectus, or an offer to sell or a solicitation of
an offer to buy any securities by any person in any jurisdiction in which such
offer or solicitation is not authorized or is unlawful. The delivery of this
Prospectus shall not, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to the date of
this Prospectus.
TABLE OF CONTENTS
PAGE
Prospectus Summary...............................
Risk Factors.....................................
Use of Proceeds..................................
Termination of S Corporation Status..............
Dilution.........................................
Capitalization...................................
Selected Financial Data..........................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................................
Business.........................................
Management.......................................
Certain Transactions.............................
Principal Stockholders...........................
Description of Capital Stock.....................
Shares Eligible for Future Sale
Underwriting.....................................
Legal Matters....................................
Experts..........................................
Additional Information...........................
Financial Statements Index.......................F-1
Until _______, 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
<PAGE>
1,000,000 SHARES
FASHION MAG
APPAREL, INC.
------------------
PROSPECTUS
------------------
----------, 1998
STRASBOURGER PEARSON
TULCIN WOLFF
INCORPORATED
61 BROADWAY
NEW YORK, NEW YORK 10006
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES,OF ISSUANCE AND DISTRIBUTION
The following table sets forth costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the NASDAQ SmallCap Market listing application fee.
ITEM
Securities and Exchange Commission Registration Fee..... $ 1,697.00
NASD filing fee ........................................ 674.24
Nasdaq SmallCap Market listing application fee.......... 6,000.00
Blue Sky fees and expenses ............................. 15,000.00
Printing and engraving expenses......................... 75,000.00
Legal fees and expenses ................................ 150,000.00
Accounting fees and expenses............................ 90,000.00
Transfer Agent and Registrar fees....................... 1,100.00
Directors and officers liability insurance.............. 25,000.00
Miscellaneous........................................... 10.528.76
----------
Total.............................................. $375,000.00
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he believed to be in or not opposed to the best
interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that, despite the adjudication of liability, such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification provided for by Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the corporation is empowered to purchase and maintain
insurance on behalf of a director, officer, employee or agent of the corporation
against any liability asserted him or incurred by him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under Section 145.
Article 33 of the Registrant's Bylaws provides, in substance, for the
indemnification of directors and officers of the Registrant to the fullest
extent permitted by Delaware law. The Registrant intends to obtain an insurance
policy in the amount of $2,000,000 in respect of potential liabilities of its
officers and directors, including potential liabilities under the Securities
Act.
The Registrant refers to the indemnification provisions in the
employment agreements filed as Exhibits 10.1 through 10.3 to this Registration
Statement, which provide for indemnification by the Company of certain officers
and directors of the Registrant against certain liabilities in connection with
the Offering, including liabilities under the Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
See Item 17 of this Registration Statement regarding the opinion of the
Securities and Exchange Commission as to indemnification for liabilities arising
under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On January 9, 1995 an aggregate 1,000 shares of Common Stock of the
Company's predecessor were issued to the shareholders thereof (Lawrence A. Dear,
Lori Dorough Eisenberg and Jon Eisenberg), for $100 in cash. The issuance of
such shares was effected in reliance upon an exemption from registration under
Section 4(2) of the Securities Act as a transaction by an issuer not involving a
public offering. On September 30, 1997, in connection with the organization of
the Company, an aggregate of 4 shares of Common Stock of the Company were issued
the shareholders of the Company in exchange for transferring the predecessor to
the Company. On February __, 1998, the shareholders contributed the shares of
Common Stock of the predecessor in exchange for 1,499,996 shares of the
Company's Common Stock. The issuance of such shares was effected in reliance
upon an exemption from registration under Section 4(2) of the Securities Act as
a transaction by an issuer not involving a public offering. The issuance of the
shares of Common Stock was effected in reliance upon an exemption from
registration under Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Registrant.*
3.2 Bylaws of Registrant.*
4.1 Specimen Common Stock Certificate.*
5.1 Opinion of Stroock & Stroock & Lavan LLP.*
10.1 Employment Agreement between the Company and
Lawrence A. Dear.*
10.2 Employment Agreement between the Company and
Jon Eisenberg.*
10.3 Employment Agreement between the Company and
Lori Dorough Eisenberg.*
10.4 1998 Stock Incentive Plan and form of agreement
thereunder.*
10.5 License Agreement dated January 1, 1997 by and
between the Company and Hachette Filipacchi Presse.
10.6 Lease Agreement dated May 1, 1996 by and between the
Company and Evard Realty, Inc.
10.7 Factoring Agreement dated June 26, 1995 by and
between the Company and Republic Factors Corp.
10.8 Note dated May 23, 1995 made by the Company in favor
of The Money Store Investment Corporation.*
21.1 Subsidiaries of the Registrant.
23.1 Consent of Grobstein, Horwath & Company, LLP.
23.2 Consent of Stroock & Stroock & Lavan LLP (see
exhibit 5.1).*
23.3 Consent of Irving B. Kroll.
23.4 Consent of Maurice Schoenholz.
24.1 Power of Attorney (see page II-4).
- -----------------------------------
* To be filed by amendment
(B) FINANCIAL STATEMENT SCHEDULES
None.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under Securities Act
of 1933, as amended (the "Securities Act"), may be permitted as to directors,
officers, and controlling persons of the Registrant pursuant to the provisions
described in Item 14 or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be initial BONA FIDE offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Fashion Mag Apparel, Inc., a corporation duly organized and existing
under the laws of the State of Delaware, has duly caused this Amendment No. 1 to
the Registration Statement on Form SB-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on the 9th day of March, 1998.
FASHION MAG APPAREL, INC.
By /S/ LAWRENCE A. DEAR
Lawrence A. Dear,
President, Chief Executive Officer
and Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below on this Amendment No. 1 to
the Registration Statement hereby constitutes and appoints Jon Eisenberg and
Lori Dorough Eisenberg, and each of them, with full power to act without the
other, his true and lawful attorneys-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (until revoked in writing) to sign any and all amendments
to this Registration Statement (including post-effective amendments and
amendments thereto) and any registration statement relating to the same offering
as this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting to said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing, ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE Title Date
/s/ Morton Dear Chairman of the Board March 9, 1998
Morton Dear nominee
/s/ Lawrence A.Dear President, Chief March 9, 1998
Lawrence A. Dear Executive
Officer, Chief
Financial
Officer and Director
/s/ Lori Dorough Eisenberg Vice President of March 9 , 1998
Lori Dorough Eisenberg Design
and Merchandising and
Director
/s/ Jon Eisenberg Vice President of March 9, 1998
Jon Eisenberg Purchasing/National
Sales and Director
<PAGE>
EXHIBIT DESCRIPTION
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of Registrant*
3.2 Bylaws of Registrant*
4.1 Specimen Common Stock Certificate*
5.1 Opinion of Stroock & Stroock & Lavan LLP*
10.1 Employment Agreement between the Company and
Lawrence A. Dear*
10.2 Employment Agreement between the Company and
Jon Eisenberg*
10.3 Employment Agreement between the Company and Lori
Dorough Eisenberg*
10.4 1998 Stock Incentive Plan and form of agreement
thereunder*
10.5 License Agreement dated January 1, 1997 by and
between the Company and Hachette Filipacchi Presse
10.6 Lease Agreement dated May 1, 1996 by and between
the Company and Evard Realty, Inc.
10.7 Factoring Agreement dated June 26, 1995 by and
between the Company and Republic Factors Corp.
10.8 Note dated May 23, 1995 made by the Company in
favor of The Money Store Investment Corporation*
21.1 Subsidiaries of the Registrant.
23.1 Consent of Grobstein, Horwath & Company, LLP.
23.2 Consent of Stroock & Stroock & Lavan LLP (see exhibit
5.1)*
23.3 Consent of Irving B. Kroll
23.4 Consent of Maurice Schoenholz
24.1 Power of Attorney (see page II-4)
- -------------------------
* To be filed by amendment
EXHIBIT 10.5
LICENSE AGREEMENT
THIS AGREEMENT, made and entered into as of the 1st day of January
1997, by and between HACHETTE FILIPACCHI PRESSE (hereinafter referred to as
"Licensor") having an address c/o Hachette Filipacchi Magazines, Inc. of 1633
Broadway, New York, New York 10019, and T.K. MAB INCORPORATED of 3745 Overland
Avenue, Los Angeles, California 90034 (hereinafter referred to as "Company");
WITNESSETH:
WHEREAS, Licensor is the owner of the ELLE trademark and owns all
rights therein, and is exclusively entitled to license the rights to manufacture
and sell merchandise identified with the "Licensed Property," as hereinafter
defined; and
WHEREAS, ELLE magazine is published in the United States by Elle
Publishing L.P. under license from Licensor; and
WHEREAS, Company desires to obtain from Licensor a license to
manufacture and sell certain articles using the Licensed Property;
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, the parties agree as follows:
Article I. Definitions. For purposes of this Agreement the following
definitions shall apply:
(a) "Products" shall mean those articles of merchandise grouped into
categories, as follows:
i) "Ladies' swimwear" consisting of one-piece and two-piece
ladies' swimwear designed and manufactured expressly for
swimming (hereinafter referred to as "Swimwear Products");
ii) "Ladies' swimwear coverups" consisting of casual tops
designed using fabrics, colors and styles which are similar
to and coordinate with "Ladies' swimwear" (defined
immediately above) and which are sold together with such
"Ladies' swimwear" in the swimwear sales area (hereinafter
referred to as "Coverup Products"); and
iii) "Activewear" consisting of sweatsuits, fleece tops and
bottoms, sweatshirts, t-shirts, exercise tights and
leotards, long sleeve and short sleeve knit tops and
coordinated knit wear, and all articles of clothing (not
including any articles of footwear, socks or hosiery)
appropriate to be worn while participating in exercise
activity (hereinafter referred to as "Activewear Products").
(b) "Licensed Products" shall mean all Products manufactured
by or on behalf of Company which are identified with the Licensed
Property or which are sold to consumers in a container or
packaging which incorporates the Licensed Property. Licensed
Products consisting of "Swimwear Products" are hereinafter
referred to as "Category A Products" and Licensed Products which
consist of "Coverup Products" and "Activewear Products" are
hereinafter collectively referred to as "Category B Products."
(c) "Territory" shall mean the United States of America, its
territories and possessions, and Canada, subject to the
provisions set forth in Article II (d) below.
(d) "Licensed Property" shall mean and be limited to the
name, logo and identification of ELLE Magazine.
(e) "Initial Period" shall mean that period of time which
shall be deemed to have commenced January 1, 1997 and which shall
continue until December 31, 1999.
(f) "Renewal Period" shall mean that period of time
commencing on January 1, 2000, and continuing until December 31,
2002.
(g) "Contract Period" shall mean the Initial Period and, if
this Agreement is renewed in accordance with Article VII below,
the Renewal Period, collectively.
(h) "Contract Year" shall mean a period of twelve (12)
successive months commencing on any first day of January during
the Contract Period.
Article II. Grant of Rights. (a) Licensor hereby grants to Company,
during the term of the Contract Period, subject to all of the terms and
conditions set forth in this Agreement, those rights to the Licensed Property as
are set forth in Section A of the attached Standard Terms and Conditions.
(b) Company hereby agrees that Company shall distribute and sell
Licensed Products only through department stores, mail order catalogues and
specialty apparel stores located in the Contract Territory. Company agrees, in
particular, that Company shall not distribute or sell Licensed Products through
any chain of mass market general retail stores (which for these purposes shall
include JC Penney) or through liquidation stores, or by sales through discount
merchandisers. If Company desires to conduct end-of-season inventory clearance
sales through any retail outlet which does not regularly sell Licensed Products
in-season, then Company shall request Licensor's advance written approval of the
particular retail outlet at which Company proposes to conduct such end-of-season
inventory clearance sales.
(c) Company agrees that Company shall distribute and sell Coverup
Licensed Products only in association with Swimwear Licensed Products (in the
swimwear sales area of the relevant retail sales location).
(d) The definition of the "Territory" as set forth above shall exclude
Guam, Saipan, and duty-free sales locations. Company agrees that Company will
not distribute or sell Licensed Products through duty-free retailers, including
without limitation those retailers listed in Exhibit A. "Duty Free" shall be
defined as:
i) duty and tax free shops in the International areas (across
the border) of ports and airports, duty and tax free
pre-order counters of ports and airports,
ii) duty and tax free on board sales, duty and tax free mail
order catalogues managed by airlines or duty free operators,
and
iii) outlets managed downtown by major duty free operators, of
which the list is attached as Exhibit A (and as amended in
writing from time to time by mutual agreement between the
parties).
(e) Company acknowledges that the foregoing rights shall not include
the right of Company to print, publish or distribute any mail order catalogue
identified as an "ELLE" catalogue.
Article III. Guaranteed Minimum Royalty. As compensation to Licensor
for the grant to Company of the above rights, Company shall pay to Licensor, in
the manner set forth in Section G of the attached Standard Terms and Conditions,
with respect to each Contract Year during the Contract Period, and with respect
to each separate "Category" of Licensed Products, guaranteed minimum annual
royalties as follows:
Guaranteed Royalty
Category A Category B
Contract Year Products Products
First US$25,000 US$125,000
Second US$35,000 US$150,000
Third US$45,000 US$200,000
If renewed pursuant to Article VII below
Fourth US$50,000 US$250,000
Fifth US$50,000 US$300,000
Sixth US$50,000 US$350,000
The guaranteed minimum annual royalty for each Contract Year shall be payable in
four equal annual installments due on or before January 31, April 30, July 31
and October 31 during each Contract Year.
Article IV. Earned Royalty. As compensation to Licensor for the rights
hereinbefore granted, Company agrees to pay to Licensor an earned royalty at the
rate of six percent (6%) of the "Net Wholesale Sales" (as that term is defined
in the attached Standard Terms and Conditions) of all Licensed Products sold
hereunder by Company during each Contract Year; provided, however, that the full
amount of the guaranteed minimum annual royalty which is payable by Company to
Licensor pursuant to Article III above which is applicable to the relevant
Contract Year, and to the particular Category of Licensed Products, shall first
be credited against the payment of any earned royalties with respect to sales of
Licensed Products within the relevant Category made during such Contract Year.
No part of any guaranteed minimum annual royalty shall be carried forward (or
back) as a credit from one Contract Year to another, nor shall any be carried
over as a credit from one category of Licensed Products to another. Earned
royalties shall be payable within thirty (30) days following the end of each
calendar year quarter with respect to sales made during such calendar year
quarter.
Article V. Identified Retailers. At any time during the Contract
Period, Licensor shall have the right, upon written notice to Company, to
require company to discontinue further or additional sales of Licensed Products
to any retailer (the "Identified Retailer") which may at that time advertise,
promote and distribute Licensed Product as a retail account of Company for
Licensed Products. Licensor represents, however, that Licensor shall not require
Company to discontinue distributing Licensed Product to any Identified Retailer
unless Licensor shall believe, in its reasonable good faith business judgment,
that continued efforts to distribute and sell Licensed Products through the
Identified Retailer will have the result of lessening the overall image and
reputation of Licensed Products by reason of conflict (at the Identified
Retailer) between sales of articles of ladies apparel (produced and sold by
third parties which have advertised in ELLE magazine) and the distribution and
sale of Licensed Products identified with the name and trademark of ELLE
magazine.
Article VI. Licensed Tights. Company agrees that as to all Activewear
Products consisting of "exercise tights" Licensed Products (hereinafter referred
to as "Licensed Tights"), Company shall advertise, distribute and sell such
items only as items of sports apparel for use while participating in active
sports and, as such, Company agrees that Licensed Tights shall be distributed
and sold only through sports apparel departments of department stores, specialty
sporting goods stores, sporting goods catalogues, and other sports specialty
apparel stores. Company acknowledges and agrees that Licensor has retained the
right to grant to a third party (the "Fashionwear Licensee") the right and
license to use the Licensed Property throughout the Contract territory during
the Contract Period in connection with the advertisement, distribution and sale
of ladies tights as articles of "fashionwear" for everyday use by the consumer
engaging in casual leisure-time activities. Licensor represents and agrees that
such Fashionwear Licensee shall be limited to distribution and sale of such
ladies tights (identified with the Property) only in the fashionwear,
casual-wear and general hosiery departments of department stores, specialty
apparel stores and other retail sales locations not to include sports apparel
departments of any such retailers.
Article VII. Renewal. Provided that Company is not then in default of
any material obligation set forth in this Agreement, and provided that Company
shall, during the Initial Period, achieve sales of Licensed Products in an
amount sufficient to produce for Licensor at least US$1,000,000 in earned
royalties (that is, US$1,000,000 of total earned royalties before application of
any guaranteed minimum royalty as a credit; not US$1,000,000 in earned royalties
in excess of the guaranteed minimum royalty); then and in such event the
Contract Period of this Agreement shall be automatically renewed and extended
for the Renewal Period described above. If during the Initial Period, the amount
of sales of Licensed Products shall have produced less than US$1,000,000 in
earned royalties (before the application of any guaranteed minimum annual
royalty as a credit), then Licensor shall have the right and option, at its
election, to elect to renew and extend the Contract Period of this Agreement for
the Renewal Period, such option to be effective upon written notice of renewal
delivered by Licensor to Company no later than the date ninety (90) days prior
to the last day of the Initial Period.
Article VIII. Liability Insurance. Company represents and warrants
that the liability insurance which will be acquired and maintained by Company
pursuant to Section M of the attached Standard Terms and Conditions shall be in
the amount of no less than US$1,000,000 (the "Insured Coverage").
Article IX. Non-Competition. Company agrees that during the Contract
Period, Company shall not manufacture, advertise, promote, distribute or sell
any one or more items of "Products" (as hereinafter defined) with the use of any
name, logo or trademark which is identified with any women's fashion periodical
(other than the Licensed Property as herein defined).
Article X. Licensed Products Designs. During the twenty-four (24)
month period next following the last day of the Contract Period, Company agrees
it will not distribute and sell anywhere in the Territory any "collection" of
ladies' swimwear which consists of swimsuits which are substantially identical
in styles, designs and colors to Licensed Products distributed and sold by
Company during the Contract Period.
Article XI. Licensed Products for Use of Licensor. Company agrees that
it will supply to Licensor at Licensor's offices in New York, New York, as
indicated below, free of charge, and at no cost or expense, with three (3) units
of each item of Licensed Products distributed and sold pursuant to this
Agreement by Company. Company shall pay all delivery costs, customs duties, and
any other fees or expenses in connection with the delivery of these items to
Licensor.
Article XII. Standard Terms and Conditions. This Agreement is subject
to all of the provisions of the Standard Terms and Conditions which are attached
to and made a part of this Agreement.
Article XIII. Execution and Delivery Required. This instrument shall
not be considered to be an agreement or contract nor shall it create any
obligation whatsoever on the part of Licensor and Company, or either of them,
unless and until it has been signed by a representative of Licensor and by a
representative of Company and delivery has been made of a fully signed original.
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Agreement as of the day and year first above written.
HACHETTE FILIPACCHI PRESSE T.K. MAB INCORPORATED
By: /S/ By: /S/
Susan Alter Larry A. Dear, CEO
V.P. Marketing
<PAGE>
EXHIBIT A
Major Duty-Free Operators
DFS (USA)
Nuance (Switzerland)
Allders (UK)
Weitnauer (Switzerland)
Van Brugge House (Honolulu)
International Access (Guam)
Continental Micronesia (Saipan)
<PAGE>
STANDARD TERMS AND CONDITIONS
FOR
ELLE MAGAZINE LICENSE AGREEMENT
WITH
T.K. MAB INCORPORATED
SECTION A. GRANT OF RIGHTS.
(1) Sales within the Territory. Licensor hereby grants to Company,
during the term of the Contract Period, and any extension thereof, subject to
all of the terms and conditions set forth in this Agreement, including these
Standard Terms and Conditions, the right and license to use the Licensed
Property, within the Territory only, on and in connection with the manufacture,
advertising, promotion, distribution and sale of the Licensed Products, and
Licensor hereby agrees that except as set forth in Section B of these Standard
Terms, Licensor will not grant to anyone other than Company the right to use the
Licensed Property on or in connection with the advertisement, promotion,
distribution or sale of Licensed Products (as hereinbefore defined) within the
Territory during the Contract Period. Licensor further hereby grants to Company
the non-exclusive right to have Licensed Products manufactured anywhere outside
the Territory, provided that such Licensed Products are distributed and sold
only within the Territory subject to all of the terms and conditions set forth
in this Agreement.
(2) Sales Outside the Territory. Company agrees that Company will not
sell Licensed Products to any party whom Company believes, or has reasons to
believe, will export the Licensed Products for resale outside of the Territory.
Without limiting the generality of the foregoing, where Company learns that any
of the Licensed Products have been exported out of the Territory, Company shall
not in future make any sale to the party to whom Company sold such Licensed
Products nor, in the event of a chain of sales of such Licensed Products, to any
party within the chain to whom such goods were resold. Furthermore, where
Company learns from a source other than Licensor that any party, to whom the
Licensed Products have been sold or resold, is involved, directly or indirectly,
in the export of the Licensed Products outside the Territory, Company shall
immediately communicate to Licensor all information available concerning such
party, including its name and address.
SECTION B. PREMIUM SALES BY LICENSOR/COMPANY.
(1) "Premium" Defined. For the purposes of this Agreement, a "premium"
use of Licensed Products shall mean the sale or supply of Licensed Products to
any third party where such Licensed Products are intended to be given away free
of charge, sold or distributed as a part of any plan intended to promote the
merchandise, services or business of such third party. A "premium" use shall
also include the sale or supply of Licensed Products to a third party where such
third party intends to package Licensed Products together with other items of
merchandise and to sell the combination thereof as a single product (hereinafter
sometimes referred to as a "combination sale").
(2) Premium Uses by Company. If at any time during the Contract Period
hereof, Company so wishes to sell or supply Licensed Products for use by any
third party as a Premium (whether to be given away free-of-charge, sold at a
discount, or used in a combination sale, as aforesaid), or if Company, itself,
wishes to make any "premium" use of Licensed Products, Company agrees to so
notify Licensor in writing in advance and to disclose to Licensor the nature and
terms of such proposed Premium arrangement. Licensor shall have the right to
approve or disapprove any such proposed premium arrangement in advance within
fifteen (15) days of receipt of Company's notice in its sole and absolute
discretion. Failure of Licensor to deliver approval in writing shall constitute
disapproval.
(3) Premium Sales by Licensor. If, at any time during the Contract
Period of this agreement, any other licensee of Licensor (or Licensor itself)
shall intend or desire to use as "premiums" (as hereinbefore defined) any items
of merchandise which incorporate the Licensed Property and which are of the same
generic type as Licensed Products, then Licensor agrees to require its licensee
to negotiate (or Licensor itself shall negotiate) in good faith with Company the
terms and conditions under which Company may be retained to supply such licensee
(or Licensor) with Licensed Products to be used as premiums. If Company does not
deliver to the licensee concerned (or to Licensor, as the case may be) its
commitment to supply such licensee (or Licensor) with sufficient quantities of
relevant Licensed Products for use as premiums as aforesaid, whether due to
Company's inability to supply such items in the quantities required, of the
quality required, on a timely basis, or at prices competitive with other sources
of supply, then Company acknowledges that such licensee (or Licensor) shall be
authorized to contract with third parties for the manufacture and supply of
Products bearing the Licensed Property for use as premiums as aforesaid.
SECTION C. MARKETING EFFORTS.
Company agrees that, during the Contract Period, it will use its
diligent efforts to actively and aggressively promote the sale of Licensed
Products throughout the Territory. Company agrees that it will continue to
manufacture, advertise, promote and distribute commercially substantial
quantities of Licensed Products continuously throughout the entire duration of
the Contract Period. Company understands and agrees that Company may use the
Licensed Property only in connection with Licensed Products and only as
specifically permitted by the terms hereof.
SECTION D. APPROVAL PROCEDURES FOR LICENSED PRODUCTS AND ADVERTISING
MATERIALS.
(1) Approval of Licensed Products. Company agrees that Licensor shall
have the right to approve or disapprove in advance of sale the quality, style,
design, colors, appearance, materials, workmanship, and all other aspects of all
Licensed Products and the components thereof, and to approve or disapprove any
and all trademarks, trade names, designs and logos used on or in connection with
Licensed Products. Company shall not distribute or sell any such Licensed
Product which has not been approved by Licensor or which is, at any time,
disapproved by Licensor in accordance with the provisions below. Company
represents that Licensed Products will be of high quality and superior fit and
finish for similarly-priced articles of merchandise.
(2) Submission of Licensed Products. Before selling or distributing
any Licensed Products hereunder, Company shall submit to Licensor, at such
address or addresses as Licensor may from time to time designate, for its
examination and approval or disapproval, a prototype or production sample
thereof together with any related or associated items. Licensor agrees that it
will promptly examine and either approve or disapprove such samples, and that
Licensor will promptly notify Company of its approval or disapproval. Licensor
agrees that it will not unreasonably disapprove any item and, if any is
disapproved, that Company will be notified in writing of the specific
modifications (to the extent these can be readily identified or expressed) which
are required to obtain approval. Company will resubmit disapproved items until
approval is obtained.
(3) Maintenance of Quality. Company shall, from time-to-time, at the
request of Licensor, but nor more often than once during each semi-annual period
during each Contract Year, submit current production samples of Licensed
Produces produced hereunder in order that Licensor may assure itself of the
maintenance of quality standards hereunder. Company represents and warrants that
all Licensed Products which are advertised, distributed and sold to consumers in
accordance with this agreement shall be substantially identical to and of no
lesser quality than the sample thereof which was previously submitted to and
approved by Licensor in accordance with this section.
(4) Approval of Advertising Materials. The term "Advertising
Materials" shall mean all advertising and promotional materials and all
packaging, wrapping and labeling materials for the Licensed Products (including,
by way of illustration but not limitation, catalogs, trade advertisements,
flyers, sales sheets, labels, package inserts, hangtags and displays) which are
produced by or for the Company and which make any use of, or which are proposed
to be used in connection with, the Licensed Property. Company agrees that
Licensor shall have the right to approve or disapprove in advance the contents,
appearance and presentation of any and all Advertising Materials. Company agrees
that it will not produce, publish or in any manner use or distribute any such
Advertising Materials which have not been previously submitted to and approved
by Licensor in accordance with this section.
(5) Submission of Advertising Materials. Before producing, publishing
or distributing any Advertising Materials hereunder, Company shall first submit
to Licensor, at such address or addresses as Licensor may from time to time
designate, for its examination and approval or disapproval, a sample thereof
together with the text, coloring and a copy of any photograph proposed to be
used. Licensor agrees that it will promptly examine and either approve or
disapprove such sample Advertising Material, and that Licensor will promptly
notify Company of its approval or disapproval. Licensor agrees that it will not
unreasonably disapprove any sample Advertising Material and, if any is
disapproved, that Licensor will notify Company in writing of the specific
modifications (to the extent these can be readily identified or expressed) which
must be made in order to obtain approval. Company will resubmit disapproved
items until approval is obtained.
(6) Inadequate Quality. Failure by Company to comply with the
provisions of this Section D shall constitute a material breach of this
Agreement and shall be grounds for termination of this Agreement by Licensor, as
provided in Section O.
(7) Photography. Company acknowledges and agrees that if Company
should desire to use in its Advertising Materials any one or more photographs
which depict any identifiable individual, it shall be the sole and exclusive
responsibility of Company to obtain from such individual whatever copyright
approval, license, photographic waiver or release may be required to permit
Company to use such photograph in Advertising Materials for Licensed Products.
Company further agrees that it shall be the sole and exclusive responsibility of
Company to obtain from the photographer or other copyright owner of such
photograph whatever copyright approval, license, photographic waiver or release
may be required to permit Company to use such photograph in advertising for
Licensed Products.
(8) Advertising/Design Indemnity. Company hereby agrees to protect,
defend, indemnify and save harmless Licensor and Licensor's authorized agent,
and their related and affiliated entities and their officers, directors,
employees, shareholders and representatives, or any of them, from and against
any and all expenses, damages, claims, suits, actions, judgments and costs
whatsoever, including reasonable attorneys fees, arising out of, or in any way
connected with, any alleged infringement by Company of the patent rights, design
rights, trademarks, copyrights, personal or proprietary rights of any third
party (any party other than Licensor), provided that Company shall be given
prompt notice of any such action or claim, and further provided that Company
shall defend any such action or claim with counsel approved in advance by
Licensor, which approval will not be unreasonably withheld or delayed.
SECTION E. NOTICES AND SUBMISSIONS.
Unless and until Licensor shall notify Company to the contrary, all
notices and all submissions of advertising materials and sample Licensed
Products to be made or delivered by Company to Licensor hereunder, and a copy of
each check, sales report or other notification of payment delivered to Licensor
at the address set forth in Section G below, shall be delivered to Licensor's
representative, as follows:
International Merchandising Corporation
420 W. 45th Street
New York, NY 10036
Attention: Mr. David Mitchell
with a copy of all notices to be sent at the same time to:
Hachette Filipacchi Presse
c/o Hachette Filipacchi Presse, Inc.
1633 Broadway
New York, NY 10019
Attention: Susan Alter
Vice President/Marketing
with a copy thereof to:
Hachette Filipacchi Presse
c/o Hachette Filipacchi Presse, Inc.
1633 Broadway
New York, NY 10019
Attention: Catherine Flickinger
General Counsel
All materials submitted shall be delivered free of all charges such as, for
example, shipping charges and customs duties.
SECTION F. EARNED ROYALTIES; SALES REPORTS.
(1) Basis for Computation of Royalties. "Net Wholesale Sales" as that
term is used in this agreement shall mean Company's invoiced billing price to
its customers or distributors, deducting only the following items (and only if
separately stated in the relevant invoice issued by Company): shipping charges,
freight, duties, insurance, discounts actually given, sales taxes, value-added
taxes, and credits allowed for returned or defective merchandise (but no reserve
for returns). All royalties due to Licensor shall accrue upon the sale of the
Licensed Products, regardless of the time of collection by the Company. For
purposes of this Agreement, the Licensed Product shall be considered "sold" as
of the date on which such Licensed Product is billed, invoiced, shipped, or paid
for, whichever event occurs first. If any Licensed Products are consigned to a
distributor by Company, the Licensed Product shall be considered "sold" by
Company as of the date on which such distributor bills, invoices, ships, or
receives payment for any of the Licensed Products, whichever first occurs.
(2) Sales to Related Parties. If Company sells any Licensed Products
to any party affiliated with Company, or in any way directly or indirectly
related to or under common control with Company, at a price less than the
regular price charged to other parties, the royalties payable to Licensor
hereunder shall be computed on the basis of the regular price charged to other
parties.
(3) Uncollectable Accounts. There shall be no deduction either from
Company's "Net Wholesale Sales" for Licensed Products or from the royalties
payable to Licensor hereunder for uncollectable accounts.
(4) Sales Reports. Company shall submit to Licensor a sales report
with respect to all sales of Licensed Products sold during each calendar year
quarter, said sales reports to be delivered to Licensor within thirty (30) days
following the conclusion of each calendar year quarter. Said sales report shall
indicate, for each category of Licensed Products, and for each of Company's
primary accounts (Company's top twenty (20) accounts), the number of each item
of Licensed Products sold during each month, the gross wholesale sales price of
each such Licensed Product, and any deductions allowed in accordance with
subparagraph (1) immediately above in arriving at "Net Wholesale Sales" and the
total "Net Wholesale Sales" of all such items.
SECTION G. PAYMENTS.
Unless and until Licensor advises Company to the contrary, all sales
reports and payments hereunder shall be made to Licensor's authorized agent,
International Merchandising Corporation. Sales reports and payments to Licensor
hereunder shall be made by way of check payable to the order of "International
Merchandising Corporation" which shall be mailed to Licensor's authorized agent
at the following address:
International Merchandising Corporation
One Erieview Plaza, Suite 1300
Cleveland, Ohio 44114
Attention: Treasurer
Past due payments shall bear interest at the rate of (i) one and one-half
percent ("1-2") per month, or (ii) the maximum interest rate permissible under
law, whichever is less. If in connection with any payment to be made hereunder
by Company, Company is obligated to deduct withholding tax at source, Company
shall promptly after making such withholding deliver to Licensor at the address
set forth above the receipt evidencing payment of such withholding tax.
SECTION H. BOOKS OF ACCOUNT; AUDITS.
(1) Books of Account. Company agrees to keep and maintain complete and
accurate books of account, records and other documents with respect to sales of
Licensed Products achieved by Company during each calendar year. Such books of
account, records and other documents shall be available for inspection, audit
and copying by Licensor, by its duly authorized agents and representatives,
during ordinary business hours during the relevant calendar year and during the
two (2) year period following the conclusion of the calendar year during which
such sales of Licensed Products were achieved.
(2) Audits by Licensor. If any audit of Company's books and records
reveals that Company has failed properly to account for and pay royalties owing
to Licensor hereunder, and the amount of any royalties which the Company has
failed properly to account for and pay for any quarterly accounting period
exceeds, by three percent (3%) or more, the royalties actually accounted for and
paid to Licensor for such period, Company shall, in addition to paying Licensor
such past due royalties, reimburse Licensor for its direct out-of-pocket
expenses incurred in conducting such audit, together with interest on the
overdue royalty amount at the rate of (i) one and one-half percent (1-2%) per
month, or (ii) the maximum interest rate permissible under law, whichever is
less.
SECTION I. TRADEMARKS.
(1) Definition of "Trademarks". For all purposes of this Agreement,
the "Trademarks" shall mean and include all trademark rights, including common
law rights, and all trademark applications and registrations, filed or obtained
by Licensor for the ELLE name and identification.
(2) Goodwill in Licensed Property. All trademark uses of the Licensed
Property by Company shall inure to the benefit of Licensor, which shall own all
Trademarks and trademark rights created by such uses. Company hereby assigns and
transfers to Licensor all Trademarks and trademark rights created by such uses
of the Licensed Property, together with the goodwill of the business in
connection with which such Trademarks are used. Company shall not take any
action which would be detrimental to the goodwill developed by Licensor in the
Licensed Property.
(3) Trademark Registrations. Licensor shall have the right, but not
the obligation, to file in the appropriate offices of countries of the
Territory, at its own expense, trademark or design applications relating to the
use or proposed use by Company of any of the Trademarks in connection with the
Licensed Products, such filings to be made in the name of Licensor or in the
name of any third party selected by Licensor.
(4) Trademark Notices. Company agrees to affix or to cause its
authorized manufacturing sources to affix to the Licensed Products and to the
Advertising Materials such trademark and design notices (that is, 7 or J, as the
case may be) as may be designated by Licensor. Company agrees to affix or to
cause other authorized manufacturing sources to affix to the Licensed Products
or the containers the legend "Manufactured under license from Hachette
Filipacchi Presse" together with the name and address of Company. (In Canada,
the foregoing notice shall read "Manufactured under License from France Canada
Editions et Publications.")
SECTION J. INFRINGEMENTS.
(1) Notice of Infringement. Company agrees to notify Licensor in
writing of any articles similar to the Licensed Products which are advertised,
promoted or sold by any third party in the Territory which in Company's opinion
may constitute an infringement of the Licensed Property or a passing off of the
rights to the Licensed Property herein granted to Company.
(2) Legal Action Against Infringements. Licensor shall control
absolutely all infringement litigation as well as the settlement of all claims
involving the Licensed Property. If Licensor elects to institute legal action in
accordance with the foregoing, then Licensor shall do so through counsel of its
own selection, at its own cost and expense. Company shall have the right at its
election to join in such action through counsel of its own selection, at its own
cost and expense.
(3) Cooperation by Company. If, in accordance with the foregoing,
Company joins with Licensor in such action, Company acknowledges that it shall
in no event have the right, without the prior written consent of Licensor, to
acknowledge the validity of any claim of any infringer, to seek or obtain a
license from any infringer, or to take any other action relating in any way to
the Licensed Property which may in any way derogate from the rights of Licensor
or which might impair the ability of Licensor to contest such claim if it so
elects.
SECTION K. LIABILITY INSURANCE.
(1) Company hereby represents and warrants to Licensor that Company
has the full power to enter into this Agreement; that Licensor will not be
obligated to make any payments to or on behalf of any third party in connection
with the manufacture, advertising, promotion, distribution or sale of Licensed
Products by Company pursuant to this Agreement; and that the Licensed Products
shall be manufactured, distributed and sold in compliance with any statutory or
regulatory laws, orders or regulations applicable thereto in the jurisdiction in
which such items are manufactured, distributed and sold.
(2) Company agrees to protect, defend, indemnify and save harmless
Licensor and Licensor's authorized agent, and their parents, subsidiaries and
affiliates and their officers, directors, employees, shareholders and
representatives, or any of them, from and against any and all expenses, damages,
claims, suits, actions, judgments and costs whatsoever, including reasonable
attorneys' fees, arising out of, or in any way connected with, any claim or
action for personal injury, death or other cause of action involving alleged
defects in Licensed Products, including any packaging and/or advertising
therefor, and any alleged breach by Company of any statutory obligation, and any
default by Company of its representations and warranties set forth in
subparagraph (1) immediately above, provided that Company shall be given prompt
notice of any such action or claim which is brought to Licensor's attention, and
further provided that Company shall defend any such action or claim with counsel
approved in advance by Licensor, which approval will not be unreasonably
withheld or delayed.
(3) Company agrees to acquire and maintain, throughout the entire
Contract Period hereof, and for the two (2) year period next following the last
day of the Contract Period, at Company's sole cost and expense, comprehensive
general liability insurance (including product, personal injury, advertising and
contractual liabilities) on an occurrences basis, for claims arising under the
circumstances described in subsection (2) immediately above, with limits of no
less than the "Insured Coverage" (as defined in Article IX hereinabove) and
within ten (10) days following the execution of this Agreement, Company shall
submit to Licensor a fully-paid policy or certificate of insurance naming
Licensor, and Licensor's authorized agent, and their constituent entities and
their officers, directors, employees, shareholders and representatives, or any
of them, as additional insured parties, and requiring that the insurers shall
not terminate or materially modify such policy without written notice to
Licensor at least thirty (30) days in advance thereof.
SECTION L. DISTRIBUTORS/SUBCONTRACTORS.
Company shall not have the right to sublicense any of the rights
granted to it under this Agreement, but Company shall have the right to make
arrangements for subcontracting the manufacture, finishing, packaging and
storing of Licensed Products, and to appoint distributors for the Licensed
Products within the Territory, provided that Company shall ensure that no such
subcontractor or distributor shall take any action contrary to or inconsistent
with the terms and conditions set forth in this Agreement, and further provided
that no company name, trade name or brand name other than Company's may be used
on or in connection with Licensed Products.
SECTION M. USE OF LICENSED PROPERTY AFTER TERMINATION.
(1) From and after the expiration or other termination of the Contract
Period, and except as provided in Section N below, all of the rights of Company
to the use of the Licensed Property shall cease absolutely, and Company shall
not thereafter manufacture, distribute or sell any item whatsoever with the use
of the Licensed Property or use the Licensed Property in any way whatsoever.
(2) Company acknowledges that the failure by Company to discontinue
the manufacture, sale or distribution of Licensed Products or any class or
category thereof at the termination or expiration of the Contract Period of this
Agreement will result in immediate and irreparable damage to Licensor and to the
rights of any subsequent licensee of Licensor. Company acknowledges and admits
that there is no adequate remedy at law for such failure to cease manufacture,
sale or distribution, and Company agrees that, in the event of such failure,
Licensor shall be entitled to equitable relief by way of injunctive relief and
such other relief as any court with jurisdiction may deem just and proper.
SECTION N. INVENTORY OF LICENSED PRODUCTS ON TERMINATION.
Any Licensed Products that may have been manufactured by or for
Company prior to the expiration or other termination of the Contract Period, or
which were in the process of manufacture by Company, or were required to fill
purchase orders from customers accepted by Company prior to the date of
termination, may be sold by Company during a six (6) month sell-off period
immediately following the date of termination, provided that:
(a) Company is not in default of any material
term or condition of this Agreement;
(b) the quantity of such Licensed Products in
inventory at the time of such termination is not in excess of
a reasonable quantity taking into account Company's sales
requirements for Licensed Products;
(c) Company shall furnish to Licensor within thirty
(30) days after the effective date of expiration or
termination of the Contract Period a written statement of the
number and description of such Licensed Products in inventory
and in the process of manufacture and Licensed Products
ordered as of the effective date of termination, provided,
however, that Licensor, at its own expense, may conduct a
physical inventory in order to ascertain or verify such
inventory and/or statement, and in the event that Company
refuses to permit Licensor to conduct such physical inventory,
then Company shall forfeit its rights hereunder to dispose of
such inventory;
(d) Company shall continue to pay to Licensor with
respect to such sales earned royalties at the rate specified
above;
(e) Company shall during the sell-off period continue
to make payments to Licensor and render sales reports to
Licensor on a calendar year quarterly basis;
(f) Company shall, within thirty (30) days after the
end of said sell-off period, deliver to Licensor a final
accounting with respect to sales of Licensed Products during
the sell-off period and, at the same time, shall pay to
Licensor any earned royalty amounts due but not theretofore
paid; and
(g) any items of Licensed Products which remain in
Company's inventory as of the last day of the said sell-off
period shall be destroyed or, at the election of Licensor,
shall be delivered to Licensor in return for payment to
Company for such items calculated at Company's
cost-of-goods-sold for such items.
SECTION O. TERMINATION FOR DEFAULT.
(1) Non-Payment. If either party at any time during the period of this
Agreement shall fail to make any payment of any sum of money or render any
accounting herein specified to be made or rendered, then the non-defaulting
party may terminate this Agreement if such payment is not made or such
accounting is not rendered within ten (10) days after the aggrieved party shall
have delivered to the other party written notice of such failure to make payment
or to render an account.
(2) Non-Performance. If either party at any time during the period of
this Agreement shall fail to observe or perform any of the covenants, agreements
or obligations of such party hereunder (other than the payment of money or
rendering of an account), then the non-defaulting party may terminate this
Agreement if such default is not cured within fifteen (15) days after the
aggrieved party shall have delivered to the other party written notice
specifying in reasonable detail the nature of such default.
(3) No Waiver. Failure to terminate this Agreement pursuant to this
section shall not constitute a waiver of any rights or remedies the
non-defaulting party would have been entitled to demand in the absence of this
section, whether by way of damages, termination or otherwise. Termination of
this Agreement pursuant to this section, for whatever reason, shall not
constitute a waiver of any other rights or remedies to which either party is
entitled at law, in equity or otherwise. In the event of termination of this
Agreement pursuant to the provisions of this Section O, all amounts payable by
Company to Licensor, including earned royalties on sales of Licensed Products
theretofore achieved, shall immediately be due and payable.
(4) Immediate Termination. Notwithstanding the provisions of
subparagraph (2) immediately above, Company hereby agrees that Licensor shall
have the immediate right to terminate the Contact Period of this Agreement, upon
written notice to Company, immediately (and without any obligation on the part
of Licensor to provide Company with a period for cure of such default) in the
event that Company should:
(a) Make, sell, offer for sale, use
or distribute any Licensed Products or Advertising
Materials after receiving written notice from
Licensor denying or withdrawing approval of same;
(b) Fail, after receipt of written
notice from Licensor, immediately to discontinue the
distribution or sale of Licensed Products or the use
of any Advertising Material that does not contain the
appropriate legal legend;
(c) Be subject to any voluntary or
involuntary order of any government agency involving
the recall of any of the Licensed Products because of
safety, health or other
hazards or risks to the public;
(d) Breach any of the provisions of
this Agreement relating to the unauthorized assertion
of rights in the Trademark;
(e) Breach any provision of the
Agreement prohibiting Company from directly or
indirectly assigning, transferring, sublicensing or
otherwise encumbering this Agreement or any of its
rights or obligations hereunder.
SECTION P. MISCELLANEOUS PROVISIONS.
(1) Reservation of Rights. All rights in and to the Licensed Property
are retained by Licensor for its own use, except for the specific rights which
are granted to Company under this Agreement.
(2) Restriction on Assignments. This Agreement shall bind and inure to
the benefit of Licensor, and its successors and assigns. The rights granted
Company hereunder shall be personal to it and shall not, without the prior
written consent of Licensor, or by operation of law, be sublicensed or
transferred to or assigned to any other party. If Company desires to assign this
Agreement or any rights hereunder, Company shall give written notification
thereof to Licensor, and Licensor shall have the right to approve or disapprove
any such proposed assignment in Licensor's sole and exclusive discretion.
(3) Merger; Sale of Business. In the event of the merger or
consolidation of Company with any other entity which is not a subsidiary nor a
company related to or affiliated with Company as of the date of the execution of
this Agreement, or in the event Company shall intend to sell, assign or
otherwise dispose of its business related to Licensed Products, Company shall so
notify Licensor no later than thirty (30) days prior to the event, and Licensor
shall have the right to approve or disapprove such transaction by written notice
to Company within fourteen (14) days after receiving written notice of such
proposed merger, consolidation, sale, assignment or transfer. If Licensor
disapproves of the transaction, Licensor may terminate this Agreement
immediately.
(4) Bankruptcy. If Company shall become bankrupt or insolvent, if
Company makes an assignment for the benefit of creditors, or if Company's
business shall be placed in the hands of a receiver or trustee, whether by
voluntary act of Company or otherwise, the Contract Period shall, at the option
of Licensor, immediately terminate.
(5) Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of New York, United States of America,
without giving effect to conflict of laws. The parties hereby irrevocably
consent to submit to the jurisdiction of all state and federal courts within New
York City for the resolution of any disputes between them.
(6) Waiver. The failure of either party at any time or times to demand
strict performance by the other of any of the terms, covenants or conditions set
forth herein shall not be construed as a continuing waiver or relinquishment
thereof and each made any time demand strict and complete performance by the
other of said terms, covenants and conditions.
(7) No Joint Venture. This Agreement does not constitute and shall not
be construed as constituting a partnership or join venture between Licensor and
Company. Neither party shall have any right to obligate or bind the other party
in any manner whatsoever.
(8) Entire Understanding. This Agreement comprises the entire
understanding of the parties with respect to the subject matter herein
contained. Any and all prior agreement between the parties and all oral
representations or agreements by any agent or representative of either party
shall be null and void.
EXHIBIT 10.6
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--GROSS
(Do not use this form for Multi-Tenant Property)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
May 1, 1996, is made by and between Evard Realty, Inc., a California Corporation
("LESSOR") AND T.K. MAB, Inc., a California Corporation ("LESSEE"),
(COLLECTIVELY THE "PARTIES," OR INDIVIDUALLY A "PARTY").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 3745 Overland Avenue, Los Angeles, CA 90034,
located in the County of Los Angeles, State of California and generally
described as (describe briefly the nature of the property) an approximately
9,375 square foot building. Lessee has verified square footages. ("PREMISES").
(See Paragraph 2 for further provisions.)
1.3 TERM: 3 years and 0 months ("ORIGINAL TERM") commencing June 1,
1996 ("COMMENCEMENT DATE") and ending May 31, 1999 ("Expiration Date"). (See
Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: May 10, 1996 ("EARLY POSSESSION DATE"). (SEE
PARAGRAPHS 3.2 AND 3.3 FOR FURTHER PROVISIONS.)
1.5 BASE RENT: $5,250 per month ("BASE RENT"), payable on the 1st day
of each month commencing June 1, 1996 (SEE PARAGRAPH 4 FOR FURTHER PROVISIONS.)
If this box is checked, there are provisions in this Lease for the Base Rent to
be adjusted. (See Section 50)
1.6 BASE RENT PAID UPON EXECUTION: $5,250.00 as Base Rent for the
period June 1, 1996 through June 30, 1996.
1.7 SECURITY DEPOSIT: $6,000.00 ("SECURITY DEPOSIT"). (See Paragraph 5
for further provisions.)
1.8 PERMITTED USE: general office and industrial uses (See Paragraph 6
for further provisions.)
1.9 INSURING PARTY: Lessor is the "INSURING PARTY." $2,650 is the
"BASE PREMIUM." (See Paragraph 8 for further provisions.)
1.10 REAL ESTATE BROKERS: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
MAUD PROPERTIES represents
Lessor exclusively ("LESSOR'S BROKER"); both Lessor and
Lessee, and
THE STONE COMPANY represents
Lessee exclusively ("LESSOR'S BROKER") both Lessor and
Lessee. (See Paragraph 15 for further provisions.)
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to
be guaranteed by Lawrence Dear and Jon Eisenberg (See paragraph 49)
("GUARANTOR"). (See Paragraph 37 for further provisions.)
1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 49 through 56 and Exhibit A all of which constitute a part of this
Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee on the
Commencement Date and warrants to Lessee that the existing plumbing, fire
sprinkler system, lighting, air conditioning, heating, and loading doors, if
any, in the Premises, other than those constructed by Lessee, shall be in good
operating condition on the Commencement Date. If a non-compliance with said
warranty exists as of the Commencement Date, Lessor shall, except as otherwise
provided in this Lease, promptly after receipt of written notice from Lessee
setting forth with specificity the nature and extent of such non-compliance,
rectify same at Lessor's expense. If Lessee does not give Lessor written notice
of a non-compliance with this warranty within thirty (30) days after the
Commencement Date, correction of that non-compliance shall be the obligation of
Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement 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. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within six (6)
months following the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense. (See Section 55)
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it
has been advised by the Brokers to satisfy itself with respect to the condition
of the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease, and (c) that neither Lessor, nor
any of Lessor's agents, has made any oral or written representations or
warranties with respect to the said matters other than as set forth in this
Lease.
2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any non-
compliance of the Premises with said warranties.
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, however, shall be in effect during such period. Any such early possession
shall not affect nor advance the Expiration Date of the Original term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is
specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease, or
the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to pay
rent or perform any other obligation of Lessee under the terms of this Lease
until Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days thereafter, cancel this Lease, in which event the Parties
shall be discharged from all obligations hereunder; provided, however, that if
such written notice by Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease shall terminate and be of no further
force or effect. Except as may be otherwise provided, and regardless of when the
term actually commences, if possession is not tendered to Lessee when required
by this Lease and Lessee does not terminate this Lease, as aforesaid, the period
free of the obligation to pay Base Rent, if any, 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, changes or omissions of
Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent
or charges, as the same may be adjusted from time to time, 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 under the terms of this Lease. Base Rent and
all other rent and charges for any period during the term hereof which is for
less than one (1) full calendar month shall be prorated based upon the actual
number of days of the calendar month involved. Payment of Base Rent and other
charges shall be made to Lessor at its address stated herein or to such other
persons or at such other addresses as Lessor may from time to time designate in
writing to Lessee.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), 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, cost, expense,
loss or damage (including attorneys' fees) 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 money with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall; upon written request from Lessor, deposit
additional moneys with Lessor sufficient to maintain the same ratio between the
Security Deposit and the Base Rent as those amounts are specified in the Basic
Provisions. Lessor shall not be required to keep all or any part of the Security
Deposit separate from its general accounts. Lessor shall, at the expiration or
earlier termination of the term hereof and after Lessee has vacated the
Premises, return to Lessee (or, at Lessor's option, to the last assignee, if
any, of Lessee's interest herein), that portion of the Security Deposit not used
or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no
part of the Security Deposit shall be considered to be held in trust, to bear
interest or other increment for its use, or to be prepayment for any moneys to
be paid by Lessee under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the
purposes set forth in Paragraph 1.8, or any other use which is comparable
thereto, and for no other purpose. Lessee shall not use or permit the use of the
Premises in a manner that creates waste or a nuisance, or that disturbs owners
and/or occupants of, or causes damage to, neighboring premises or properties.
Lessor hereby agrees to not unreasonably withhold or delay its consent to any
written request by Lessee, Lessees assignees or subtenants, and by prospective
assignees and subtenants of the Lessee, its assignees and subtenants, for a
modification of said permitted purpose for which the premises may be used or
occupied, so long as the same will not impair the structural integrity of the
improvements on the Premises, the mechanical or electrical systems therein, is
not significantly more burdensome to the Premises and the improvements thereon,
and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to
withhold such consent, Lessor shall within five (5) business days give written
notification of same, which notice shall include an explanation of Lessor's
reasonable 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, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, 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 liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by- products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3). "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. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course of Lessee's business permitted on the Premises, so long as such
use is not a Reportable Use and does not expose the Premises or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor to
any liability therefor. In addition, Lessor may (but without any obligation to
do so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance, or a condition involving or resulting from
same, 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. Lessee shall also immediately give Lessor a copy of any
statement, report, notice, registration, application, permit, business plan,
license, claim, action or proceeding given to, or received from, any
governmental authority or private party, or persons entering or occupying the
Premises, concerning the presence, spill, release, discharge of, or exposure to,
any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to all such documents as may be involved in any
Reportable Uses involving the Premises.
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 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 (including consultant's and attorney's fees and testing), removal,
remediation, restoration and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier 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 or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "APPLICABLE LAW," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now if effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. Lessee shall,
within five (5) days after receipt of Lessor's written request, provide Lessor
with copies of all documents and information, including, but not limited to,
permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law 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 failure by Lessee or the
Premises to comply with any Applicable Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined
in Paragraph 8.3(a)) 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
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES
AND ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as
to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.),
7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14
(condemnation), Lessee shall, at Lessee's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair, (whether or not such portion of the Premises requiring repair, or the
means of repairing the same, are reasonably or readily accessible to Lessee, and
whether or not the need for such repairs occurs as a result of Lessee's use, any
prior use, the elements or the age of such portion of the Premises), including,
without limiting the generality of the foregoing, all equipment or facilities
serving the Premises, such as plumbing, heating, air conditioning, ventilating,
electrical, lighting facilities, boilers, fired or unfired pressure vessels,
fire sprinkler and/or standpipe and hose or other automatic fire extinguishing
system, including fire alarm and/or smoke detection systems and equipment, fire
hydrants, fixtures, walls (interior and exterior), ceilings, floors, windows,
doors, plate glass, skylights, landscaping, driveways, parking lots, fences,
retaining walls, signs, sidewalks and parkways located in, on, about, or
adjacent to the Premises, but excluding foundations, the exterior roof and the
structural aspects of the Premises. 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, the elements surrounding same, or neighboring
properties, that was caused or materially contributed to by Lessee, or
pertaining to or involving any Hazardous Substance and/or storage tank brought
onto the Premises by or for Lessee or under its control. Lessee, in keeping the
premises in good order, condition and repair, shall exercise and perform good
maintenance practices. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and state of
repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance.
7.2 LESSOR'S OBLIGATIONS. Upon receipt of written notice of the need
for such repairs and subject to Paragraph 13.5, Lessor shall, at Lessor's
expense, keep the foundations, exterior roof and structural aspects of the
Premises in good order, condition and repair, Lessor shall not, however, be
obligated to paint the exterior surface of the exterior walls or to maintain the
windows, doors or plate glass or the interior surface of exterior walls. Lessor
shall not, in any event, have any obligation to make any repairs until Lessor
receives written notice of the need for such repairs. 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. Lessee and Lessor
expressly waive the benefit of any statute now or hereafter in effect to the
extent it is inconsistent with the terms of this Lease with respect to, or which
affords Lessee the right to make repairs at the expense of Lessor or to
terminate this Lease by reason of, any needed repairs.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is
used in this Lease to refer to all carpeting, window coverings, air lines, power
panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about 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 on the Premises from that which
are provided by Lessor under the terms of this Lease, 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 as defined
in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural Utility Installations to the
interior of the Premise (excluding the roof), 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 the term of this
Lease as extended does not exceed $25,000.
(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 proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable
permits required by governmental authorities, (ii) the furnishing of copies of
such permits together with a copy of the plans and specifications for the
Alteration or Utility Installation to Lessor prior to commencement of the work
thereon, and (iii) the compliance by Lessee with all conditions of said permits
in a prompt and expeditions manner. Any Alterations or Utility Installations by
Lessee during the term of this Lease shall be done in a good and workmanlike
manner, with good and sufficient materials, and in compliance with all
Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor
with as-built plans and specifications therefor. Lessor may (but without
obligation to do so) condition its consent to any requested Alteration or
Utility Installation that costs $10,000 or more upon Lessee's providing Lessor
with 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 under Paragraph 36 hereof.
(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 mechanics' 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 in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at it 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 against the
Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor 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, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorney's fees and costs in participating in
such action if Lessor shall decide it is to its best interest to do so.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal or
become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. 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 of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date, with all
of the improvements, parts and surfaces thereof clean and free of debris and in
good operating order, condition and state of repair, ordinary war and tear
excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration
that would have been prevented by good maintenance practice of by Lessee
performing all of its obligations under this Lease. Except as otherwise agreed
or specified in writing by Lessor, the Premises, as surrendered, shall include
the Utility Installations. The obligation of Lessee shall include the repair of
any damage occasioned by the installation, maintenance or removal of Lessee's
Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good service practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation to
repair and restore the Premises per this Lease.
8. INSURANCE, INDEMNITY.
8.1 PAYMENT OF PREMIUM INCREASES.
(a) Lessee shall pay to Lessor any insurance cost increase ("INSURANCE
COST INCREASE") occurring during the term of this Lease. "INSURANCE COST
INCREASE" is defined as any increase in the actual cost of the insurance
required under Paragraphs 8.2(b), 8.3(a) and 8.3(b). ("REQUIRED INSURANCE"),
over and above the Base Premium, as hereinafter defined, calculated on an annual
basis. "INSURANCE COST INCREASE" shall include, but not be limited to, increases
resulting from the nature of Lessee's occupancy, any act or omission of Lessee,
requirements of the holder of a mortgage or deed of trust covering the Premises,
increased valuation of the Premises, and/or a premium rate increase. If the
parties insert a dollar amount in Paragraph 1.9 such amount shall be considered
the "BASE PREMIUM." In lieu thereof, if the Premises have been previously
occupied, the "BASE PREMIUM" shall be the annual premium applicable to the most
recent occupancy. If the Premises have never been occupied, the "BASE PREMIUM"
shall be the lowest annual premium reasonably obtainable for the Required
Insurance as of the commencement of the Original Term, assuming the most nominal
use possible of the Premises. In no event, however, shall Lessee be responsible
for any portion of the premium cost attributable to liability insurance coverage
in excess of $1,000,000 procured under Paragraph 8.2(b) (Liability Insurance
Carried By Lessor).
(b) Lessee shall pay any such Insurance Cost Increase to Lessor within
thirty (30) days after receipt by Lessee of a copy of the premium statement or
other reasonable evidence of the amount due. If the insurance policies
maintained hereunder cover other property besides the Premises, Lessor shall
also deliver to Lessee a statement of the amount of such Insurance Cost Increase
attributable only to the Premises showing in reasonable detail the manner in
which such amount was computed. Premiums for policy periods commencing prior to,
or extending beyond, the term of this Lease shall be prorated to coincide with
the corresponding Commencement or Expiration of the Lease term.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor (as an additional insured) against claims for
bodily injury, personal injury and property damage based upon, involving 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 $1,000,000 per
occurrence with an "Additional Insured- Managers or Lessors of Premises"
Endorsement and contain the "Amendment of the Pollution Exclusion" 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 required by this Lease or as carried by
Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of
any obligation hereunder. All insurance to be 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. In the event Lessor is the Insuring Party,
Lessor shall also maintain liability insurance described in Paragraph 8.2(a),
above, 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 during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds
of trust or ground leases on the Premises ("LENDER(S)"), insuring loss or damage
to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, such latter amount is less than full
replacement cost. Lessee Owned Alterations and Utility Installations shall be
insured by Lessee under Paragraph 8.4. 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 any additional costs
resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
of any undamaged sections of the Premises required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of loss, but not including plate glass insurance.
Said policy or policies shall also contain an agreed valuation provision in lieu
of any coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall, in addition, obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and Lender(s), insuring the loss of the full rental and
other charges payable by Lessee to Lessor under this Lease for one (1) year
(including all real estate taxes, insurance costs, and any scheduled rental
increases). 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 rental
revenues 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 rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period.
(c) ADJACENT PREMISES. If the Premises are part of a larger building
or if the Premises are part 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.
(d) TENANT'S IMPROVEMENTS. Since Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Lessee Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. 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 or the restoration of Lessee Owned Alterations
and Utility Installations. Lessee shall be the Insuring Party with respect to
the insurance required by this Paragraph 8.4 and shall provide Lessor with
written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at lease B+, V or such other rating as may be required by a Lender having a
lien on the Premises, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done anything which shall
invalidate the insurance policies referred to in this Paragraph 8. Lessee shall
cause to be delivered to Lessor certified copies of, or certificates evidencing
the existence and amounts of, the insurance, and with the additional insureds,
required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or
subject to modification except after thirty (30) days prior written notice to
Lessor. Lessee shall at least thirty (30) days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 8. The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by any deductibles applicable thereto.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, 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,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought against
Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor
shall 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 so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning 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, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
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, the repair cost of which damage or destruction is less than 50%
of the then Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to improvements on
the Premises, other than Lessee Owned Alterations and Utility Installations,
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 building codes, ordinances or
laws, 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. 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 as
and when required to complete said repairs. In the event, however, the shortage
in proceeds 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 Lessor does not receive such
funds or assurance within said period, Lessor may nevertheless elect by written
notice to Lessee within ten (10) days thereafter to 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. If in
such case Lessor does not so elect, then this Lease shall terminate sixty (60)
days following the occurrence of the damage or destruction. Unless otherwise
agreed, Lessee shall in no event have any right to reimbursement from Lessor for
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 rather than Paragraph 9.2, 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 and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, 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) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said 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 and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
a Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term 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,
at Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, 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, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option during
said Exercise Period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's
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 said Exercise Period, then Lessor may at
Lessor's option terminate this Lease as of the expiration of said sixty (60) day
period following the occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within ten (10) days after the expiration
of the Exercise Period, notwithstanding any term or provision in the grant of
option to the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 9.2 (Partial Damage
- - Insured), whether or not Lessor or Lessee repairs or restores the Premises,
the Base Rent, Real Property Taxes, insurance premiums, and other charges, if
any, payable by Lessee hereunder for the period during which such damage, its
repair or the restoration continues (not to exceed the period for which rental
value insurance is required under Paragraph 8.3(b), shall be abated in
proportion to the degree to which Lessee's use of the Premises is impaired.
Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and
other charges, if any, as aforesaid, all other obligations of Lessee hereunder
shall be performed by Lessee, and Lessee shall have no claim against Lessor for
any damage suffered by reason of any such repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises 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 to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after receipt of such notice, this Lease shall
continue in full force and effect. "COMMENCE" as used in this Paragraph 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 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under 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 investigate
and 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 giving of such notice. In the event
Lessor elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except to the extent of
an amount equal to twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater. Lessee shall provide Lessor with the funds required of
Lessee or satisfactory assurance thereof within thirty (30) days following
Lessee's said commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and remediation
as soon as reasonably possible and the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance Condition
occurs for which Lessee is not legally responsible, there shall be abatement of
Lessee's obligations under this Lease to the same extent as provided in
Paragraph 9.6(a) for a period of not to exceed twelve (12) months.
9.8 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this 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 under the terms
of this Lease.
9.9 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 (a) PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes,
as defined in Paragraph 10.2, applicable to the Premises; provided, however,
that Lessee shall pay, in addition to rent, the amount, if any, by which Real
Property Taxes applicable to the Premises increase over the fiscal tax year
during which the Commencement Date occurs ("TAX INCREASE"). Subject to Paragraph
10.1(b), payment of any such Tax Increase shall be made by Lessee within thirty
(30) days after receipt of Lessor's written statement setting forth the amount
due and the computation thereof. Lessee shall promptly furnish Lessor with
satisfactory evidence that such taxes have been paid. If any such taxes to be
paid by Lessee shall cover any period of time prior to or after the expiration
or earlier termination of the term hereof, Lessee's share of such taxes shall be
equitably prorated to cover only the period of time within the tax fiscal year
this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment
after such proration.
(b) ADVANCE PAYMENT. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, at
Lessor's option, to estimate the current Real Property Taxes applicable to the
Premises, and to require such current year's Tax Increase to be paid in advance
to Lessor by Lessee, either: (i) in a lump sum amount equal to the amount due,
at least twenty (20) days prior to the applicable delinquency date, or (ii)
monthly in advance with payment of the Base Rent. If Lessor elects to require
payment monthly in advance, the monthly payment shall be that equal monthly
amount which, over the number of months remaining before the month in which the
applicable tax installment would become delinquent (and without interest
thereon), would provide a fund large enough to fully discharge before
delinquency the estimated Tax Increase to be paid. When the actual amount of the
applicable Tax Increase is known, the amount of such equal monthly advance
payment shall be adjusted as required to provide the fund needed to pay the
applicable Tax Increase before delinquency. If the amounts paid to Lessor by
Lessee under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Tax Increase as the same becomes due, Lessee
shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary
to pay such obligation. 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 the obligations of Lessee
under this Lease, then any balance of funds paid to Lessor under the provisions
of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at
the option of Lessor, be treated as an additional Security Deposit under
Paragraph 5.
(C) ADDITIONAL IMPROVEMENTS. Notwithstanding Paragraph 10.1(a) hereof,
Lessee shall pay to Lessor upon demand therefor the entirety of any increase in
Real Property Taxes assessed by reason of Alterations or Utility Installations
placed upon the Premises by Lessee or at Lessee's request.
10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. 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, or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties.
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 determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
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 contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal 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 within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b).
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 with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of the execution
by Lessor of this Lease or at the time of the most recent assignment to which
Lessor has consented, or as it exists immediately prior to said transaction or
transactions constituting such reduction, at whichever time said Net Worth of
Lessee was or is greater, shall be considered an assignment of this Lease by
Lessee to which Lessor may reasonably withhold its consent. "NET WORTH OF
LESSEE" for purposes of this Lease shall be the net worth of Lessee (excluding
any guarantors) established under generally accepted accounting principles
consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written 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 unconsented to assignment or subletting as a noncurable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to
fair market rental value or one hundred ten percent (110%) of the Base Rent then
in effect, whichever is greater. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and market value
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (110%) of the price
previously in effect, whichever is greater, (ii) any index- oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to require
that the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting shall
not: (i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, or (iii) alter the primary liability of Lessee for
the payment of Base Rent and other sums due Lessor hereunder or for the
performance of any other obligations to be performed by Lessee under this Lease.
(b) Lessor may accept any 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 any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to any assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the current monthly Base Rent,
whichever is greater, as reasonable consideration for Lessor's considering and
processing the request for consent. Lessee agrees to provide Lessor with such
other or additional information and/or documentation as may be reasonably
requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, 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 in writing.
(g) The occurrence of a transaction described in Paragraph 12.1(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased to an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
amount required to establish such Security Deposit a condition to Lessor's
consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment structure of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment structure for property similar to the Premises as then constituted.
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 rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. 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 the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee, or, until the Breach has been cured, against Lessor, for any
such rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any 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 other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(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. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said Default. A "DEFAULT" as defined as a
failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH"
is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2
and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure
by Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with applicable law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non- subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of 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 by or on behalf of Lessor 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,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; 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 of this Lease by Lessee 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 by
Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. '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 by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder 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 breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with 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 affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), 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 to Lessor upon 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 under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have be
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of 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 the leasing commission paid by Lessor 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 prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under subparagraphs 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such
case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, 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 in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
(d) 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 IN EVENT OF BREACH. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, 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 to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, 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,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph shall not be deemed a waiver by Lessor of the provisions of this
Paragraph unless specifically so stated in writing by Lessor at the time of such
acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder 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 the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within five (5) days
after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of
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 late
payment by Lessee. 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 Lessor from exercising 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 Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 BREACH BY LESSOR. 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 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises 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 after such notice
are reasonably required for its performance, then Lessor shall not be in breach
of this Lease if performance is commenced within such thirty (30) day period and
thereafter diligently pursued to completion.
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 (all of which are herein called "CONDEMNATION"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area, of the Premises, or more than twenty-five percent (25%) of the
land are 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 the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
15. BROKER'S FEE.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of
this Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to
said Brokers jointly, or in such separate shares as they may mutually designate
in writing, a fee as set forth in a separate written agreement between Lessor
and said Brokers (or in the event there is no separate written agreement between
Lessor and said Brokers, the sum of $________________) for brokerage services
rendered by said Brokers to Lessor in this transaction.
15.3 Unless Lessor and Brokers have otherwise agreed in writing,
Lessor further agrees that: (a) if Lessee exercises any Option (as defined in
Paragraph 39.1) or any Option subsequently granted which is substantially
similar to an Option granted to Lessee in this Lease, or (b) if Lessee acquires
any rights to the Premises or other premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or (c) if Lessee remains in possession of the
Premises, with the consent of Lessor, after the expiration of the term of this
Lease after having failed to exercise an Option, or (d) if said Brokers are the
procuring cause of any other lease or sale entered into between the Parties
pertaining to the Premises and/or any adjacent property in which Lessor has an
interest, or (e) if Base Rent is increased, whether by agreement or operation of
an escalation clause herein, then as to any of said transactions, Lessor shall
pay said Brokers a fee in accordance with the schedule of said Brokers in effect
at the time of the execution of this Lease.
15.4 Any buyer or transferee of Lessor's interest in this Lease,
whether such transfer is by agreement or by operation of law, shall be deemed to
have assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a
third party beneficiary of the provisions of this Paragraph 15 to the extent of
its interest in any commission arising from this Lease and may enforce that
right directly against Lessor and its successors.
15.5 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 named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said transaction.
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.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 10.
16. TENANCY STATEMENT.
16.1 Each party (as "RESPONDING PARTY") shall within ten (10) days
after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "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,
any part thereof, or the building of which the Premises are a part, Lessee and
all Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors 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. LESSOR'S LIABILITY. 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 or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. 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.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within (30) days
following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. 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.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under
the terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS: BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
23. NOTICES.
23.1 All notices required or permitted by this Lease shall be in
writing and may be delivered in person (by hand or by messenger or courier
service) 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 notice purposes. Either
Party may by written notice to the other specify a different address for notice
purposes, except that upon Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to be
given to Lessor hereunder shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time hereafter designate by
written notice to Lessee.
23.2 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 guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of same to
the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If Notice is received on
a 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. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. Any payment given Lessor 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 or taxes 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 earlier termination of
this Lease.
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. All provisions of this Lease to be
observed or performed by Lessee are both covenants and conditions.
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 by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under the
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall given 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) by 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 assurance (a "NON-DISTURBANCE AGREEMENT") from the
Lender that Lessee's possession 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.
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
such subordination or non-subordination, attornment and/or non-disturbance
agreement as is provided for herein.
31. ATTORNEY'S 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) or Broker in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such
fees may be awarded in the same suit or recovered in a separate suit, whether or
not such action or proceeding is pursued to decision or judgment. The term,
"PREVAILING PARTY" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorney's fee award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to
attorney's 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 or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred twenty (120) days of the term
hereof place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises, except
that Lessee may, with Lessor's prior written consent, install (but not on the
roof) such signs as are reasonably required to advertise Lessee's own business.
The installation of any sign on the Premises by or for Lessee shall be subject
to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.
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, Lessor shall, in the event of any such
surrender, termination or cancellation, have the option to continue any one or
all of any existing subtenancies. Lessor's failure within ten (10) days
following any such event to make a written election to the contrary by written
notice to the holder of any such lesser interest, shall constitute Lessor'
selection to have such event constitute the termination of such interest.
36. CONSENTS
(a) Except for Paragraph 33 hereof (Auctions) or 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 or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will
incur in considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act, assignment of this Lease or subletting of
the Premises by Lessee 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.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. 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.
37. GUARANTOR.
37.1 If there are to be any Guarantors of this Lease per Paragraph
1.11, the form of the guaranty to be executed by each such Guarantor shall be in
the form most recently published by the American Industrial Real Estate
Association, and each said Guarantor shall have the same obligations as Lessee
under this Lease, including but not limited to the obligation to provide the
Tenancy Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if
any such Guarantor fails or refuses upon reasonable request by Lessor to give:
(a) evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the
Premises and the observance 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 of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has
the following meaning: (a) the right to extend the term of this Lease or to
renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal to lease the Premises or the
right of first offer to lease the Premises or the right of first refusal to
lease other property of Lessor or the right of first offer to lease other
property of Lessor; (c) the right to purchase the Premises, or the right of
first refusal to purchase the Premises, or the right of first offer to purchase
the Premises, or the right to purchase other property of Lessor, or the right of
first refusal to purchase other property of Lessor, or the right of first offer
to purchase other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1
hereof, and cannot be voluntarily or involuntarily assigned or exercised by any
person or entity other than said original Lessee while the original Lessee is in
full and actual possession of the Premises and without the intention of
thereafter assigning or subletting. The Options if any, herein granted to Lessee
are not assignable, either as a part of an assignment of this Lease or
separately or apart therefrom, and no Option may be separated from this Lease in
any manner, by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In event that Lessee has any Multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of Default under Paragraph 13.1, 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) All rights of Lessee under the provisions of 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 during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of Default under Paragraph 13.1 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 part of a group of
buildings controlled by Lessor, Lessee agrees that it will abide by, keep and
observe all reasonable rules and regulations which Lessor may make from time to
time for the management, safety, care, and cleanliness of the grounds, the
parking and unloading of vehicles and the preservation of good order, as well as
for the convenience of other occupants or tenants of such other buildings and
their invitees, 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 under the
provisions of this Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or
general or limited partnership, 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. If Lessee is a corporation, trust
or partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
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 Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed 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. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. 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 an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein,
if more than one person or entity is named herein as either Lessor or Lessee,
the obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
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.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR
SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD
BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE
POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES.
NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS
OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO
THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY
IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE
WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at ___Beverly Hills__ Executed at __Los Angeles_____
on ________5/9/96_____________ on _________5/7/96____________
by LESSOR: by LESSEE:
__Evard Realty, Inc.__________ ____T.K. MAB, Inc.____________
__a California Corporation____ ____a California Corporation__
By:________/s/________________ By:__________/s/______________
Name Printed:_Fred S. Volmer__ Name Printed:_Lawrence Dear___
Title:________President_______ Title:________President_______
By:___________________________ By:__________/s/______________
Name Printed:_________________ Name Printed:_Jon Eisenberg___
Title:________________________ Title:____Vice President______
Address:_1002 Woodland Drive__ Address:_3745 Overland Avenue_
__Beverly Hills, CA 90210_____ ____Los Angeles, CA 90034____
Tel.No. (310)_275-0647________ Tel.No. (213)_934-8200________
Fax.No. (310)_275-5447________ Fax.No. (213)_934-8211________
NOTICE: 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, 345 South
Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777. Fax. No.
(213) 687-8616.
Copyright 1990 -- By American Industrial Real Estate Association. All rights
reserved. No part of these works may be reproduced in any form without
permission in writing.
FORM 105G-R-12/91
<PAGE>
Paragraph 49
GUARANTY OF LEASE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
WHEREAS, EVARD REALTY, INC., hereinafter referred to as "Lessor" and
T.K. MAB, INC., hereinafter referred to as "Lessee", are about to execute a
document entitled "Lease" dated MAY 1, 1996 concerning the premises commonly
known as 3745 OVERLAND AVENUE, LOS ANGELES, CA 90034 wherein Lessor will lease
the premises to Lessee; and
WHEREAS, LAWRENCE DEAR AND JON EISENBERG hereinafter referred to as
"Guarantors" have a financial interest in Lessee; and
WHEREAS, Lessor would not execute the Lease if Guarantors did not
execute and deliver to Lessor this Guarantee of Lease.
NOW THEREFORE, for and in consideration of the execution of the
foregoing Lease by Lessor and as a material inducement to Lessor to execute said
Lease, Guarantors hereby jointly, severally, unconditionally and irrevocably
guarantee the prompt payment by Lessee of all rentals and all other sums payable
by Lessee under said Lease and the faithful and prompt performance by Lessee of
each and every one of the terms, conditions and covenants of said Lease to be
kept and performed by Lessee.
It is specifically agreed and understood that the terms of the
foregoing Lease may be altered, affected, modified or changed by agreement
between Lessor and Lessee, or by a course of conduct, and said Lease may be
assigned by Lessor or any assignee of Lessor without consent or notice to
Guarantors and that this Guaranty shall thereupon and thereafter guarantee the
performance of said Lease as so changed, modified, altered or assigned.
This Guaranty shall not be released, modified or affected by failure
or delay on the part of Lessor to enforce any of the rights or remedies of the
Lessor under said Lease, whether pursuant to the terms thereof or at law or in
equity.
No notice of default need be given to Guarantors, it being
specifically agreed and understood that the guarantee of the undersigned is a
continuing guarantee under which Lessor may proceed forthwith and immediately
against Lessee or against Guarantors following any breach or default by Lessee
or for the enforcement of any rights which Lessor may have as against Lessee
pursuant to or under the terms of the within Lease or at law or in equity.
Lessor shall have the right to proceed against Guarantors hereunder
following any breach or default by Lessee without first proceeding against
Lessee and without previous notice to or demand upon either Lessee or
Guarantors.
Guarantors hereby waive (a) notice of acceptance of this Guaranty, (b)
demand or payment, presentation and protest, (c) all right to assert or plead
any statute of limitations as to or relating to this Guaranty and the Lease, (d)
any right to require the Lessor to proceed against the Lessee or any other
Guarantor or any other person or entity liable to Lessor, (e) any right to
require Lessor to apply to any default any security deposit or other security it
may hold under the Lease, (f) any right to require Lessor to proceed under any
other remedy Lessor may have before proceeding against Guarantors, (g) any right
of subrogation.
Guarantors do hereby subrogate all existing or future indebtedness of
Lessee to Guarantors to the obligations owed to Lessor under the Lease and this
Guaranty.
Any married woman who signs this guaranty expressly agrees that
recourse may be had against her separate property for all of her obligations
hereunder.
The obligations of Lessee under the Lease to execute and deliver
estoppel statements and financial statements, as therein provided, shall be
deemed to also require the Guarantors hereunder to do and provide the same
relative to Guarantors.
The term "Lessor" whenever hereinabove used refers to and means the
Lessor in the foregoing Lease specifically named and also any assignee of said
Lessor, whether by outright assignment or by assignment for security, and also
any successor to the interest of said Lessor or of any assignee in such Lease or
any part thereof, whether by assignment or otherwise. So long as the Lessor's
interest in or to the leased premises or the rents, issues and profits
therefrom, or in, to or under said Lease are subject to any mortgage or deed of
trust or assignment for security, no acquisition by Guarantors of the Lessor's
interest in the leased premises or under said Lease shall affect the continuing
obligations of Guarantors under this Guaranty which shall nevertheless continue
in full force and effect for the benefit of the mortgagee, beneficiary, trustee
or assignee under such mortgage, deed of trust or assignment, of any purchase at
sale by judicial foreclosure or under private power of sale, and of the
successors and assigns of any such mortgagee, beneficiary, trustee, assignee or
purchaser.
The term "Lessee" whenever hereinabove used refers to and means the
Lessee in the foregoing Lease specifically named and also any assignee or
sublessee of said Lease and also any successor to the interests of said Lessee,
assignee or sublessee of such Lease or any part thereof, whether by assignment,
sublease or otherwise.
In the event any action be brought by said Lessor against Guarantors
hereunder to enforce the obligation of Guarantors hereunder, the unsuccessful
party in such action shall pay to the prevailing party therein a reasonable
attorney's fee which shall be fixed by the court.
If this Form 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 Form or
the transaction relating thereto.
Executed at LOS ANGELES /S/
on 5/7/96 Lawrence Dear
Address 3745 OVERLAND AVENUE ____________________
LOS ANGELES, CA 90034 /S/
Jon Eisenberg
"GUARANTORS"
Copyright 1977 -- American Industrial Real Estate Association All rights
reserved. No part of these works may be reproduced in any form without
permission in writing.
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, 345 So. Figueroa
St., M-1, Los Angeles, CA 90071 (213) 687-8777.
<PAGE>
RENT ADJUSTMENT(S)
ADDENDUM TO STANDARD LEASE
Dated MAY 1, 1996
by and Between (Lessor) EVARD REALTY, INC.
(Lessee) T.K. MAB, INC.
Property Address: 3745 OVERLAND AVENUE, LOS
ANGELES, CA 90034
Paragraph 50
A. RENT ADJUSTMENTS:
The monthly rent for each month of the adjustment period(s) specified
below shall be increased using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
I. COST OF LIVING ADJUSTMENT(S) (COL)
INTENTIONALLY CROSSED OUT
II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV)
INTENTIONALLY CROSSED OUT
III. FIXED RENTAL ADJUSTMENT(S) (FRA)
The monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be increased to the following amounts on the dates set forth below:
On (Fill in FRA Adjustment The New Base Rental shall be:
Date(s):
$ $5,500.00
December 1, 1997
B. NOTICE: Unless specified otherwise herein, notice of any escalations other
than Fixed Rental Adjustment(s) shall be made as specified in Paragraph 23 of
the attached Lease.
C. BROKER'S FEE:
The Real Estate Brokers specified in paragraph 1.10 of the attached
Lease shall be paid a Brokerage Fee for
each adjustment specified above in accordance with Paragraph 15 of the
attached Lease.
<PAGE>
OPTION(S) TO EXTEND
ADDENDUM TO
STANDARD LEASE
Dated MAY 1, 1996
By and Between (Lessor) EVARD REALTY, INC.
(Lessee) T.K. MAB, INC.
Property Address: 3745 OVERLAND AVE., LOS ANGELES, CA
90034
Paragraph 51
A. OPTION(S) TO EXTEND:
Lessor hereby grants to Lessee the option to extend the term of this
Lease for 1 additional 36 month period(s) commencing when the prior term expires
upon each and all of the following terms and conditions:
(i) Lessee gives to Lessor, and Lessor actually receives on a date
which is prior to the date that the option period would commence (if exercised)
by at least 4 and not more than 6 months, a written notice of the exercise of
the option(s) to extend this Lease for said additional term(s), time being of
essence. If said notification of the exercise of said option(s) is (are) not so
given and received, the option(s) shall automatically expire; said option(s) may
(if more than one) only be exercised consecutively;
(ii) the provisions of paragraph 39, including the provision relating
to default of Lessee set forth in paragraph 39.4 of this Lease are conditions of
this Option;
(iii) All of the terms and conditions of this Lease except where
specifically modified by this option shall apply;
(iv) the monthly rent for each month of the option period shall be
calculated as follows, using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
I. COST OF LIVING ADJUSTMENT(S) (COL)
INTENTIONALLY CROSSED OUT
II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV)
INTENTIONALLY CROSSED OUT
III. FIXED RENTAL ADJUSTMENT(S) (FRA)
The monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be increased to the following amounts on the dates set forth below:
On (fill in FRA Adjustment The New Base Rental Shall be:
Date(s)):
JUNE 1, 1999 $ $5,750.00
- ---------------------- -------------
DECEMBER 1, 2000 $ $6,000.00
- ---------------------- -------------
B. NOTICE: Unless specified otherwise herein, notice of any
escalations other than Fixed Rental Adjustments shall be made as
specified in Paragraph 23 of the attached Lease.
C. BROKER'S FEE:
The Real Estate Brokers specified in paragraph 1.10 of the attached
Lease shall be paid a Brokerage Fee for each adjustment specified above
in accordance with paragraph 15 of the attached Lease.
D. Section 56 of Said Lease does not apply to this Option
Period (if exercised)
NOTICE: 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, 345 South Figueroa
Street, Suite M-1, Los Angeles CA 90071. (213) 687-8777. Fax No. (213) 687-8616
<PAGE>
EXHIBIT A
[ILLUSTRATION OF PREMISES]
This illustration is not to scale. The above highlighted area in "yellow" is not
a part of this Lease and is addressed in Section 54 of said Lease.
REPUBLIC
FACTORING AGREEMENT
June 26, 1995
Republic Factors Corp.
1000 Wilshire Boulevard, Suite 400
Los Angeles, California 90017
Re: T.K. Mab Inc.
3346 S. La Cienega Blvd.
Los Angeles, CA 90016
Gentlemen:
We hereby request that you act as our sole factor, effective as of the date of
your acceptance hereof, upon the terms and conditions set forth below:*
*THIS AGREEMENT AMENDS AND RESTATES IN ITS ENTIRETY THE PRIOR FACTORING
AGREEMENT BETWEEN THE PARTIES (THE "PRIOR FACTORING AGREEMENT") EFFECTIVE AS OF
JULY 1, 1995 (THE "AMENDMENT DATE"). RECEIVABLES ASSIGNED TO YOU PRIOR TO THE
AMENDMENT DATE SHALL CONTINUE TO BE GOVERNED BY THE PRIOR FACTORING AGREEMENT,
AND RECEIVABLES ASSIGNED TO YOU ON OR AFTER THE AMENDMENT DATE SHALL BE GOVERNED
BY THIS AGREEMENT.
1.A. We agree that we will do all our business through you as our sole
factor and hereby assign and sell to you as absolute owner all Receivables. As
used herein, the term "Receivables" shall mean and include all accounts*, and
all other obligations of customers of ours arising out of the sale and delivery
of goods by us or the rendition of services by us, whether now existing or
hereafter created. We represent and warrant that each and every Receivable now
or hereafter assigned to you will be a bona fide and existing obligation of a
customer of ours, owned by and owing to us, arising our of the sale and delivery
of goods by us or the rendition by us of services as aforesaid, free and clear
of any and all deductions, Disputes (as defined in paragraph 8. below), liens,
security interests and encumbrances.
B. You agree to (i) purchase and hereby do purchase, without recourse
to us except as set forth hereinafter, all Receivables approved by you in
accordance with paragraph 2. below and which are promptly assigned to you, and
(ii) assume the risk of non-payment on such Receivables, which non-payment is
due solely to the financial inability of our customer, whose credit standing you
will have approved in advance in accordance with paragraph 2. below, to make
payment in accordance with the terms of the invoice provided the customer has,
prior to the expiration of the payment terms of the invoice, and thereafter
received and finally accepted the merchandise or services giving rise to such
Receivables without any Dispute.
C. Receivables not covered by the provisions of paragraph 1.B. above,
in whole or in part, shall be assigned to, and purchased by you with full
recourse to us in the event of non-payment thereof or in the event of a Dispute.
D. In addition, we hereby sell, assign and transfer to you all of our
right, title and interest in and to the merchandise the sale of which resulted
in creation of Receivables and in all such merchandise that may be returned by
customers and all causes of action and rights in connection therewith which we
now have or may hereafter acquire including our rights of reclamation, replevin
and stoppage in transit and as an unpaid vendor of merchandise or services as a
lienor. We hereby agree upon your instruction to promptly take any and all
action necessary for you to enforce your rights of reclamation, replevin and
stoppage in transit and in the event of our failure to do so, you shall be
authorized to exercise any such right in our name or in any manner you deem
appropriate. Any merchandise so recovered shall be treated as returned
merchandise, and shall be set aside, marked with your name and held for your
account. We shall notify you promptly of all such returned merchandise.
2. No purchase of any Receivable by you shall be deemed to be made
pursuant to paragraph 1.B. above unless the sale of merchandise or rendition of
services by us resulting in such Receivable shall have been made with your prior
written approval of the amount and terms of such sale or rendition of services
and the credit standing of our customer, and you shall have the right to
withdraw such approval at any time before actual delivery of such merchandise or
rendition of such services. You shall not be liable in any manner or respect for
refusing to accept or approve any Receivable or the credit standing of any
customer of ours or for withdrawing any approval as provided in the preceding
sentence.
3. On the face of all bills and invoices for all Receivables assigned
to and purchased by you hereunder shall be placed the following legend: "This
Receivable is assigned to, owned by and payable only to: REPUBLIC CORP. AT P.O.
BOX 7777, W8720, PHILADELPHIA, PA. 19175 OR DEPT. 49941, LOS ANGELES, CA. 90088,
whichever is nearer. Any objection to this invoice must be reported to Republic
Factors Corp. at 1000 Wilshire Boulevard, Suite 400, Los Angeles, California
90017.
4.A. The "Purchase Price of Receivables" shall be the net amount of
Receivables less the amount of your commission described in paragraph 6. below.
As used herein "net amount" of Receivables shall mean the gross amount of said
Receivables less returns, discounts (based upon shortest or longest payment
terms, as you may elect), credits or allowances of any nature at any time
issued, owing, claimed by customers, granted or outstanding.
B. Discounts to customers, at your option, may be calculated on any
of the stated terms. The Purchase Price of Receivables shall be payable to us on
the Collection Date. For the purpose hereof, the term "Collection Date" shall
mean the earlier of (a) 7 business days after receipt by you of payment of the
Receivables or (b) 120 days after the due date of the Receivable in question,
provided that no Dispute has been raised with respect to such Receivable, and
provided that such Receivable has been credit approved by you, ("Deems Paid
Provision"). Moreover, Receivables created under paragraph 1.C. shall not be
subject to the Deems Paid Provision.
C. You may, in your sole discretion, make advances to us from time to
time at our request. In your sole discretion you shall withhold a reserve
against the Purchase Price of Receivables, and you may revise such reserve from
time to time, as a protection to you against all possible returns, claims,
allowances, expenses, indebtedness owing by us to you or any other
contingencies.
D. As security for any and all "Obligations" (as defined below), you
shall be entitled to hold and we hereby grant to you a continuing general lien
upon, security interest in and to, and right of set off on or against any of the
following (collectively, the "Collateral"): All Receivables whether or not
specifically assigned to you and all of our reserves and all of our present and
future instruments, documents, contract rights, notes, bills, chattel paper, all
other forms of obligations owing to us, all general intangibles (including
without limitation all tax refunds, proceeds of insurance, bank and other
deposit accounts, trade names, trademarks, trade secrets, customer lists, and
all other licenses, rights, privileges and franchises), all balances, sums and
other property at any time to our credit or in your possession or in the
possession of any of your Affiliates (as defined in paragraph 11. below),
together with all merchandise the sale of which resulted in the creation of
Receivables and in all such merchandise that may be returned by customers and
all books and records relating to any of the foregoing. We represent and warrant
to you that we now have, and shall at all times continue to have, good and
marketable title to all of the Collateral, free and clear of any and all liens,
security interests and encumbrances. As used herein, the term "Obligations"
means and includes all loans, advances, indebtedness, liabilities, debit
balances, covenants and duties and all other obligations of whatever kind or
nature at any time or from time to time owing by us to you or any of your
Affiliates, whether fixed or contingent, no matter how or when arising and
whether under this or any other agreement or otherwise and including all
obligations for purchases made by us from any other concern factored by you. You
shall have the right and are hereby irrevocably authorized to charge to our
account the amounts of any and all Obligations and, upon the demand of any of
your Affiliates or clients, to pay over to such Affiliate or clients any amounts
owing to them by us. We shall execute and deliver to you all financing
statements and other documents and instruments that you may request to perfect,
protect or establish your security interest hereunder and we authorize you to
execute and file any financing statements covering such security interest
without our signature or, if you so elect, signed in our name by you, and you
are hereby irrevocably appointed our attorney-in-fact to do so. You shall be
entitled to charge our account with all costs and expenses incurred by you in
connection with the preparation, execution, administration and enforcement of
this Agreement, or to enforce any of the Obligations, or in the prosecution or
defense of any action, involving you or us, concerning any matter growing out of
or in any manner relating to this Agreement, the Receivables or other Collateral
or any Obligation whatsoever including, without limitation, all reasonable fees
and expenses of your attorneys, and all fees and costs in connection with public
record searches and filings, accounting fees, investigation fees, periodic field
examination fees and expenses and all other costs and expenses with respect
thereto, whether or not a legal action is commenced by or against us, and if
such action is commenced, whether or not judgment is obtained. Moreover, you
shall similarly be entitled to such attorneys' fees in the event of any state
court insolvency proceeding or federal bankruptcy proceeding. Recourse to
security or any Collateral shall not at any time be required and we shall at all
times remain liable for the repayment on demand to you of all loans and advances
to or for our account and of all other Obligations at any time or from time to
time owing to you or any of your Affiliates.
5.A. Interest on all sums advanced and charged to us or to or for our
account shall be calculated on the daily balance of all monies remitted, paid or
otherwise advanced to us by you or for our account including all fees and
commissions net of all payments received by you from us including the Purchase
Price of Receivables purchased by you hereunder and which is credited to our
account on the Collection Date.
B. All interest charges to our account shall be at 2-1/2% above the
reference rate of Republic National Bank of New York ("Republic Reference
Rate"), computed on the basis of a 360-day year for the actual number of days
elapsed and charged to our account at the end of each month. The term "Republic
Reference Rate" shall mean the lending rate announced by Republic National Bank
of New York from time to time as its reference rate. The interest rate in effect
during each calendar month shall be based on the Republic Reference Rate in
effect on the last business day of the preceding calendar month.
C. You will send us a monthly statement of account after the end of
each month. Unless you receive our written exceptions to any monthly accounting
rendered by you within thirty (30) days after such accounting is rendered, such
monthly accounting shall constitute an account stated and be deemed accepted by
us and shall be conclusive and binding upon us.
D. If funds remain with you past the Collection Date which creates a
balance in our favor in our account with you ("Matured Funds"), you shall pay us
interest on such Matured Funds at a rate per annum equal to 3% below the
Republic Reference Rate.
6.A. As compensation for your services as factor hereunder, we agree
to pay to you a factoring commission equal to 1-1/2% of the amount of each bill
or invoice less discounts granted to the customer. Your factoring commission as
so calculated shall be charged to our account as of the fifteenth day of the
month in which the Receivable was created.
B. Commissions payable to you hereunder are based upon our usual and
regular terms which do not exceed ninety (90) days. On all Receivables on which
additional terms or dating are granted, your commissions thereon shall be
increased at the rate of twenty-five percent (25%) of the basic commission rate
for each additional thirty (30) days or fraction thereof by which our regular
terms are increased. No such increase in terms or dating, however, shall be
granted without your prior written approval. A minimum factoring commission on
each invoice shall be $4.50. In addition to the foregoing, we shall pay to you
an annual minimum factoring commission for each consecutive twelve month period
hereafter (each such period is hereinafter called the "Contract Year"), in the
amount of $25,000.00 (the "Minimum Factoring Commission"), irrespective of the
actual aggregate face amount of bills or invoices factored by us in each
Contract Year pursuant to the terms of this Agreement. Each month you shall
charge our account with the greater of (i) $2,083.33 ("Minimum Monthly
Commission"), or (ii) the amount of the factoring commission at the rate
provided for herein based upon the actual aggregate face amount of all bills or
invoices, less discounts, factored by you in each such month (the "Contract
Commission"). If at the end of any Contract Year the aggregate factoring
commissions actually charged to our account for that Contract Year (the "Charged
Commissions") is greater than the Minimum Factoring Commission, and in any month
we were charged the Minimum Monthly Commission rather than the Contract
Commission for that month, then you will refund to us the amount by which the
Minimum Monthly Commission in that month exceeded the Contract Commission, but
in no event, taking into account all such refunds, will the aggregate factoring
commissions for the Contract Year be reduced below the Minimum Factoring
Commission. The refund shall be made by credit to our account. We will issue
credits only with your prior written approval and credits may be claimed only by
the customer. Such credits shall be issued only for full invoice amounts.
7. We will provide you with an assignment and schedule of Receivables
sold and assigned to you in form satisfactory to you. All invoices shall be
mailed by us to our customers at our sole expense. We will give you copies of
all invoices, together with such proof of shipment or delivery as you may from
time to time require. The issuance of or any billing by us of such invoices,
shall constitute an assignment thereof to you for the Receivables represented
thereby, whether or not we execute any other specific instrument of assignment.
8. We hereby further warrant to you that the customer in each instance
has received and will accept the merchandise sold or the services rendered and
the invoice therefor, and will pay the same as and when due without any Dispute.
As used herein, the term "Dispute" shall mean and include any dispute, claim,
offset, defense or counterclaim, regardless of whether the same is in an amount
greater than, equal to or less than the Receivables concerned, whether bona fide
or not, and regardless of whether the same, in part or in whole, relates to
unpaid Receivables or other Receivables, and whether or not such Dispute arises
by reason of an Act of God, civil strife, war, currency restrictions, foreign
political restrictions or regulations, or the like. We will notify you promptly
of, and, at our own cost and expense, including attorneys' fees, shall settle
all Disputes and will pay you promptly the amount of the Receivables affected
thereby. Any Dispute not settled by us by the sixtieth (60th) day next following
the maturity of the invoice affected thereby may, if you so elect, be settled,
compromised, adjusted or litigated by you directly with the customer or other
complainant for our account and risk and upon such terms and conditions as you
in your sole discretion deem advisable. You may also in your discretion take
possession of and sell or cause the sale of any returned or recovered
merchandise, at such prices, upon such terms and to such purchasers as you deem
proper (including, in the event of any public sale, yourself) and in any event
to charge the deficiency costs and expenses thereof, including attorneys' fees,
to us. In addition to all other rights to which you are entitled hereunder,
whenever there is any Dispute, or if any unapproved Receivable is unpaid at its
maturity, you may reduce the amount of our Receivables balance (and charge our
loan account if you have previously paid us the purchase price) by the amount of
the Receivables so affected or unpaid (as well as all other Receivables due and
owing from that customer) at any time (a "Chargeback"). Such Chargeback shall
not be deemed nor shall it constitute a reassignment to us of the Receivable
affected thereby, and title hereto and to the merchandise represented thereby
shall remain in you until you are fully reimbursed. Regardless of the date or
dates upon which you charge back the amount of any Receivable with respect to
which there is any Dispute, or the amount owing from a customer which has raised
any Dispute, we agree that immediately upon the occurrence of any such Dispute,
any obligation you may otherwise have had hereunder to bear the risk of loss
with respect to such Receivable shall cease and such obligation shall
immediately revert to and be assumed by us without any act upon your part to
effect the same.
9.A. If any remittances are made directly to us, we shall hold the
same in trust for you as your property and immediately deliver to you the
identical checks, monies or other forms of payment received, and you shall have
the right to endorse our name on any and all checks or other forms of
remittances received if such endorsement is necessary to effect collection. We
agree that we will hold at our offices and be fully responsible to you for any
and all shipping receipts evidencing delivery of goods regarding Receivables
factored by you. Such shipping evidences held by us shall be available for your
inspection and for delivery to you at your request at any time.
B. We further agree to make our records, files and books of account,
including, but not limited to, any and all invoices, shipping or transport
documents, ledgers, journals, checkbooks, correspondence, memoranda, copies of
correspondence and memoranda, microfilm, microfiche, computer programs and
records, source materials, tapes and discs (collectively "Documents"), available
to you on request and that you may visit our premises during normal business
hours to examine such Documents and to make copies or extracts thereof and to
conduct such examinations as you deem necessary.
10. Any state, city, local or federal sales or excise taxes on sales
of Receivables hereunder and any payroll taxes, state disability premiums,
premiums for workman's compensation insurance and unemployment taxes shall be
timely paid by us, but if you should make any payment of any thereof, we will
repay the same to you upon demand.
11. As used herein, an "Affiliate" shall mean and include any person,
firm or corporation controlling, controlled by or in common control with you
and/or any subsidiary or parent corporation of yours.
12. We hereby warrant our solvency and hereby agree that we are not
entitled to and shall not pledge your credit for any purpose whatsoever. This
Agreement is the complete agreement between the parties hereto and is entered
into for the benefit of said parties, their successors and assigns, and cannot
be changed, modified or terminated orally except that we shall not assign or
hypothecate our rights under this Agreement to any other person, firm,
corporation or entity without your prior written consent. No delay or failure on
your part in exercising any right, privilege or option hereunder shall operate
as a waiver of such or of any other right, privilege or option, and no waiver
whatever shall be valid unless in writing signed by you and then only to the
extent a waiver is therein set forth. This Agreement is made in the State of
California and shall be governed by and construed in accordance with the laws of
said State.
13.A. This Agreement shall continue in full force and effect until one
year from the date this Agreement is signed and accepted by you and from year to
year thereafter unless terminated by you or unless we notify you of our desire
to terminate this Agreement effective on its anniversary date in any year by
giving you at least sixty (60) days' prior written notice. You shall have the
right to terminate this Agreement at any time upon sixty days' prior written
notice. Termination shall be effective by the mailing by certified mail, return
receipt requested of a letter of notice addressed by either of us to the other
specifying the date of termination. Notwithstanding the foregoing, you may
terminate this Agreement without notice upon the occurrence of any Event of
Default. On termination for any reason, all Obligations shall, unless and to the
extent that you otherwise elect, become immediately due and payable without
notice or demand. Any of the following events shall constitute "Events of
Default" hereunder: we fail to pay or perform any Obligation owing to you or any
of your Affiliates when due or commit any breach of or default in the
performance of any agreement contained herein or in any instrument or document
delivered pursuant hereto or in any other agreement, instrument or document
under which we are obligated to you or any of your Affiliates; we as principal,
guarantor, surety or other party liable upon any Obligation make any false or
untrue representation to you or any of your Affiliates in connection with this
Agreement or any transaction relating hereto or in connection with any
Obligation; any partner (if we are a partnership) shall die or otherwise
withdraw from the partnership; any guarantor, surety or other party liable upon
any Obligation shall die; we (if a corporation) shall be dissolved or become a
party to any merger or consolidation without your prior written consent; if we
are a corporation, the persons who are in control of us shall change, or we
become insolvent or unable to meet our debts as they mature, or we file or have
filed against us a petition under the Bankruptcy Code or otherwise seek a
rearrangement or restructuring of our indebtedness.
B. Notwithstanding any termination hereof, this Agreement shall
nevertheless continue in full force and effect as to, and be binding upon us,
after any termination, until we have fully paid, performed and satisfied all of
the Obligations, no matter how or when arising and whether under this or any
other agreement.
14. Upon the occurrence of any Event of Default, you shall have all of
the rights and remedies of a secured party under the Uniform Commercial Code and
other applicable laws with respect to all Collateral, such rights and remedies
being in addition to all of your other rights and remedies provided for herein,
and further, you may, at any time or times, after the occurrence of any such
Event of Default, sell and deliver any and all other Collateral held by you or
for you at public or private sale, in one or more sales or parcels, at such
prices and upon such terms as you may deem best, and for cash or on credit or
for future delivery, without your assumption of any credit risk, and at public
or private sales, as you may deem appropriate. If reasonable notice of the time
and place of such sale is required under applicable law, such requirement shall
be met if any such notice is mailed, postage prepaid, to our address shown on
the cover page hereof, or the last shown address in your records, at least five
(5) days before the time of the sale or disposition thereof. You may be the
purchaser at any sale, if it is public, free from any right of redemption, which
we also hereby expressly waive. The proceeds of sale shall be applied first to
all costs and expenses of sale, including attorneys' fees and disbursements, and
then to the payment (in such order as you may elect) of all Obligations. You
will return any excess to us and we shall remain liable to you for any
deficiency. Your rights and remedies under this Agreement will be cumulative and
not exclusive of any other rights or remedies which you may otherwise have.
15. We agree to furnish you with balance sheets, statements of profit
and loss, financial statements and such other information regarding our business
affairs and financial conditions as you may from time to time require, and in
any event, a statement of our financial position for each fiscal year prepared
and certified by our regularly engaged Certified Public Accountant. All such
statements shall fairly present our financial condition as of the dates, and the
results of our operations for the periods, for which the same are furnished.
16. We agree that any claim or cause of action by us against you, or
any of your directors, officers, employees, agents, accountants or attorneys,
based on, arising from or relating in any way to this Agreement, or any
supplement or amendment hereto, or any other present or future agreement between
us, or any other transaction contemplated hereby or thereby or relating hereto
or thereto, or any other matter whatsoever shall be barred unless asserted by us
by the commencement of an action or proceeding in a court of competent
jurisdiction by the filing of a complaint within one year after the first act,
occurrence or omission upon which such claim or cause of action, or any part
thereof, is based, and the service of a summons and complaint upon one of your
officers, within thirty (30) days thereafter. We agree that said one year period
is a reasonable and sufficient time for us to investigate and act upon such
claim or cause of action. Said one year period shall not be waived, tolled or
extended except by specific written consent by you. YOU AND WE EACH HERE WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION BASED UPON, ARISING FROM, OR IN ANY WAY
RELATING TO: (I) THIS AGREEMENT, OR ANY SUPPLEMENT HERETO; OR (II) ANY OTHER
PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN YOU AND US; OR (III) ANY
CONDUCT, ACTS OR OMISSIONS BY YOU OR US OR ANY OF YOUR OR OUR RESPECTIVE
DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS
AFFILIATED WITH YOU OR US; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE. As a material part of the consideration to you to
enter into this Agreement, we (1) agree that, at your option, all actions and
proceedings based upon, arising out of or relating in any way directly or
indirectly to this Agreement shall be litigated exclusively in courts located
within the City of Los Angeles, County of Los Angeles, California, (2) consent
to the jurisdiction of any such court and consent to the service of process in
any such action or proceeding by personal delivery, first-class mail, or any
other method permitted by law, and (3) waive any and all rights to transfer or
change the venue of any such action or proceeding to any court located outside
Los Angeles County, California. This Agreement and the other written documents
previously or now executed in connection herewith are the entire and only
agreements between us with respect to the subject matter hereof, and all oral
representations, agreements and undertakings, previously or contemporaneously
made, which are not set forth herein or therein, are superseded hereby and
thereby. The provisions of this paragraph 16, shall survive any termination of
this Agreement.
Very truly yours,
T.K. MAB INC.
By /S/ LAWRENCE A. DEAR
President or Vice President
By /S/ JON EISENBERG
Secretary or Ass't Secretary
Accepted at Los Angeles, California on:
6/28 , 1995
Republic Factors Corp.
By /S/
Title VICE-PRESIDENT
<PAGE>
TRADESTYLE LETTER
June 26, 1995
Republic Factors Corp.
1000 Wilshire Boulevard, Suite 400
Los Angeles, CA 90017
Gentlemen:
This is in reference to the Factoring Agreement between us bearing the date of
JUNE 26, 1995.
The undersigned represents to you that certain Receivables are and will be
billed under the name or names on the schedule below, or by names similar
thereto. Inasmuch as the Receivables thereby created are assigned under our
Factoring Agreement, and in order to induce you to accept such Receivables and
to make advances thereon, and in consideration of your doing so, the undersigned
warrants and represents to you as follows:
Any and all Receivables heretofore or hereafter tendered to you by the
undersigned which are or may be billed in the name or names on the schedule
below, or designation of similar import, are owned exclusively by the
undersigned; and no other individual, partnership, corporation or other entity
whatsoever has or will have any right, title or interest in or with respect to
said Receivables at the time of their assignment to you and their acquisition by
you. All merchandise sold to purchasers and customers under the name or names on
the schedule below and represented by Receivables assigned to you will be the
exclusive property of the undersigned up to the time of the sale of such
merchandise to said purchasers and customers.
We further warrant and represent that you have not granted to any other person
or firm any security interest in any of the accounts arising by reason of the
sale of our goods covered by invoices reflecting such tradenames and/or
tradestyles as seller.
All rights conferred upon you under our Factoring Agreement and all warranties
given by the undersigned to you thereunder shall apply with equal force to all
Receivable billed as hereinabove stated.
Without in any way limiting the generality of the foregoing, your right under
our Factoring Agreement to endorse the name of the undersigned on checks or
other forms of remittance received whenever such endorsement is required to
effectuate collection is hereby extended to include the right on your part to
endorse the name or names on the attached schedule or words of similar import
upon any such check or other form of remittance.
Very truly yours,
T.K. MAB INC.
By /S/
Title CEO
SCHEDULE OF FICTITIOUS FIRM NAMES
The fictitious firm names used by us are as follows: ELLE
<PAGE>
REPUBLIC FACTORS CORP.
JUNE 26, 1995
T.K. Mab Inc.
3346 S. La Cienega Blvd.
Los Angeles, CA 90016
Gentlemen:
Reference is made to the Factoring Agreement between us as the same may
be amended from time to time (the "Agreement"). All terms used and not otherwise
defined herein shall have the meanings set forth in the Agreement.
We are pleased to confirm that we are prepared to factor sales made by
you to your customers in Canada.
Accordingly, notwithstanding anything to the contrary contained in the
Agreement, effective as of the date hereof, the Agreement is amended as follows:
Subject to the terms and conditions of the Agreement, we shall
purchase Receivables arising from your sales of goods or rendition of services
to customers in Canada ("Canadian Receivables").
The "Purchase Price of Canadian Receivables" shall be the net amount
of Canadian Receivables less the amount of our commission set forth in paragraph
4 below. The Purchase Price of Canadian Receivables purchased by us during any
month, less any monies advanced, remitted or otherwise paid by us for your
account, including any amounts which we may be obligated to pay in the future
and less any other charges to your account, shall be credited to your account as
and when the Canadian Receivables shall be deemed "Collected" as set forth
herein. A Canadian Receivable, as to which the credit standing of the customer
has been approved by us or our assignee, shall be deemed "Collected" upon the
earlier of (i) 120 days from the due date thereof, or (ii) seven (7) business
days after receipt by us of remittances from your customers in payment of
Canadian Receivables and only such on account payments specifically applicable
to specific Canadian Receivables and provided that prior to either such date
there is no Dispute as to such Canadian Receivables.
It is understood that we may assign any and all of the Canadian
Receivables purchased by us to other persons or entities to act on our behalf on
the performance of our services hereunder including, without limitation,
investigations and approvals and collection of Canadian Receivables and the
institution of legal or other proceedings necessary to effect collection thereof
and you hereby consent thereto in all respects. You shall execute such
instruments as we may from time to time require empowering our designees to act
in your name, and endorse your name on any and all checks, drafts or other forms
of remittance received in payment of Canadian Receivables purchased by us
hereunder.
On all Canadian Receivables which are assigned by us to other persons
or entities as provided in paragraph 3, you shall pay to us an additional
factoring commission of 1%. On all other Canadian Receivables, you shall pay to
us the regular factoring commission.
You shall assign the Canadian Receivables to us in separate assignment
schedules, clearly identified as such. You shall legend each of the Canadian
Receivables and every copy thereof to the effect that the same has been assigned
to us or to our assignee as we may direct and is payable in United States
dollars only.
We shall charge your account with all of our out-of-pocket costs
relative to the Canadian Receivables including, without limitation, cable and
wire transfer of funds, international telephone and telex communications, and
exchange rates and fees.
In the event remittances and payment of Canadian Receivables are
received by us or our assignee in other than United States dollars, we will
charge your account with any difference between the United States dollars owing
under such Canadian Receivables and United States dollars actually received upon
the exchange of the foreign currency, after deducting all costs and expenses
incurred in the making of the exchange.
Except as hereby specifically modified and amended, all of terms and
conditions of the Agreement shall remain in full force and effect.
Kindly indicate your acceptance of the foregoing by signing and
returning the enclosed copy of this letter.
Very truly yours,
REPUBLIC FACTORS CORP.
/S/
George Heitner
Vice President
AGREED:
T.K. MAB INC.
By: /S/
<PAGE>
REPUBLIC FACTORS CORP.
June 26, 1995
T.K. Mab Inc.
3346 S. La Cienega Blvd.
Los Angeles, CA 90016
Gentlemen:
Reference is made to the Factoring Agreement entered into between us as amended
from time to time (the "Agreement").
This will confirm that notwithstanding anything to the contrary contained in the
Agreement, effective this date, we shall charge to your account a commission in
excess of your regular factoring commission as set forth below (the "Additional
Commission") for credit approved sales made by you to Debtors-In- Possession set
forth in the attached Schedule "A" ("DIP Sales") which Schedule may be modified
by our notification to you of any additional Debtors-In-Possession to whom such
Additional Commission may be applicable:
(a) On sales terms up to Net 30 day terms - Additional Commission of
1%.
We shall not be responsible for the credit risk in connection with DIP Sales
unless shipment is made in the calendar month in which any credit approval has
been communicated by us to you. In addition, notwithstanding any practice or
procedure to the contrary with respect to credit approved sales in general, our
maximum credit risk with respect to DIP Sales shall not exceed the actual amount
approved by us as to credit.
Except as herein specifically provided, no other changes in the terms and
conditions of the Agreement are intended or implied.
Kindly acknowledge your consent to the foregoing by signing and returning the
copy of this letter.
Very truly yours,
REPUBLIC FACTORS CORP.
/S/
George Heitner
Vice President
READ AND AGREED TO:
T.K. MAB INC.
By: /S/
Title: CEO
<PAGE>
SCHEDULE "A"
John Wanamaker, Alexandria, VA
Merry Go Round, Joppa, MD
Woodward & Lothrop, Inc., Alexandria, VA
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
T.K. MAB, Inc.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITOR
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form SB-2 of our report dated
October 28, 1997, relating to the financial statements of Fashion Mag Apparel,
Inc., which appears in such Prospectus. We also consent to the references
to us under the headings "Experts" and "Selected Financial Data" in such
Prospectus. However, it should be noted that Grobstein, Horwath & Company
LLP has not prepared or audited such "Selected Financial Data."
/S/GROBSTEIN, HORWATH & COMPANY LLP
GROBSTEIN, HORWATH & COMPANY LLP
Sherman Oaks, Californa
March 9, 1998
Exhibit 23.3
CONSENT OF DIRECTOR NOMINEE
The undersigned hereby consents to be named in the Prospectus constituting part
of this Amendment No. 1 to the Registration Statement on Form SB-2 as a director
nominee of the Company.
/S/ IRVING B. KROLL
..............................
Irving B. Kroll
Exhibit 23.4
CONSENT OF DIRECTOR NOMINEE
The undersigned hereby consents to be named in the Prospectus constituting part
of this Amendment No. 1 to the Registration Statement on Form SB-2 as a director
nominee of the Company.
/S/ MAURICE SCHOENHOLZ
....................................
Maurice Schoenholz
