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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
AMERICAN INTERNATIONAL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Commission file number: 000-25223
Nevada 88-0326480
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
601 Hanson Road 77565-2701
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(Address of Principal Executive Office) (Zip Code)
281-334-4764
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [ ] No [ X ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
Issuer's revenues for the 12 months ended December 31, 1998 were $10,213,039.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the average bid and ask price on the OTC Electronic
Bulletin Board on March 31, 1999 was $12,914,635. As of March 31, 1999
registrant had 118,059,522 shares of Common Stock outstanding.
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TABLE OF CONTENTS
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ITEMS PAGE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . .1
ITEM 2. DESCRIPTION OF PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . . . . . . . . . . . . . . . 17
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . 24
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . 24
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT OFFER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 10. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . 25
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . 25
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PART I
All references to American International Industries, Inc. common stock
reflect a three for one common stock split in July 1996.
ITEM 1. DESCRIPTION OF BUSINESS
Some of the statements contained in this Form 10-KSB for American
International Industries, Inc. ("AIII" or "Company"), discuss future
expectations, contain projections of results of operations or financial
condition or state other "forward-looking" information. The term "AIII" or
the "Company" refers to American International Industries, Inc. or to
American International Industries, Inc. and its consolidated subsidiaries, as
applicable. These statements are subject to known and unknown risks,
uncertainties, and other factors that could cause the actual results to
differ materially from those contemplated by the statements. The
forward-looking information is based on various factors and is derived using
numerous assumptions. Important factors that may cause actual results to
differ from projections include, for example:
- the success or failure of management's efforts to implement their
business strategy;
- the ability of the Company to raise sufficient capital to meet
operating requirements;
- the ability of the Company to protect its intellectual property
rights;
- the ability of the Company to compete with major established
companies;
- the effect of changing economic conditions;
- the ability of the Company to attract and retain quality employees;
and
- other risks which may be described in future filings with the SEC.
GENERAL
American International Industries, Inc. is a Nevada corporation which began
conducting its current operations in September 1996, when it made its first
acquisition. The Company is a holding company currently operating five
subsidiaries:
- Acqueren, Inc. (whose sole business operating entity is Northeastern
Plastics Inc. which is a supplier of automotive after-market products
and consumer durables),
- Brenham Oil & Gas, Inc. (an owner of an oil and gas royalty interest),
- Har-Whit/Pitt's & Spitt's, Inc. (a manufacturer and distributor of
barbeque pits and a custom sheet metal fabricator),
- Modern Film Effects, Inc., doing business as, Cinema Research
Corporation, (a provider of optical title and credits services and
digital special effects for the motion picture industry), and
- Texas Real Estate Enterprises, Inc. (which owns certain undeveloped
real estate in Harris, Galveston, and Chambers counties in Texas, some
of which is held by its wholly-owned subsidiary Midtowne Properties,
Inc.).
The Company's long-term strategy is to expand the operations of each of its
subsidiaries in their respective fields.
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The Company encounters substantial competition, in each of its product and
service areas, with businesses producing the same or similar products or
services, or with businesses producing different products designed for the same
uses. Such competition is expected to continue. Depending on the particular
market involved, the Company's businesses compete on a variety of factors, such
as price, quality, delivery, customer service, performance, product innovation
and product recognition. Other competitive factors for certain products include
breadth of product line, research and development efforts and technical and
managerial capability.
AMERICAN INTERNATIONAL INDUSTRIES, INC.
In September 1994, the Company was incorporated in Nevada under the name
Black Tie Affair, Inc. for the purposes of engaging in catering services. In
July 1996, an unaffiliated group of investors purchased shares of Company common
stock constituting 90% of the outstanding shares of Black Tie Affair, Inc. This
group changed the name of the Company to Pitts and Spitts of Texas, Inc., and
acquired Pitt's & Spitts, Inc. and Har-Whit, Inc. in September 1996. In
September and October 1997, a new investor group ("1997 Group") including
Mr. Daniel Dror, Sr., gained control of the Company through the following
arms-length negotiated transactions with the Company and unaffiliated third
parties: (i) Elk International Corporation, Ltd., an entity controlled by Mr.
Dror's brother, purchased 5,000,000 shares of Company common stock at a
purchase price of $0.03 per share from the Company, received an option to
purchase 2,000,000 shares of Company common stock at an exercise price of
$0.02 per share from the Company, and purchased 1,200,000 shares of Company
common stock at a purchase price of $0.03 per share from an individual (Mr.
Dror has never owned any shares of Elk International Corporation, Ltd., nor
has he ever served as an officer or director of such entity), (ii) Jack
Talan, currently a director of the Company, purchased 500,000 shares of
Company common stock from the Company at a purchase price of $0.10 per share,
and (iii) Daniel Dror & Company, Inc., controlled by Mr. Dror, purchased
200,000 shares of Company common stock at a purchase price of $0.03 per share
from an individual. At the closing of this transaction, the sole operating
entities of the Company were its two subsidiaries Pitt's & Spitt's, Inc. and
Har-Whit, Inc. This group elected a new board of directors, appointed
current management, and appointed Mr. Dror chairman of the board and chief
executive officer. In December 1997, the name of the Company was changed to
Energy Drilling Industries, Inc., and in June 1998, the Company changed its
name to American International Industries, Inc.
In January 1998, the Company amended its Articles of Incorporation to
increase its authorized common shares to 100,000,000 and to authorize 10,000,000
preferred shares. In September 1998, the Company amended its Articles of
Incorporation to increase its authorized common shares to 200,000,000 ("Common
Stock"). The Company is located at 601 Hanson Road in Kemah, Texas 77565. Its
telephone number is (281) 334-4764.
As of March 15, 1999, the Company, excluding its subsidiaries, employed
seven persons, on a full-time basis, none of which are covered by a collective
bargaining agreement.
HAR-WHIT/PITT'S & SPITT'S, INC.
In September 1996, prior to the 1997 Group gaining control of AIII, the
Company purchased all of the capital stock of Pitt's & Spitt's, Inc., a Texas
corporation, incorporated in December 1989, and Har-Whit, Inc., a Texas
corporation, incorporated in January 1975, for 2,527,000 shares of Common
Stock and $500,000 in exchange for non-compete agreements with the previous
owners. Messrs. Hartis and Whitworth, two of the prior owners of the above
corporations who served as directors for fiscal year 1998, each received
631,750 shares of Common Stock and $250,000 in connection with the
acquisitions. In August 1998, Pitt's & Spitt's, Inc. was merged into
Har-Whit, Inc., which subsequently changed its name to Har-Whit/Pitt's &
Spitt's, Inc. ("Har-Whit"). Har-Whit is located at 14221 Eastex Freeway in
Houston, Texas 77032. Its telephone number is (281) 442-5013.
BRENHAM OIL & GAS, INC.
In December 1997, the Company purchased all of the capital stock of Brenham
Oil and Gas, Inc., a Texas corporation, incorporated in November 1997
("Brenham"), for 6,000,000 shares of Common Stock from Daniel Dror II 1976
Trust. Mr. Dror is the trustee of the Daniel Dror II 1976 Trust, but he has no
financial interest in such trust, the sole beneficiary being Mr. Dror's son.
Brenham's sole asset is an oil and gas royalty interest which was purchased by
the Daniel Dror II 1976 Trust prior to December 1995. The purchase price was
based on the discounted estimated cash
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flows from the royalty interest over a five year period. While no independent
valuation appraisal was conducted, management believes the terms of the
purchase were fair and reasonable based on such cash flows. Brenham is
located at 601 Hanson Road in Kemah, Texas 77565. Its telephone number is
(281) 334-4764.
TEXAS REAL ESTATE ENTERPRISES, INC.
In December 1997, the Company purchased all of the capital stock of Texas
Real Estate Enterprises, Inc. a Texas corporation, incorporated in March 1996
("TRE"), for 10,000,000 shares of Common Stock from Elk International
Corporation, Ltd., which is controlled by Mr. Dror's brother. The Company also
purchased G.C.A. Incorporated ("GCA") for a total consideration of 6,000,000
shares of AIII Common Stock. TRE and GCA are collectively referred to as TRE.
In May 1998, the Company through TRE issued 8,000,000 shares of AIII Common
Stock to Daniel Dror & Company, Inc., which is controlled by Mr. Dror, in
exchange for additional property. Subsequently, Daniel Dror & Company, Inc.
transferred 5,000,000 of such AIII Common Stock to Elk International
Corporation, Ltd. in extinguishment of debt on this property. In June 1998, the
Company through TRE purchased all of the capital stock of Midtowne Properties,
Inc. for 1,100,000 shares of AIII Common Stock, from two parties, one of which
is an affiliate of Mr. Dror, which received 660,000 shares of AIII Common Stock.
In December 1998, because the appraisals on the properties exceeded the
preliminary values of the properties as estimated by both parties to the
transaction, the Company authorized the issuance of an additional 1,000,000
shares of AIII Common Stock, of which the party with which Mr. Dror is
affiliated is to receive 600,000 shares. The purchase price of TRE, GCA,
Midtowne Properties, Inc., and the additional property was established based on
the fair market value of the assets acquired as determined by independent,
certified appraisals. Management believes the terms of the purchases were fair
and reasonable based on such appraisals. TRE is located at 601 Hanson Road in
Kemah, Texas 77565. Its telephone number is (281) 334-4764.
ACQUEREN, INC.
In June 1998, the Company entered into a purchase agreement to acquire
all of the capital stock of Acqueren, Inc., a Delaware corporation,
incorporated in December 1995 ("Acqueren"), which operates through its
wholly-owned subsidiary Northeastern Plastics, Inc., a New York corporation,
incorporated in January 1986 ("NPI"). The purchase agreement provided for
the issuance of 6,750,000 shares of Common Stock to the two largest
shareholders of Acqueren in exchange for approximately 55% of the outstanding
capital stock of Acqueren, and provided for the remaining shareholders of
Acqueren to receive approximately 25.02 shares of Common Stock for each share
of Acqueren common stock exchanged (these remaining shares of Acqueren common
stock had been issued pursuant to a private placement and included a warrant
to purchase one share of Acqueren common stock, which is included in the
above exchange). The transaction was closed effective July 1, 1998, and
through April 1, 1999, the Company had exchanged shares representing a total
of 94.7% of the outstanding shares of Acqueren. Based upon the estimated
fair value of the restricted common stock of AIII ($.08 per share at date of
acquisition), the total purchase consideration for Acqueren was approximately
$2,140,000. Management believes the terms of the acquisition were fair and
reasonable being based on arms-length negotiations. NPI is located at
11601 Highway 32 in Nicholls, Georgia 31554. Its telephone number is
(912) 345-2030.
MODERN FILM EFFECTS, INC.
In September 1998, the Company purchased all of the capital stock of
Electronic Pictures California, Inc., a California corporation, incorporated in
August 1997, in exchange for 1,900,000 shares of Common Stock. Electronic
Pictures California, Inc. owned an option to purchase all of the capital stock
of Modern Film Effects, Inc., a California corporation, incorporated in June
1962, doing business as Cinema Research Corporation, and Digital Research
Corporation, a California corporation, incorporated in June 1993. In September
1998, the Company exercised such option and purchased all of the capital stock
of Modern Film Effects, Inc. and Digital Research Corporation (referred to
collectively as "CRC"), for 4,400,000 shares of Common Stock and options to
purchase 400,000 shares of Common Stock over five years at $0.20 per share to
Jordan Friedberg. In November 1998, Digital Research Corporation became a
wholly-owned subsidiary of Modern Film Effects, Inc. Based upon the estimated
fair value of the restricted common stock at the date of closing of $1,260,000
($.20 per share), stock options valued at $32,000, and the discounted present
value of the note payable to selling stockholder ($303,300), the total purchase
consideration was
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$1,595,300. Management believes the terms of the acquisitions were fair and
reasonable being based on arms-length negotiations. CRC is located at 6860
Lexington Avenue in Hollywood, California 90038. Its telephone number is
(323) 460-4111.
RECENT DEVELOPMENTS
Between November 1998 and January 1999, Acqueren and Erick Friedman, a
Company director, purchased an aggregate of 103,000 shares of Hertz Technology
Group, Inc. ("Hertz") representing approximately 9.7% of Hertz's outstanding
common stock for an aggregate purchase price of $177,131. Hertz operates the
following subsidiaries:
- Hergo Ergonomic Support Systems, Inc., which designs, manufactures,
and sells ergonomically engineered, modular racking systems,
enclosures, and technical furniture for PC's and Internet related
equipment.
- Hertz Computer Corporation, which custom designs and manufactures PC's
under the HERTZ label and provides contract manufacturing and OEM
support.
- Hertz Information Systems, Inc., which provides comprehensive
technical support including outsourcing, networking, communications
and Internet related services.
- Edutec, Inc., which offers advanced, state-of-the-art computer and
Internet training facilities for short and long-term rentals.
The Company has discussed possible business combinations with Hertz, but to
date no agreements have been reached and there can be no assurance that any
agreement will be reached regarding any business combination in the future.
In March 1999, the Company purchased all of the capital stock of Marald,
Inc., doing business as Unlimited Coatings (UC), in exchange for 3,500,000
restricted shares of Common Stock of AIII valued at fair market value of
approximately $652,000 at $.19 per share plus a finders fee of $45,000 paid
in part to a party related to Mr. Dror. In addition, under the terms of the
acquisition agreement, the Company has agreed to provide chemicals at a
discount to Toro Spray-On Liners, Inc. an entity partially owned by the above
related party. UC, headquartered in Houston, Texas, distributes specialty
chemicals to the automotive after-market and is best known for its spray-on
bed-liners for trucks. UC's products, are marketed under the "Toro Liner"
name. UC also markets specialty chemicals, including rustproofing,
undercoating, fabric protectants, fuel additives, and performance enhancement
chemicals related to the automotive after-market. The UC acquisition has been
accounted for as a purchase.
In March 1999, the Company acquired a minority interest (approximately
20%) in Signal Products, Inc. (Signal), a California corporation, which owns
the exclusive license to market handbags and leather accessories bearing the
"Guess" trademark. Signal develops, manufactures and markets its products
throughout the United States. The investment in Signal was accomplished
through the issuance of 10,000,000 restricted shares of common stock of AIII,
valued at fair market value of approximately $2,000,000. The shares are
placed in escrow pending the completion of a business valuation of Signal.
The shares will be released from escrow upon satisfactory determination of
Signal's value; 5,000,000 shares to Hardee Capital Partners and 5,000,000
shares to Elk International, a related party, both of which had claims
against the shares of Signal. Should the determination of the value of the
Signal shares, after valuation of Signal, yield a value less than $2,000,000,
the number of shares to be released from escrow shall be reduced accordingly;
however, no additional shares shall be issuable should the valuation indicate
a greater value.
In November 1998, Acqueren deposited $100,000 on behalf of TRE as
earnest money on a contract with a third party for the option to buy a
building in downtown Houston, Texas. The earnest money deposit is included in
other assets in the accompanying consolidated balance sheet at December 31,
1998. TRE exercised its option to buy the building and, in February 1999,
sold such option to unrelated third parties for $600,000, realizing a gain on
sale of $500,000.
BUSINESS OPERATIONS OF HAR-WHIT/PITT'S & SPITT'S, INC.
Har-Whit is (i) a manufacturer and seller of barbeque pits and accessories,
and (ii) a custom sheet metal and light structural fabrication company
specializing in stainless steel and aluminum. Har-Whit began selling barbeque
pits in 1983, and began its fabrication business in 1973.
PRODUCTS AND SERVICES
Har-Whit manufacturers ten standard styles of high quality barbeque pits
that it sells at retail at prices ranging from $625 to $4,395. In addition,
Har-Whit manufacturers custom barbeque pits which have been sold at prices as
high as approximately $35,000. Har-Whit's barbeque pits are sold under the name
"Pitt's & Spitt's," which management believes has established a reputation for
quality in the industry. In addition, Har-Whit offers a number of related
spices, sauces, accessories, cooking tools, and cookbooks in its retail showroom
and, on a very limited basis, through catalogs.
Har-Whit's custom fabrication business specializes in fabrication for
commercial and industrial customers predominantly in the energy and
environmental fields. Har-Whit also builds custom products for other
manufacturers under sub-contract agreements, on an as needed basis, from
specifications and drawings provided by the customer.
Har-Whit's primary raw material for both its barbeque pits and custom
fabrication business is steel, and its principal suppliers are Triple S-Steel
Supply, Vincent Metal Goods, and White Star Steel, which are all located in
Houston, Texas. To date, Har-Whit has been able to receive shipments of raw
materials within 48 hours of order.
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SALES AND MARKETING
Har-Whit distributes its barbeque pits primarily through its retail
outlet in Houston, Texas, as well as through individual mail orders.
Har-Whit has over the years, advertised in various publications, in addition
to television and radio. Har-Whit does little advertising and primarily
markets it barbeque products and custom fabrication business through limited
advertising, the Internet, and word of mouth.
Currently, Har-Whit has no contracts with distributors, no retail
agreements, and no marketing plan. Management believes its ability to increase
production is dependent, among other items, on its ability to increase its
facilities. In addition, even if Har-Whit is able to increase production, there
can be no assurance that there will be sufficient demand for its products.
In December 1998, Har-Whit entered into an agreement with Shabang! Shopping
Service ("Shabang"). Shabang hosts an online shopping service on the Internet
and provides merchants with the ability to create a "virtual" store where
customers can order products directly from the Internet. Har-Whit's agreement
expires in December 1999 and the monthly fee paid to Shabang is approximately
$300.
COMPETITION
Har-Whit competes against other manufacturers of barbeque pits, some of
which have far greater financial, marketing, and other resources than Har-Whit.
Har-Whit competes primarily on the basis of customer service and quality.
Management believes its primary and most recognizable competitors in its primary
sales markets are Klose Custom Barbeque Pits of Houston and Oklahoma Joe's of
Oklahoma. There can be no assurance that Har-Whit will be able to successfully
compete in this highly competitive marketplace.
Har-Whit competes in its custom fabrication business primarily on the basis
of quality and service. Har-Whit competes against other custom fabricators for
a limited amount of fabrication business. The recent downturn in oilfield
activity has increased competitive pressures, and Har-Whit intends to increase
its marketing emphasis on other industries, although currently no marketing plan
has been developed. Due to Har-Whit's narrow specialization in stainless and
aluminum products, it competes with a relatively small number of entities.
Management believes its primary and most recognizable competitors in the custom
fabrication field in the Houston area are Walkup Company, Robertson Metal
Fabrication, Campo Sheet Metal Works, Inc., Maudlin & Son, and Precision Metal
Fab Co. There can be no assurance that Har-Whit will be able to successfully
compete in this marketplace.
EMPLOYEES
As of March 15, 1999, Har-Whit employed thirty persons, on a full-time
basis, including management, sales, office, and manufacturing employees. No
employees are covered by a collective bargaining agreement. Management
considers relations with its employees to be satisfactory.
FACILITIES
Har-Whit currently operates from one office in Houston, Texas, that it
owns. In addition, Har-Whit has acquired land for expansion adjoining its
current facility consisting of approximately 26,000 square feet for $28,000 and
a five year note of $30,000 for future expansion. Har-Whit is planning to add
an additional 9,000 square feet to the existing manufacturing facilities on this
land at a cost of approximately $250,000 if sufficient funding can be obtained,
to effect its business strategy of increased sales as management believes a
greater demand exists for its products. One of AIII's primary functions is to
assist its subsidiaries to raise the necessary capital to support such growth,
however, there is no assurance that Har-Whit will be able to raise adequate
proceeds to effectuate any expansion plans. If Har-Whit is unable to raise
sufficient proceeds to fund such expansion it will continue to operate out of
its current facilities and with its current equipment. If Har-Whit is unable to
fund plant expansion and purchase new production equipment, it may not be able
to effectuate its business strategy of increased sales.
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BUSINESS OPERATIONS OF BRENHAM OIL & GAS, INC.
Brenham's sole asset is an oil, gas, and mineral royalty interest covering
a twenty-four acre tract of land located in Washington County, Texas. The
royalty interest is currently leased by Union Pacific Resources Company ("Union
Pacific") for a term continuing until the covered minerals are no longer
produced in paying quantities from the leased premises. Royalties on the
covered minerals produced are paid to Brenham as follows: (i) for oil and other
liquid hydrocarbons, the royalty is one-sixth of such production, (ii) for gas
(including casinghead gas) the royalty is one-sixth of the net proceeds realized
by Union Pacific on the sale thereof, less a proportionate part of ad valorem
taxes and production, severance, or other excise taxes. In addition, Brenham is
entitled to shut-in royalties of $1 per acre of land for every ninety day period
within which one or more of the wells on the leased premises, or lands pooled
therewith, are capable of producing in paying quantities, but such wells are
either shut-in or production is not being sold. Currently, Brenham is not
actively seeking further royalty agreements. Brenham is operated from AIII's
office in Kemah, Texas.
COMPETITION
Brenham's profitability is dependent on Union Pacific's ability to generate
profits from the tract of land on which Brenham owns its royalty interest. The
oil and gas industry is highly competitive, and Union Pacific competes against
companies with substantially larger financial and other resources. Union
Pacific's competitors include major integrated oil and gas companies and
numerous other independent oil and gas companies and individual producers and
operators. Competitive factors include price, contract terms, and types and
quality of service, including pipeline distribution logistics and efficiencies,
all of which may reduce any royalty payments made to Brenham.
GOVERNMENT REGULATION
As stated previously, Brenham's profitability is dependent on Union
Pacific's profitability. As Union Pacific is regulated by various state and
federal authorities, there is no assurance that Union Pacific's profitability,
and therefore Brenham's profitability, will not be adversely affected. Union
Pacific is subject to the following governmental regulations:
STATE REGULATION OF OIL AND GAS PRODUCTION. The State of Texas regulates
the production and sale of oil and natural gas, including requirements for
obtaining drilling permits, the method of developing new fields, the spacing and
operation of wells and the prevention of waste of oil and gas resources. In
addition, Texas regulates the rate of production and may establish maximum daily
production allowable from both oil and gas wells on a market demand or
conservation basis.
ENVIRONMENTAL REGULATIONS. Union Pacific's activities are also subject to
existing federal and state laws and regulations governing environmental quality
and pollution control. As of March 15, 1999, Union Pacific is in compliance, in
all material respects, with applicable environmental requirements. There can be
no assurance that future developments, such as increasingly stringent
environmental laws or enforcement thereof, will not cause Union Pacific to incur
material environmental liabilities or costs, which may adversely effect its
business.
OIL PRICE REGULATION. Historically, regulatory policy affecting crude
oil pricing was derived from the Emergency Petroleum Allocation Act of 1973,
as amended, which provided for mandatory crude oil price controls until June
1,1979, and discretionary controls through September 30, 1981. On April 5,
1979, President Carter directed the Department of Energy to complete
administrative procedures designed to phase out, commencing June 1, 1979,
price controls on all domestically produced crude oil by October 1, 1981.
However, on January 28,1981, President Reagan ordered the elimination of
remaining federal controls on domestic oil production, effective immediately.
Consequently, oil may currently be sold at unregulated prices.
GAS PRICE REGULATION. The Natural Gas Act of 1938 regulates the interstate
transportation and certain sales for resale of natural gas. The Natural Gas
Policy Act of 1978 ("NGPA") regulates the maximum selling prices
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of certain categories of natural gas and provided for graduated deregulation
of price controls for first sales of several categories of natural gas. With
certain exceptions, all price deregulation contemplated under the NGPA as
originally enacted in 1978 has already taken place. Under current market
conditions, deregulated gas prices under new contracts tend to be
substantially lower than most regulated price ceilings prescribed by the NGPA.
BUSINESS OPERATIONS OF TEXAS REAL ESTATE ENTERPRISES, INC.
TRE and its wholly-owned subsidiary Midtowne Properties, Inc. own nine
tracts of land in Harris, Chambers, and Galveston counties in Texas. See "Item
2. Description of Property." TRE is operated from AIII's office in Kemah,
Texas.
All the properties owned by TRE are undeveloped commercial properties
free of any mortgage obligations, however certain properties are subject to
property taxes in the amount of approximately $357,000 in the aggregate.
Such properties are available for sale, however, management will explore
development possibilities of its properties if such possibilities are
presented. At this time no development plans are being considered.
COMPETITION
There is intense competition among companies in the real estate investment
and development business. Sales and payments on real estate sales obligations
depend, in part, on available financing and disposable income and, therefore,
are affected by changes in general economic conditions and other factors.
The real estate development business and commercial real estate business
are subject to other risks such as shifts in population, fluctuations in the
real estate market, and unpredictable changes in the desirability of
residential, commercial and industrial areas. There is no assurance that TRE
will be able to compete in this market.
REGULATION
TRE's real estate operations are subject to comprehensive federal, state,
and local regulation. Applicable statutes and regulations may require
disclosure of certain information concerning real estate developments and credit
policies. In the future, if TRE decides to develop its properties, periodic
approval is required from various agencies in connection with the design of
developments, the nature and extent of improvements, construction activity, land
use, zoning, and numerous other matters. Failure to obtain such approval, or
periodic renewal thereof, could adversely affect the real estate development and
marketing operations of TRE. Various jurisdictions also require inspection of
properties by appropriate authorities, approval of sales literature, disclosure
to purchasers of specific information, bonding for property improvements,
approval of real estate contract forms and delivery to purchasers of a report
describing the property.
A number of states and localities have adopted laws and regulations
imposing environmental controls, disclosure rules and zoning restrictions which
have impacted the management, development, use, and/or sale of real estate.
Such laws and regulations tend to discourage sales and leasing activities and
mortgage lending with respect to some properties, and may therefore adversely
affect TRE. Failure of TRE to disclose environmental issues in connection with
a real estate transaction may subject it to liability to a buyer or lessee of
property. Property management services also could subject TRE to environmental
liabilities pursuant to applicable laws and contractual obligations to property
owners. Insurance for such matters may not be available. Additionally, new or
modified environmental regulations could develop in a manner which have not, but
could adversely affect TRE. TRE's financial results for the fiscal year 1998
have not been materially impacted by its compliance with environmental laws or
regulations, and no material capital expenditures relating to such compliance
are planned.
7
<PAGE>
BUSINESS OPERATIONS OF ACQUEREN, INC.
Acqueren through its wholly-owned subsidiary NPI, is a supplier of
products to retailers and wholesalers (i) in the automotive after-market, and
(ii) in the consumer durable electrical products markets.
PRODUCTS AND SERVICES
NPI's products in the automotive after-market include a variety of booster
cables sold under the brand name "Mechanix Choice" and "Bitty Booster Cable."
Also supplied under the brand name "Mechanix Choice," NPI markets portable hand
lamps, cord sets, and a variety of battery testers, battery repair kits, and
miscellaneous battery accessories.
The "Mechanix Choice" brand of booster cables was introduced in 1995,
and its products are currently available at CSK Automotive, Family Dollar,
Victor Automotive Products, Sam's Club, Caldor, and Bradlees, among others.
NPI's "Bitty Booster Cable" brand of booster cables are currently distributed
in the automotive after-market and through well established food and drug
retail channels.
NPI's consumer durable electrical products include flood light kits, clamp
on lamps, household extension cords, tri-tap extension cords, heavy duty
extension cords, night lights, and surge protection devices. All of NPI's
consumer durable electrical products are UL Listed.
Beginning in late 1996, management changed its business strategy, and began
to target what it believed to be the less competitive food and drug and variety
retail industry. By adding more food and drug related items such as power
strips, multiple outlet devices, cord sets, and night lights, NPI has been able
to enter the consumer durables market at such locations as Family Dollar Stores,
Bills Dollar Stores, and Dollar Tree Stores.
Currently, virtually all of NPI's products are manufactured overseas. NPI's
products are manufactured based on NPI's specifications and design. Since 1995,
NPI has changed all but one of its overseas suppliers, and as a result
management believes it has been able to reduce purchasing costs and increase
product quality. Currently, NPI has no long-term agreements with any overseas
or domestic manufacturers for its products, but relies on management's personal
contacts with such manufacturers in renewing its present agreements. There is
no assurance that NPI will be able to renew its present agreements with
manufacturers on terms economically favorable to NPI, if at all. The inability
of NPI to renew its agreements on economically favorable terms will have a
material adverse effect on NPI.
NPI orders the materials for its principal products from the following
manufacturers: Apollo Wire and Cable supplies NPI's electrical cord sets;
Longqou Dongli Wire and Cable supplies NPI's booster cables; Rite Tech supplies
NPI's surge strips; and Dashing Electric supplies NPI's night lights. To date,
NPI has typically received shipments from the above suppliers within 8-10 weeks
of order. Management believes that if NPI should be unable to utilize any of
the above suppliers, it would be able to find alternative suppliers on
comparable terms.
SALES AND MARKETING
Currently, NPI has no agreements with distributors, wholesalers, or
retailers, but sells its products from its warehouse through the use of
independent sales agents and through its in-house personnel. NPI contracts with
agents, which are responsible for contacting potential customers and clients in
a pre-determined sales area. NPI provides these agents with manuals, brochures,
and other promotional materials which are used in the selling process. After
sales are completed through the use of an agent, NPI directly bills the
customer, and all payments are made directly to NPI. Agents are compensated
solely on a commission basis, calculated on the net sales price of products
which are invoiced to customers. No commissions are paid until NPI receives
payment from customers.
NPI also sells a substantial portion of its products under a customer
friendly direct import program ("D/I program"). The D/I program offers NPI
customers the additional services of arranging for overseas manufacturing and
delivery to overseas freight forwarders. NPI can also arrange for the complete
turn key deliveries of its products to its customers place of business in the
United States. Under a turn key D/I program, NPI arranges, at an additional
cost to its customers, on site factory inspections of the goods prior to the
container loading, ocean and domestic freight services,
8
<PAGE>
customs and brokerage services, as well as container unloading at the
customer's facility. NPI's direct import sales are primarily guaranteed
through a customer irrevocable bank letter of credit issued by the customer.
Currently, management estimates that over one half of sales are made through
the use of its D/I program. Management believes the D/I program provides to
its customers the most cost effective means of obtaining large volumes of
products. The average volume of NPI's direct import shipments are
substantially larger than its warehouse shipments (management estimates that
D/I program orders average a minimum of $40,000 to a high of $1,200,000, as
compared to warehouse shipments which average $1,200), however, NPI is unable
to realize the same gross profit margins on D/I program orders, as compared
to warehouse shipments. Management estimates that D/I program gross profit
margins range from a low of 8% to a high of 19%, while the gross profit
margins on its warehouse sales range from a low of 19% to a high of 40%.
NPI has chosen not to target several of the larger retailers in the
consumer market such as Home Depot, Lowes, Builders Square, Wal-Mart, K-Mart,
and Ace Hardware due to its capital limitations and due to the extreme
competitive market conditions for such accounts. While there is no assurance,
management believes it will be able to increase margins by focusing solely on
smaller and mid-market retailers which management believes have been ignored by
larger producers.
In fiscal year 1998, Family Dollar Stores, West Coast Liquidations, and
Consolidated Stores accounted for a large amount of NPI's revenues. There is
no assurance that NPI will be able to retain these customers, and the loss of
any of these customers may have an adverse effect on NPI.
In December 1998, NPI entered into an agreement with Shabang! Shopping
Service. Shabang hosts an online shopping service on the Internet and provides
merchants with the ability to create a "virtual" store where customers can order
products directly from the Internet. NPI's agreement expires in December 1999
and the monthly fee paid to Shabang is approximately $350.
COMPETITION
In the safety products category of the automotive after-market, of which a
substantial portion of NPI's products fall, NPI competes against a large number
of suppliers many of which have far greater financial resources than NPI. In
addition, management has seen little movement between suppliers at major
national retailers, and as such, NPI's ability to increase market share will be
limited. Management believes its primary competitors in the safety products
market include General Cable, Coleman Cable, East Penn, Champion, and many other
producers and importers. Based on current sales, management believes its market
share of this safety products category to be approximately 4%. There can be no
assurance that NPI will be able to successfully compete in this marketplace.
In the consumer durables electrical products market, NPI competes against a
large number of suppliers many of which have far greater financial resources
than NPI. Management believes its primary competitors in the consumer durables
market include Pacific Electricord Company, Woods Wire, General Cable, Coleman
Cable, and various other producers. Based on current sales, management believes
its market share of the consumer durables electrical product market to be
approximately 1.4%. There can be no assurance that NPI will be able to
successfully compete in this marketplace.
Price is a highly significant factor in the safety products market and
the consumer durables electronical products markets. Many of NPI's products
are made to industry specifications, and are therefore essentially
functionally interchangeable with those of competitors. However, NPI believes
that significant opportunities exist to differentiate all of its products on
the basis of quality, reliability, and customer service.
INTELLECTUAL PROPERTY
NPI has been issued the following trademarks: "Northeastern" (TM),
expiring December 2006, "Jumpower" (TM), expiring February 2009, "The Bitty
Booster Cable" (TM), expiring August 2008, "connections with quality" (TM),
expiring October 2006, and "small enough to fit in your glove box strong enough
to start your car" (TM), expiring October 2007.
9
<PAGE>
EMPLOYEES
As of March 15, 1999, NPI employed seven persons, on a full-time basis,
including management, customer service, and warehouse employees. No employees
are covered by a collective bargaining agreement. Management considers
relations with its employees to be satisfactory.
FACILITIES
NPI currently operates from one facility in Nicholls, Georgia. Its
facility is 30,000 square feet and is leased for $3,275 per month. The lease
expires in October 1999 and NPI has the option to renew such lease for an
additional two-year period with the monthly lease payments increased based on
the consumer price index.
BUSINESS OPERATIONS OF MODERN FILM EFFECTS, INC.
Modern Film Effects, Inc. consists of two divisions, Cinema Research
Optical and Title and Cinema Research Digital, which together provide full
technical, optical, and digital services for motion pictures, television,
commercial, and industrial producers, directors, editors, special effects
supervisors, and title designers. CRC's two divisions are distinct California
corporations, Modern Film Effects, Inc., d/b/a Cinema Research Corporation and
its wholly-owned subsidiary Digital Research Corporation, which are collectively
referred to as CRC.
Management estimates that it completed more than 250 optical services
projects in its last fiscal year, and its client list consists of many of the
major studios in Hollywood, including Sony Film's Tri-Star Pictures, Columbia
Pictures, Paramount Studios, Universal Studios, and Disney Studios.
In addition, CRC is conducting initial investigations as to the feasibility
of offering high-definition television ("HDTV") production to the marketplace
through Electronic Pictures California, Inc., a wholly-owned subsidiary of AIII.
CRC has engaged the services of a person, on an at-will employment basis, with
prior experience in HDTV in Japan. CRC has no agreements with any
manufacturers, distributors, or retailers of HDTV. CRC has no agreements with
any customers for the sale or marketing of HDTV. This possible venture is in
the preliminary stages and there can be no assurance that the production of HDTV
will ever become viable within CRC.
PRODUCTS AND SERVICES
CRC's services include both optical and digital services. Its optical
services, which encompass all items that can be performed on a 35mm camera
printing system, include the following:
- Photographic creation of titles and credits - The artistic creation of
the main or opening titles and end credits, and composting them on
film.
- Correcting optical defects - The correction of defects found on the
original film that can be corrected optically.
- Wire removal - The removal of an object that is not wanted in the
viewing frame.
- Blue screen composites - The process of adding the background scene
behind a person or object that has been shot first with a blue screen
behind it, or the ability to add a person or object into the scene
that was not present in the scene when it was shot.
- Optical special effects - The creation of special effects by optical
cameras.
CRC's digital services consist of the production of digital special
effects, or special effects that are created on a computer system and then
transferred to film or videotape. CRC's digital services are provided by
digitizing film, creating special effects in the digitized format, and
subsequently transferring the digitized images back to film. Digitizing film
involves the process of transferring and storing film frame by frame into a
computerized storage system. Once this process is complete, the film in this
digitized format may be manipulated, corrected, changed, or altered from its
original created in film or video. After this process, the digitized images are
converted back to film or video.
10
<PAGE>
SALES AND MARKETING
CRC believes it can exploit its market share in the optical services
industry to promote its digital services. Previously, CRC had marketed its
digital services to large scale special effect projects involving significant
labor and technological costs. CRC no longer intends to pursue these large
scale projects, and instead will only market its digital services at the
post-production stage along with its optical services to smaller projects
with fewer special effects. The larger projects required CRC to
competitively bid for services, which often times produced losses when
unexpected costs occurred. These smaller projects are priced by the special
effect, thereby allowing CRC to better estimate its costs. While management
believes CRC's business strategy may reduce gross revenues attributable to
digital services, it believes that it will be better able to control costs.
CRC's primary marketing method is through David R. Miller's relationships
with studios in the industry. Mr. Miller, CRC's vice-president of marketing,
has been involved in the industry for over twenty years, and has cultivated
relationships with such studios as Tri-Star Pictures and Columbia Pictures.
Management estimates that Mr. Miller's contacts have accounted for over 65% of
CRC's optical business, with 60% derived solely from business conducted with
Tri-Star Pictures and Columbia Pictures. The loss of Mr. Miller for any reason
would severely limit CRC's ability to compete in the industry. In September
1998, CRC entered into a six-year employment agreement with Mr. Miller. CRC
does not maintain life insurance on Mr. Miller.
If adequate funding is obtained, CRC intends to update its digital software
and film equipment. If CRC is unable to raise sufficient proceeds to fund such
upgrades, it will continue to operate with its current equipment. CRC competes
in a high technology industry which is characterized by rapid technological
changes. Development by others of new or improved products, processes, or
technologies may make CRC's equipment obsolete or less competitive. One of
AIII's primary functions is to assist its subsidiaries to raise the necessary
capital to support such growth, however, there is no assurance that CRC will be
able to raise adequate proceeds to fund any updates to its equipment. In
addition, even if it is able to update its equipment, there can be no assurance
that its new equipment will not be obsolete in the near future. While
management believes that its optical services business is based on more
established technology, its digital services business is more susceptible to
rapid technological change.
Assuming adequate funding is obtained, CRC intends to market its
services through the use of brochures, videos, and personal contact with
studios. CRC currently employs three sales persons, including Mr. Miller, and
intends to hire one additional sales person in the future. CRC relies on its
ability to package both its optical and digital services for its clients. The
digital services industry is highly competitive and CRC's ability to compete
will depend on its maintaining current technology. There is no assurance that
its market position in the optical industry will enable CRC to compete in the
digital industry. Currently, CRC has no contracts or commitments with any
studios for its services.
COMPETITION
CRC competes primarily against two corporations in the optical services
industry, Pacific Title/Mirage Studio ("PTM") and Howard Anderson Optical.
Management estimates that PTM currently accounts for approximately 65% of the
optical services provided to the industry. As the optical services industry has
few competitors, CRC will be competing for market share against a corporation
with greater financial resources and market share than CRC. CRC believes it
competes for business through quality production, personal relationships with
studios, long-standing reputation in the industry, and timely delivery of
products. There can be no assurance that CRC will be able to successfully
compete in this marketplace.
CRC is a relatively new entrant in the digital market and is currently
competing on the basis of technology. The cost of digital services machinery
and computers are extensive and are increasing. Therefore, the ability of CRC
to compete in the digital services industry is directly related to its ability
to update its technology. CRC competes against a large number of corporations in
the digital services industry, many with greater financial resources than CRC.
Assuming CRC is able to execute its business strategy, it will begin to focus
solely on the post-production, digital special effects market. Although CRC
believes there will be fewer participants in this market, the market will be
smaller than the current digital market and CRC will be competing for fewer
projects. In addition, CRC believes that its market
11
<PAGE>
share in the optical industry will allow it to more effectively compete in
the post-production, digital special effects market. However, CRC competes
in the optical industry against PTM, which has far greater market share and
financial resources than CRC. Therefore, CRC's new business strategy will
require it to compete directly against a corporation which currently holds a
dominant position in the optical industry. There can be no assurance that
CRC will be able to successfully compete in this marketplace.
INTELLECTUAL PROPERTY
CRC has not filed for any patent protection with the United States
Government. There is no assurance that employees of CRC, consultants,
advisors or others will maintain the confidentiality of its technology, or
that its technology will not otherwise become known, or be independently
developed, by competitors. Additionally, there is no assurance that CRC's
technology does not violate patent protections of other companies. The
inability of CRC to utilize its technology or obtain patents may have a
material adverse effect on CRC.
EMPLOYEES
As of March 15, 1999, CRC employed thirty-five persons on a full-time
basis and ten persons on a part-time basis, including management, sales,
office, and manufacturing employees of which twenty persons are covered by
various industry-wide collective bargaining agreements. A strike, job
action, or labor disturbance by the members of any of these organizations may
have a material adverse effect on the Company. Management considers
relations with its employees to be satisfactory.
FACILITIES
In December 1998, CRC consolidated its optical and digital facilities in
order to eliminate duplicate administrative costs and reduce personnel.
CRC's consolidated facility is located in Hollywood, California. The
facility is 20,000 square feet and is leased for $13,000 per month. The lease
on the facility expires on November 30, 1999. CRC has acquired for $50,000 an
option on the facility, expiring on July 31 1999, which allows it to purchase
the facility for $1,170,000.
Management has determined that its current facility is in need of
renovations, including interior redecoration and earthquake preparedness
repairs. If CRC is required to exercise the option on its facility, it will be
required to borrow additional funds. One of AIII's primary functions is to
assist its subsidiaries raise the necessary capital to support such
transactions, however, there is no assurance that CRC will be able to obtain
such funds to complete the renovations or to exercise the option. In addition,
if CRC is unable to exercise the option, there is no assurance that it will be
able to extend its current lease on a long term basis, or on terms economically
favorable to CRC, if at all.
ITEM 2. DESCRIPTION OF PROPERTY
The Company operates Brenham and TRE from its office in Kemah, Texas.
This office is owned by a party affiliated with the Company and to date the
Company has not paid rent for the use of the office, however, commencing in
April 1999, the Company entered into a one-year lease at a monthly rental
rate of $500. See Item 1. Description of Business: "Business Operations of
Har-Whit/Pitt's & Spitt's, Inc.," "Business Operations of Acqueren, Inc." and
"Business Operations of Modern Film Effects, Inc.," for a description of
properties for Har-Whit, NPI, and CRC. The Company believes its various
facilities are adequate to meet current business needs, except as discussed
in Item 1, and that its properties are adequately covered by insurance.
The following table sets forth the properties owned by TRE, including
all properties owned by its wholly-owned subsidiary Midtowne Properties, Inc.
All properties listed are owned free of any mortgage obligations, however
certain properties are subject to property taxes in the amount of
approximately $357,000, as designated below, in the aggregate. TRE holds
undeveloped commercial properties for sale, although management may pursue,
without a vote of shareholders,
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<PAGE>
development opportunities it believes to be economically favorable. At the
present time TRE has no plans to develop any of its properties.
PROPERTY DESCRIPTION AND LOCATION
<TABLE>
<S> <C>
286 acres, State Highway 146, 736 acres, Anahuac,
Galveston County, Texas Chambers County, Texas
23 acres, North U.S. 59, Houston, 15 acres, North U.S. 59, Houston,
Harris County, Texas Harris County, Texas
1 acre, Greens Road, Houston, 43 acres, Airport Blvd., Houston,
Harris County, Texas Harris County, Texas ($193,000 of property tax)
17,346 sq. ft., S.E. Corner of South 4,410 sq. ft., N.E. Corner of Fannin
Main St. and Ruth St., Houston, Harris and Blodgett, Houston, Harris County,
County, Texas ($71,000 property tax) Texas ($56,000 property tax)
22,248 sq. ft., N.E. Corner Almeda and
Riverside Dr., Houston, Harris County,
Texas ($37,000 of property tax)
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
On December 10, 1998, the Company filed an Original Petition and Request
for Temporary Injunction for breach of contract and common law and stock fraud
in connection with the Company's acquisition of Acqueren, Inc. against TDA
Industries, Inc. and Fred Friedman in the 56th Judicial District Court of
Galveston, Texas. The Company has claimed the defendants misrepresented the
amount of equity in Acqueren as represented in the acquisition agreement. The
Company is seeking actual damages in the amount of not less than $1,100,000, in
addition to further relief which it may be entitled to.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock trades under the symbol "EDII" on the OTC
Electronic Bulletin Board. The market for the Common Stock on the OTC
Electronic Bulletin Board is limited, sporadic and highly volatile. The
following table sets forth the high and low bid prices per share of the
Common Stock for the last two fiscal years as reported by the OTC Electronic
Bulletin Board. These prices reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions, and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
FISCAL 1997
-----------
First Quarter 1.3636 .5545
Second Quarter .7955 .0455
Third Quarter .1364 .0273
Fourth Quarter .1455 .0727
FISCAL 1998
-----------
First Quarter .2091 .0909
Second Quarter .6364 .1091
Third Quarter .4818 .20
Fourth Quarter .27 .16
</TABLE>
On April 11, 1999, the last bid price of the Common Stock as reported by
the OTC Electronic Bulletin Board was $0.25. The Company believes that as of
March 31, 1999, there were approximately 218 record owners of its Common Stock.
It is the present policy of the Company not to pay cash dividends and to
retain future earnings to support the Company's growth. Any payment of cash
dividends in the future will be dependent upon the amount of funds legally
available therefor, the Company's earnings, financial condition, capital
requirements and other factors that the Board of Directors may deem relevant.
The Company does not anticipate paying any cash dividends in the foreseeable
future.
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<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
Current management gained control of the Company in October 1997.
Management believes that all prior issuances of Common Stock aggregating
7,028,060 for a total purchase price of $178,456 were made in reliance on
Section 4(2) of the Act.
The following information sets forth certain information, as of December
31, 1998, for all securities the Company sold since the Company began current
operations in September 1996, without registration under the Act. There were no
underwriters in any of these transactions, nor were any sales commissions paid
thereon.
SECURITIES ISSUED FOR CASH
In September 1997, the Company issued 500,000 shares of Common Stock to a
current director of the Company at a purchase price of $0.10 per share. In
September 1997, the Company issued 5,000,000 shares of Common Stock to a party
related to a director of the Company at a purchase price of $0.03 per share. In
December 1997, the Company issued 200,000 shares of Common Stock in exchange for
shares of another corporation valued at $40,000. In August 1998, the Company
returned such shares to their previous owner for $40,000 cash. In May 1998, the
Company issued 1,500,000 shares of Common Stock to directors and to a party
associated with the Company at a purchase price of $0.10 per share. As of
December 31, 1998, the Company had not received the purchase price for
500,000 of these shares. In May 1998, the Company issued 3,500,000 shares of
Common Stock to the brother of the CEO of the Company at an aggregate purchase
price of $300,000 ($0.086 per share). The Company believes these transactions
were exempt from registration pursuant to Section 4(2) of the Act.
In October 1997, the Company issued 250,000 shares of Common Stock to two
accredited investors at a purchase price of $0.10 per share. In February 1998,
the Company issued 50,000 shares of Common Stock to an accredited investor at a
purchase price of $0.20 per share. In May 1998, the Company issued 100,000
shares of Common Stock to one accredited investor at a purchase price of $0.25
per share. In June 1998, the Company issued 110,000 shares of Common Stock to
one accredited investor at a purchase price of $0.35 per share. In June 1998,
the Company agreed to issue 4,500,000 shares of Common Stock to one accredited
investor at an aggregate purchase price of $1,000,000 of which 2,000,000 shares
had been paid for as of December 31, 1998, and of which $350,000 was still to be
paid to the Company. Subsequent to year end, the subscription right was
cancelled and accordingly, the amount was eliminated against the related
equity balance. In June 1998, the Company issued 500,000 shares of Common
Stock to one accredited investor at a purchase price of $0.40 per share. In
June 1998, the Company agreed to issue 1,000,000 shares of Common Stock to one
accredited investor at a purchase price of $0.15 per share. The Company
received the purchase price of $150,000 subsequent to year end. The Company
believes the transactions were exempt from registration pursuant to Section 4(2)
and Regulation D of the Act.
From January 1998 to February 1998, the Company issued 5,000,000 shares of
Common Stock, pursuant to an exemption under Rule 504 of Regulation D, to one
accredited investor at an aggregate purchase price of $500,000 ($0.10 per
share). From February 1998 to April 1998, the Company issued 1,400,000 shares
of Common Stock, pursuant to an exemption under Rule 504 of Regulation D, to one
accredited investor at an aggregate purchase price of $200,000 ($0.143 per
share). From May 1998 to June 1998, the Company issued 1,500,000 shares of
Common Stock, pursuant to an exemption under Rule 504 of Regulation D, to one
accredited investor at an aggregate purchase price of $300,000 ($0.20 per
share).
SECURITIES ISSUED FOR SERVICES RENDERED
In July 1996, the Company issued 550,000 shares of Common Stock to former
directors for management advisory services rendered. The value of these shares
were deemed to be immaterial by prior management. In October 1996, the Company
issued 10,000 shares of Common Stock to a former officer for management services
rendered. The value of these shares were deemed to be immaterial by prior
management. In September 1996, the Company issued 10,000 shares of Common Stock
to an employee for receptionist services rendered. The value of these shares
were deemed to be immaterial by prior management. In December 1997, the Company
issued 1,400,000 shares of restricted common stock to a consulting firm for
strategic planning assistance rendered to the Company. Such shares were valued
at the market price of $.05 per share resulting in a $70,000 charge to general
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<PAGE>
and administrative expense in 1997. In May 1997, the Company issued 40,000
shares of Common Stock to an advertising consultant for services rendered. The
value of these shares were deemed to be immaterial by prior management. In
September 1997, the Company issued options to purchase 3,300,000 shares of
Common Stock at an exercise price of $0.02 per share to current and former
directors of the Company and to a party related to a director of the Company. In
addition, 600,000 options to purchase shares were issued in September 1997 to a
former officer and director. In October 1998, options to purchase 500,000 of
these options were repurchased by the Company for $20,000. The remaining options
to purchase 100,000 shares were transferred to an unrelated party who exercised
these options in August 1998. In June 1998, options to purchase 2,000,000 shares
of Common Stock were exercised by the brother of the CEO of the Company. In
October 1997, the Company issued 100,000 shares of Common Stock to a consultant
of the Company for management advisory services rendered. Such shares were
valued at the market value of $.05 per share. Accordingly, a $5,000
compensation expense was recorded. In October 1997, the Company issued six
options each to purchase 200,000 shares of Common Stock to a party pursuant to a
finders fee agreement in connection with equity raising transactions at exercise
prices of $0.02, $0.04, $0.06, $0.08, $0.10, and $0.20 per share. In February
1998, the options to purchase 200,000 shares of Common Stock at $0.02 and $0.04
were exercised, and as of December 1998 all remaining options were canceled. In
January 1998, the Company issued 610,000 shares of Common Stock to officers,
directors, and employees for management advisory services rendered. These shares
were valued at the market value of $.05 per share resulting in a $30,500
compensation expense. In January 1998, the Company issued 100,000 shares of
Common Stock to a former employee in exchange for the surrender of a previously
issued option to purchase 100,000 shares of Common Stock at an exercise price of
$0.02 per share. The issuance was recorded as $5,000 of compensation expense
($.05 per share). In January 1998, the Company issued 100,000 shares of Common
Stock to a former director as part of a severance payment. This issuance was
recorded as $5,000 compensation expense ($.05 per share). In May 1998, the
Company issued 190,000 shares of Common Stock to key employees of one of its
subsidiaries, to an officer of the Company, and to a director of the Company for
management advisory services rendered. The issuance of such shares was recorded
at the market value ($.08 per share) at the date of grant as $15,200 of
compensation expense. In May 1998, the Company issued an option to purchase
2,000,000 shares of Common Stock to the CEO of the Company at an exercise price
of $0.12 per share. In May 1998, the Company issued an option to purchase
4,000,000 of Common Stock to a party in connection with an exempt offering at an
exercise price of $0.25 per share. In August 1998, the Company issued an option
to purchase 20,000 shares of Common Stock at an exercise price of $0.34 per
share to an officer of the Company as part of an employment agreement. The
Company believes these transactions were exempt from registration pursuant to
Section 4(2) of the Act.
SECURITIES ISSUED IN ACQUISITIONS
See Item 1 "Description of Business" for detailed discussion of these
transactions and related values and values per share.
In October 1996, the Company issued 2,527,000 of Common Stock, one-half of
which was issued to current directors of the Company, in exchange for the
outstanding shares of Pitt's & Spitt's, Inc. and Har-Whit, Inc.
In December 1997, the Company issued 22,000,000 shares of Common Stock to
parties associated with the Company, to parties related to a director of the
Company, and to affiliates of the Company in exchange for the outstanding shares
of Brenham Oil & Gas, Inc., Texas Real Estate Enterprises, Inc., and GCA, Inc.
In May 1998, the Company on behalf of one of its subsidiaries issued
8,000,000 shares of Common Stock to a party associated with the Company in
exchange for a piece of property.
In June 1998 and in December 1998, the Company on behalf of one of its
subsidiaries issued a total of 2,100,000 shares of Common Stock to party
associated with the Company and to party related to a director of the Company in
exchange for the outstanding shares of Midtowne Properties, Inc.
Effective July 1, the Company entered into a purchase agreement to acquire
Acqueren Inc. which provided for the issuance of 6,750,000 shares of Common
Stock to the two primary shareholders of Acqueren, Inc, and provided for the
remaining shareholders of Acqueren, Inc. to receive approximately 25.02 shares
of common stock
16
<PAGE>
for each share of Acqueren, Inc. common stock exchanged for a total of
26,750,000 shares of AIII Common Stock. As of December 31, 1998, the Company
had exchanged approximately 19,577,000 shares of Common Stock pursuant to the
purchase agreement with the remaining shares held by the Company until the
Acqueren shares are exchanged.
In September 1998, the Company issued 6,300,000 shares of Common Stock, and
an option to purchase 400,000 shares of Common Stock at an exercise price of
$0.20 per share to a current director in exchange for the outstanding shares of
Modern Film Effects, Inc., Digital Research Corporation, and Electronic Pictures
California, Inc.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The Company is a holding company, which currently has five operating
subsidiaries. Har-Whit is a manufacturer and distributor of barbeque pits and
a custom sheet metal fabricator. TRE which owns certain undeveloped real
estate in Harris, Galveston and Chambers counties in Texas, some of which is
held by its wholly-owned subsidiary, Midtowne Properties, Inc. TRE has no
operating activities other than acquiring and holding real estate for
investment purposes. Brenham has a non-operating royalty interest in a
producing gas well. Acqueren which has no separate operations other than its
investment in NPI and investments in marketable securities. NPI is a supplier
of automotive after-market products and consumer durable goods. CRC and its
subsidiary, Digital Research Corporation, is a provider of optical title and
credits services and digital special effects for the motion picture industry.
All of the acquisitions were accounted for using the purchase method of
accounting whereby the purchase price of the acquisition was allocated based
upon the fair value of the assets acquired and liabilities assumed. If the
purchase price exceeded the net fair market value of the assets acquired, any
remaining purchase price was allocated to goodwill.
17
<PAGE>
The historical financial statements of AIII include the acquisitions of
acquired companies (Acqueren and CRC) as of the effective date of the
purchase and the results of these companies subsequent to closing, as both
the Acqueren and CRC transactions were accounted for under the purchase
method of accounting. Accordingly, Acqueren has been included in AIII's
results of operations since July 1, 1998, and CRC was included in the results
of operations beginning October 1, 1998.
The Company intends to grow through the acquisition of additional and
complimentary businesses and to expand its holdings in its various
businesses. The Company expects to face competition for acquisition
candidates, which may limit the number of acquisition opportunities and may
lead to higher acquisition prices. There can be no assurance that the
Company will be able to identify, acquire or manage profitably additional
businesses or to integrate any acquired businesses into the Company without
substantial costs, delays or other operational or financial problems.
Further, acquisitions involve a number of risks, including possible adverse
effects on the Company's operating results, diversion of management's
attention, failure to retain key personnel of the acquired business and risks
associated with unanticipated events or liabilities, some or all of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. The timing, size and success of the
Company's acquisition efforts and the associated capital commitments cannot
be readily predicted. The Company currently intends to finance future
acquisitions by using shares of its Common Stock and other forms of financing
as the consideration to be paid. In the event that the Common Stock does not
maintain a sufficient market value, or potential acquisition candidates are
otherwise unwilling to accept Common Stock as part of the consideration for
the sale of their businesses, the Company may be required to seek other forms
of financing in order to maintain its acquisition program. If the Company
does not have sufficient cash resources, its growth could be limited unless
it is able to obtain additional equity or debt financing.
In March 1999, the Company completed the acquisition of Marald, Inc.
d/b/a Unlimited Coatings, (UC). This transaction was accomplished through the
issuance of 3,500,000 restricted shares of AIII valued at fair market value
of approximately $652,000 plus a finders fee of $45,000 paid in part to a
party related to Mr. Dror. UC is a distributor of specialty chemicals to the
automotive after-market. Best known for its spray-on bed-liners for truck
beds, UC products are marketed under the "TORO LINER" name through a network
of independent distributors. Distributors buy equipment, training and
chemicals from UC and are granted exclusive territories. In addition, other
specialty chemicals, including rustproofing, undercoating, fabric
protectants, fuel additives and performance enhancement chemicals related to
the automotive after-market are sold through the distributors. The
acquisition has been accounted for as a purchase.
In March 1999, the Company acquired a minority interest (approximately
20%) in Signal Products, Inc. (Signal), a California corporation, which owns
the exclusive license to market handbags and leather accessories bearing the
"Guess" trademark. Signal develops, manufactures and markets its products
throughout the United States. The investment in Signal was accomplished
through the issuance of 10,000,000 restricted shares of common stock of AIII,
valued at fair market value of approximately $2,000,000. The shares have
been placed in escrow pending the completion of a business valuation of
Signal. The shares will be released from escrow upon satisfactory
determination of Signal's value; 5,000,000 shares to Hardee Capital Partners
and 5,000,000 shares to Elk International, an affiliate of the Company, both
of which had claims against the shares of Signal. Should the determination
of value of the Signal shares, after valuation of Signal, yield a value less
than $2,000,000, the number of shares to be released from escrow will be
reduced accordingly; however, no additional shares shall be issuable should
the valuation indicate a greater value.
18
<PAGE>
In November 1998, Acqueren deposited $100,000 on behalf of TRE as earnest
money on a contract with a third party for an option to buy a downtown
Houston, Texas, office building. Subsequent to December 31, 1998, TRE
realized a profit of $500,000 related to its earnest money contract sold to
unrelated third parties.
19
<PAGE>
RESULTS OF OPERATIONS - CONSOLIDATED AIII
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31,
1997. Net loss for the year ended December 31, 1998, was $705,973, as compared
to $870,027 for the year ended December 31, 1997. The factors contributing to
the decrease in the loss are discussed below:
The net sales for the year ended December 31, 1998, were $10,213,039 as
compared to $2,501,860 for December 31, 1997, such 308% increase being
primarily attributable to the inclusion of Acqueren's sales since its
acquisition as of July 1, 1998 and CRC's sales since acquisition as of
October 1, 1998. NPI, a wholly-owned subsidiary of Acqueren, had sales for
the six-month period of $6,211,170. CRC's revenues for the three-month period
ended December 31, 1998 were $1,305,422. Har-Whit's sales for the year ended
December 31, 1998 were $2,696,447, an eight percent increase over the
$2,501,860 reported in the prior year. Brenham reported royalty income of
$72,048 in the current year, while no royalties were included in 1997, as
Brenham was acquired in late December 1997. The only activity of Acqueren
consisted of investments in various trading and available for sale equity
securities. TRE and its subsidiary Midtowne Properties Inc. had no sales of
properties during the year 1998 and the operating expenses consisted of
property tax accruals.
Cost of sales as a percentage of net sales for the year ended December 31,
1998, was approximately 79.5%, with gross margins of 20.5%, as compared to
approximately 65.4% cost of sales and 34.6% gross margins during the year ended
December 31, 1997. The change is the result of the inclusion of NPI which
sustained gross margins averaging 13.9%. CRC posted margins averaging 34.5% and
Har-Whit sustained 28.9% margins in 1998 as compared to 34.6% margins in 1997.
The decreased margins at Har-Whit in 1998 are attributable to increased
competitive pressures in bidding for fabrication jobs due to the slowing of oil
and gas related work.
Operating expenses for the year ended December 31, 1998, were
$3,173,504, as compared to $1,674,172 for 1997. This increase is primarily
the result of the acquisition of NPI, which had operating expenses of
$504,755 since July 1, 1998; CRC incurred operating expenses of $642,743
between October and December 1998, including certain costs of relocating its
digital operations to its optical facility. TRE incurred operating expenses,
primarily property taxes, of $115,291. AIII incurred expenses at the
corporate level of $892,265, including $150,000 in compensation expense to
Mr. Dror. Corporate expenses also included the following unusual expenses:
$145,900 of professional fees related to the Company becoming a reporting
entity, $55,700 non-cash compensation expense related to shares of stock
granted to key employees, $ 80,100 of travel expenses, much of which related
to the acquisition activity of management personnel. Management believes
fiscal 1998 was a particularly active year for mergers and acquisitions,
therefore related expenses were higher than would otherwise have been
incurred.
Other income amounted to $76,203 for the year 1998, including interest
income of $45,936, investment income of $129,034, other income of $5,277, and
$104,044 of interest expense. This compares to total other expense for
1997 of $61,860 which consisted of interest expense of $63,908 and other
income of $2,048. The increased interest expense for 1998 results from the bank
debt attributable to acquired companies and the financing cost associated with
equipment leases of CRC. Investment income in 1998 was generated through
investment in trading and available-for-sale equity securities.
20
<PAGE>
NET LOSS AND COMPREHENSIVE LOSS
Consolidated net loss for the year ended December 31, 1998 was $705,973 as
compared to the net loss sustained in 1997 of $870,027. Of the 1998 loss,
$219,533 was incurred by CRC, $97,791 by TRE, and $1,098,978 by AIII. NPI
realized net income of $394,581, Har-Whit had net income of $13,181, and Brenham
had net income of $ 3,763. Tax benefits of $298,804 offset the consolidated
losses. Unrealized losses on available-for-sale investments in equity securities
of $18,964 are included as a component of stockholders' equity. Such
unrealized investment losses are included as a component of comprehensive
loss which totaled $724,937 for the year ended December 31, 1998.
The prior year loss was attributable to the Har-Whit's operations as no
other subsidiaries were owned at that time.
LIQUIDITY AND CAPITAL RESOURCES - AIII
Total assets at December 31, 1998, were $17,478,737, as compared to
$4,558,081 at December 31, 1997, an increase of 283%. The increase is primarily
attributable to AIII's acquisition of Acqueren and CRC.
Total liabilities at December 31, 1998, were $6,429,997, as compared to
$1,069,353 at December 31, 1997, and the increase is the result of 1998
acquisitions of Acqueren and CRC.
At December 31, 1998, AIII's current working capital was $1,905,940 as
compared to $344,093 at December 31, 1997. Cash flows during 1998 increased
the beginning cash balance of $62,991 at December 31, 1997 to $2,149,916 at
December 31, 1998.
Cash flows used by operating activities were $625,576 in 1998 compared
to $678,282 in 1997. The cash flows used in the operating activities was
primarily the result of net loss from operations of $705,973 offset by
non-cash items of $257,126 resulting in net cash flows used in operating
activities of $448,847. Accounts receivable, inventory and other current
assets decreased by $1,431,007, net of amounts acquired, due primarily to
NPI's lower seasonal activity in the fourth quarter. Other assets increased
$125,793 primarily due to a deposit for an option to purchase a building in
downtown Houston, Texas. Accounts payable and accruals decreased due to the
timing of payments of payables. Accrued property taxes increased due to the
acquisition of additional land.
Cash flows provided by investing activities were $471,973 in 1998
compared to $26,262 used in 1997 for capital expenditures. The cash flows
provided by investing activities were primarily due to cash received in
acquisitions of $1,036,242 from Acqueren. Investments available for sale, net
of unrealized losses, increased by $134,848 due to the Company's wish to
invest excess funds. Also, CRC and TRE used funds for capital expenditures
and the purchase of real estate of $338,231. Net notes receivable of
$91,190 were issued during the year including a note to the CEO.
Cash flows provided by financing activities were $2,240,528 in 1998
compared to $708,276 provided in 1997. This is primarily due to the issuance
of stock during 1998 which provided cash flows of $2,377,500 offset by CRC's
principal payments on lease obligations, net of amounts acquired, of $137,661.
To date, the Company has no commitments for any additional financing and
there can be no assurance that any such financing will be available or, if it is
available, that it will be available on acceptable terms. If adequate funds are
not available to satisfy either short or long-term capital requirements, the
Company may be required to limit its operations significantly. At December
31, 1998, the Company was in violation of certain financial ratios on its
capital leases and has received a waiver for those violations from the lessor.
21
<PAGE>
MEDIA/ENTERTAINMENT SEGMENT:
RESULTS OF OPERATIONS -- CRC
For the three months ended December 31, 1998, CRC had net sales of
$1,305,422, operating expenses of $642,743 and sustained an operating loss of
$192,215.
For the three months ended December 31, 1998, CRC cost of sales were
$854,894 or 65.5% of net sales and margins of $450,528 averaged 34.5%.
Operating expenses of $642,743 comprised 49.2% of net sales. Net loss for
the period was $219,533.
LIQUIDITY AND CAPITAL RESOURCES - CRC
Total assets of CRC at December 31, 1998, were $4,391,898, total
liabilities were $3,319,431, and CRC had negative current working capital of
$1,531,235. CRC had $154,502 net cash provided from operations, $42,088 net
cash provided by investing activities, and $99,335 net cash provided by
financing activities for the three months ended December 31, 1998.
CRC has arranged a line of credit, guaranteed by the parent, AIII to
provide the financing necessary to support its operations and to meet its
ongoing cash requirements. Management believes CRC has achieved significant
economies and savings by relocating the operations of its digital operations
into the building occupied by its optical operations. These changes reduced
rent expenditures and eliminated some duplicate functions such as
administrative support, equipment costs and supplies. Management believes
that the consolidation has resulted in better co-ordination of projects
involving both optical and digital work. CRC management identified the need
to invest in improvements to the building it is leasing related to the
relocation including improvements to comply with the California earthquake
code. The Company estimates these costs to be approximately $150,000 and
were agreed to in connection with a modification in the lease to extend the
term and to obtain an option to buy the building which expires in July 1999.
In connection with the Company's option to acquire its building, it is
currently negotiating to obtain $2 million in financing through the city of Los
Angeles. Such financing is at favorable interest rates and is to be used to
acquire and renovate the building, perform necessary earthquake compliance
related improvements, and upgrade computer systems and other production
equipment. There is no assurance that such financing will be granted, and if
such financing is not granted, CRC will be required to obtain alternative
financing. At the present time, CRC has no commitments for such financing,
and there is no assurance that it will be able to obtain any other financing
at favorable interest rates, if at all.
In September 1998, CRC borrowed $1,000,000 in the form of a promissory note
from a financial institution at the institution's prime interest rate, which
matures in May, 2000. That borrowing was used to retire bank and other
indebtedness which existed prior to the acquisition by AIII. Beginning in
February 1999, CRC will make quarterly payments of accrued interest. CRC has
(i) an outstanding note payable to a former stockholder of CRC of $196,224, due
in monthly payments of $6,325 through September 2003, and (ii) an outstanding
note payable to an officer and director of CRC payable on demand of $284,072 at
an interest rate of 8% per annum. AIII has committed to funding the operations
of CRC until December 31, 1999.
INDUSTRIAL/ COMMERCIAL SEGMENT
RESULTS OF OPERATIONS -- NPI
For the six months ended December 31, 1998 NPI had net sales of
$6,211,170, operating expenses of $504,755, and operating income of $359,283.
Other expense of $57,598, includes net interest expense of $9,355 and loss on
disposition of equipment of $21,994. Net income for the six months ended
December 31, 1998 was $301,685.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES NPI
NPI has financed its operations to date primarily through advances from its
parent company, Acqueren, which had raised equity financing through sales of its
equity securities prior to the acquisition of Acqueren by AIII. Total assets of
NPI at December 31, 1998, were $2,357,916, total liabilities were $1,477,542 and
current working capital of $1,043,135 existed at December 31, 1998.
NPI and Acqueren had $112,648 combined net cash provided from operations,
$480,016 combined net cash provided by investing activities, and $10,626
combined net cash used in financing activities for the six months ended December
31, 1998.
NPI has an outstanding note payable to a former stockholder of Acqueren of
$300,000 at an interest rate of 6% per annum, with a payment of $100,000 due in
August 1999 and 2000 and the remainder due in August 2001. The Company is
involved in litigation through the suit filed against the former principal
stockholder of Acqueren. The substance of that suit related to representations
made prior to the acquisition and the outcome of such litigation could reduce
the amount payable on the note to such former stockholder; although there is no
assurance that the Company will prevail in its litigation.
RESULTS OF OPERATIONS - HAR-WHIT
Net sales of Har-Whit for the year ended December 31, 1998 totaled
$2,696,447, an increase of eight percent over the $2,501,860 sustained in 1997.
Little marketing and advertising has been done to promote sales of barbeque pits
as "word of mouth" advertising has been the principal marketing approach.
For 1998, Har-Whit had cost of sales of $1,918,489 or 71.1% of sales as
compared to $1,635,835 or 65.4% during 1997. Reduced margins result from
competitive pressures in fabrication work. In 1998, Har-Whit had operating
expenses of $887,832 or 32.9% of sales compared to $1,027,255 or 41.1% of
sales for 1997. The reduction of operating expenses is primarily attributable
to reduced insurance costs resulting from renegotiations of all insurance
policies. Har-Whit also had decreases in its freight and supplies expenses
in 1998 compared to 1997. Har-Whit had an operating loss for 1998 of
$109,874 as compared to an operating loss of $161,230 for 1997.
LIQUIDITY AND CAPITAL RESOURCES - HAR-WHIT
Har-Whit has arranged for a $150,000 line of credit with a financial
institution secured by its accounts receivables. The interest rate for the line
of credit is 10.50% and matured on March 18, 1999. Minimum monthly payments of
accrued unpaid interest began on April 18, 1998. As the borrowing is secured by
Har-Whit's accounts receivable, the amount actually available under the line of
credit will fluctuate, and based on accounts receivables at December 31, 1998,
approximately $50,000 additional borrowing is currently available. Har-Whit has
an outstanding note payable to another financial institution of $574,276 at an
interest rate of 9.75% per annum due in monthly payments of $7,895 through
February 2003 with the remaining amount due in March 2003.
During 1998 Har-Whit had $170,623 provided by operations, used $146,341
in investing activities, used $23,527 in financing activities and had
resulting net cash flows of $755 for the year ended December 31, 1998. This
compares to $397,351 used by operations, $26,262 used in investing activities
and $404,820 provided by financing activities, resulting in an decrease in
cash of $18,793 during 1997.
23
<PAGE>
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer systems that use two digits
rather than four to define the applicable year, which may prevent such systems
from accurately processing dates ending in the year 2000 and after. This could
result in system failures or in miscalculations causing disruption of
operations, including, but not limited to, an inability to process transactions,
to send and receive electronic data, or to engage in routine business activities
and operations.
Management has spoken to all management personnel at each of its
subsidiaries regarding their company's reliance on computer systems. Based
upon these discussions, management believes that the Company does not have
significant exposure to the Year 2000 issue. The majority of the subsidiaries'
operations do not rely on computer operations for conducting the significant
parts of its business, and accordingly, the Company does not believe that its
products and services involve any material Year 2000 risks. CRC's optical
operations do not involve the use of computerized equipment for the material
portion of its operations, and its digital equipment has been updated with
year 2000 compliant software. In the second quarter of 1999, the Company will
establish a formal Year 2000 task force to develop and implement a Year 2000
readiness program.
In addition to reviewing its internal systems, the Company plans to have
communications with its significant customers and vendors concerning Year 2000
compliance, including electronic commerce. There can be no assurance that the
systems of other companies that interact with the Company will be sufficiently
Year 2000 compliant so as to avoid an adverse impact on the Company's
operations, financial condition and results of operations.
The Company does not presently anticipate that the costs to address the
Year 2000 issue will have a material adverse effect on the Company's financial
condition, results of operations or liquidity due to the aforementioned factors.
However, management has not performed a formal estimate of the costs for
conversion of systems necessitated by the Year 2000 issue.
The Company presently anticipates that it will complete its Year 2000
assessment and any necessary remediations by December 31, 1999. However, there
can be no assurance that the Company will be successful in implementing its Year
2000 remediation plan according to the anticipated schedule. In addition, the
Company may be adversely affected by the inability of other companies whose
systems interact with the Company to become Year 2000 compliant and by potential
interruptions of utility, communication or transportation systems as a result of
Year 2000 issues.
Although the Company expects its internal systems to be Year 2000 compliant
as described above, the Company intends to prepare a contingency plan that will
specify what it plans to do if it or important external companies are not Year
2000 compliant in a timely manner. The Company expects to prepare its
contingency plan during 1999.
NEW ACCOUNTING PRONOUNCEMENTS
DERIVATIVE AND HEDGING ACTIVITIES - In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company does not expect adoption of the new standard
on January 1, 2000 to affect its financial statements.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
See Item 13.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Reference is made to the information appearing under the heading "Election
of Directors" of the Company's 1999 Proxy Statement, which information is hereby
incorporated by reference.
ITEM 10. EXECUTIVE COMPENSATION
Reference is made to the information appearing under the headings
"Executive Compensation" and "Employment Agreements" of the Company's 1999 Proxy
Statement, which information is hereby incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information appearing under the heading "Security
Ownership of Certain Beneficial Owners and Management" of the Company's 1999
Proxy Statement, which information is hereby incorporated by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information appearing under the heading "Certain
Relationships and Related Transactions" of the Company's 1999 Proxy Statement,
which information is hereby incorporated by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are to be filed as part of this Form 10-KSB:
<TABLE>
<CAPTION>
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
<S> <C>
3(i)(1) Certificate of Incorporation of the Company, and
Amendments thereto.
3(ii)(1) Amended and Restated By-laws of the Company
4.1(1) Common Stock Certificate, American International
Industries, Inc.
4.2(1) Common Stock Certificate, Acqueren, Inc.
4.3(1) Common Stock Certificate, Har-Whit/Pitt's & Spitt's,
Inc.
10.1(1) Daniel Dror, Sr. Employment Agreement dated May 14,
1998
10.2(1) Daniel Dror, Sr. Employment Agreement dated October 16,
1998
10.3(1) Raymond C. Hartis Employment Agreement
10.4(1) D. Wayne Whitworth Employment Agreement
10.5(1) Marc Fields Employment Agreement
10.6(1) Jordan Friedberg Employment Agreement
10.7(2) Shabang! Merchant Service Agreement
10.8(2) American International Industries, Inc. Lease
10.9(2) Brenham Oil and Gas, Inc. Royalty Interest
10.10(2) Brenham Oil and Gas Interest Lease
10.11(2) Modern Film Effects, Inc. Lease
10.12(2) Northeastern Plastics, Inc. Lease
21.1(2) List of Subsidiaries
27(2) Financial Data Schedule
</TABLE>
(1) Filed previously on registration statement Form 10-SB SEC File
No. 000-25223.
(2) Filed herewith.
25
<PAGE>
(b) There have been no reports filed on Form 8-K.
26
<PAGE>
SIGNATURES
In accordance with the Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
American International Industries, Inc.
By /s/ Daniel Dror
------------------------------------------
Daniel Dror, President, Chief Executive
Officer and Director
---------------------------
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ Daniel Dror Chairman of the Board April 12, 1999
- ----------------------------- and Chief Executive Officer
Daniel Dror
/s/ William Dartmouth Director April 12, 1999
- -----------------------------
William Dartmouth
/s/ Jordan Friedberg Director April 12, 1999
- -----------------------------
Jordan Friedberg
/s/ Erick Friedman Director April 12, 1999
- -----------------------------
Erick Friedman
/s/ Raymond C. Hartis, Jr. Director April 12, 1999
- -----------------------------
Raymond C. Hartis, Jr.
/s/ Jack R. Talan Director April 12, 1999
- -----------------------------
Jack R. Talan
/s/ D. Wayne Whitworth Director April 12, 1999
- -----------------------------
D. Wayne Whitworth
27
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
-----------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
F-1
<PAGE>
<TABLE>
<CAPTION>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONTENTS
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets F-4 - F-5
Statements of operations and comprehensive loss F-6
Statements of stockholders' equity F-7
Statements of cash flows F-8 - F-9
Notes to consolidated financial statements F-10 - F-32
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors
American International Industries, Inc.
Kemah, Texas
We have audited the consolidated balance sheets of American International
Industries, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations and comprehensive loss, stockholders'
equity and cash flows for the years then ended. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of American International Industries, Inc. at December 31, 1998 and 1997, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
Houston, Texas
March 26, 1999
F-3
<PAGE>
<TABLE>
<CAPTION>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash (Note 8) $ 2,149,916 $ 62,991
Trading securities (Note 4) 418,770 -
Securities available-for-sale (Note 4) 115,884 -
Accounts receivable, net of allowance
for doubtful accounts of $179,000
and $19,000, respectively (Note 8) 1,641,469 253,553
Notes receivable (Note 14) 116,190 -
Inventories, net of reserve of $62,682 in
1998 (Notes 5 and 8) 1,055,091 180,022
Other 141,996 46,160
- --------------------------------------------------------------------------------------------------------------------
Total current assets 5,639,316 542,726
REAL ESTATE HELD FOR SALE (Note 6) 4,910,140 1,983,700
PROPERTY AND EQUIPMENT, net of accumulated
depreciation (Notes 7 and 8) 5,060,372 1,335,713
NATURAL GAS AND MINERALS INTEREST, net of
amortization of $105,000 and $45,000,
respectively (Note 3) 240,000 300,000
GOODWILL, net of amortization of $32,297 in 1998 (Note 3) 1,085,616 -
NON-COMPETE AGREEMENTS, net of amortization of $232,500
and $125,000, respectively 417,500 375,000
OTHER 125,793 20,942
- --------------------------------------------------------------------------------------------------------------------
$ 17,478,737 $ 4,558,081
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,451,717 $ 87,085
Accrued expenses (Note 13) 481,227 29,412
Margin loan from a financial institution (Note 4) 195,645 -
Accrued property taxes 444,119 -
Notes payable, current portion (Note 8) 116,144 72,962
Notes payable to related parties, current portion (Note 9) 459,972 -
Capital lease obligations, current portion (Note 10) 584,552 9,174
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,733,376 198,633
NOTES PAYABLE, less current portion (Note 8) 1,599,909 571,916
NOTES PAYABLE TO RELATED PARTIES, less current portion (Note 9) 320,324 -
CAPITAL LEASE OBLIGATIONS, less current portion (Note 10) 776,388 -
DEFERRED TAX LIABILITY (Note 12) - 298,804
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 6,429,997 1,069,353
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 13)
- --------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value;
10,000,000 shares authorized,
none issued (Note 11) - -
Common stock, $.001 par value;
200,000,000 shares authorized (Note 11) 121,116 46,117
Additional paid-in capital 15,726,799 4,540,482
Deficit (4,192,960) (1,097,871)
- --------------------------------------------------------------------------------------------------------------------
11,654,955 3,488,728
Less: Common stock subscriptions receivable (550,000) -
Treasury stock, at cost - 238,000 shares in 1998 (37,251) -
Accumulated other comprehensive loss (Note 4) (18,964) -
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,048,740 3,488,728
- --------------------------------------------------------------------------------------------------------------------
$ 17,478,737 $ 4,558,081
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
<TABLE>
<CAPTION>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES $ 10,213,039 $ 2,501,860
COST OF SALES 8,120,515 1,635,855
- --------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 2,092,524 866,005
OPERATING EXPENSES 3,173,504 1,674,172
- --------------------------------------------------------------------------------------------------------------------
OPERATING LOSS (1,080,980) (808,167)
- --------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 45,936 -
Investment income (Note 4) 129,034 -
Interest expense (Note 9) (104,044) (63,908)
Other income 5,277 2,048
- --------------------------------------------------------------------------------------------------------------------
Total other income (expense), net 76,203 (61,860)
- --------------------------------------------------------------------------------------------------------------------
NET LOSS BEFORE INCOME TAX BENEFIT (1,004,777) (870,027)
Deferred income tax benefit (Note 12) (298,804) -
- --------------------------------------------------------------------------------------------------------------------
NET LOSS $ (705,973) $ (870,027)
- --------------------------------------------------------------------------------------------------------------------
LOSS PER SHARE - BASIC AND DILUTED $ (.01) $ (.06)
WEIGHTED AVERAGE SHARES OUTSTANDING 87,985,486 14,121,344
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
- --------------------------------------------------------------------------------------------------------------------
NET LOSS $ (705,973) $ (870,027)
OTHER COMPREHENSIVE ITEMS
Unrealized loss on shares available for sale (18,964) -
- --------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS $ (724,937) $ (870,027)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
<TABLE>
<CAPTION>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------
Common Accumulated
Stock Other
Additional Sub- Comprehen-
Common Stock Paid-in scription Treasury sive
FOR THE YEAR ENDED DECEMBER 31, Shares Amount Capital Deficit Receivable Stock Loss
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 9,739,000 $ 9,739 $ 1,963,404 $ (227,844) $ -- $ -- $ --
Issuance of restricted shares for:
Brenham Oil and Gas (Note 3) 6,000,000 6,000 294,000 -- -- -- --
Texas Real Estate Enterprises,
Inc. and G.C.A. Incorporated (Note 3) 16,000,000 16,000 1,784,000 -- -- -- --
Consulting services (Note 11) 1,400,000 1,400 68,600 -- -- -- --
Other assets (Note 11) 200,000 200 39,800 -- -- -- --
Sale of shares for cash (Note 11) 12,778,060 12,778 390,678 -- -- -- --
Net loss -- -- -- (870,027) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 46,117,060 46,117 4,540,482 (1,097,871) -- -- --
Issuance of restricted shares for:
Acqueren, Inc. (Note 3) 26,750,000 26,750 2,113,250 -- -- -- --
Cinema Research Corporation and
D-Rez Corporation (Note 3) 6,300,000 6,300 1,285,700 -- -- -- --
Investment properties (Note 6) 8,000,000 8,000 728,000 -- -- -- --
Midtowne Properties (Note 6) 2,100,000 2,100 1,662,900 -- -- -- --
Employee Compensation (Note 11) 1,000,000 1,000 110,700 -- -- -- --
Sale of shares for cash (Note 11) 15,160,000 15,160 2,308,340 -- -- -- --
Exercise of stock options (Note 11) 2,500,000 2,500 51,500 -- -- -- --
Common stock subscribed (Note 11) 4,000,000 4,000 546,000 -- (550,000) -- --
Treasury stock acquired -- -- -- -- -- (37,251) --
Stock Dividend Issued (Note 11) 9,188,911 9,189 2,379,927 (2,389,116) -- -- --
Unrealized loss on shares available for sale -- -- -- -- -- -- (18,964)
Net loss -- -- -- (705,973) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 121,115,971 $ 121,116 $15,726,799 $(4,192,960) $(550,000) $ (37,251) $ (18,964)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
<TABLE>
<CAPTION>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
FOR THE YEARS ENDED DECEMBER 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (705,973) $ (870,027)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 488,588 194,107
Common stock issued for services 111,700 70,000
Inventory reserve 62,682 -
Loss on disposal of equipment 21,994 -
Deferred tax benefit (298,804) -
Realized gain on sale of securities (91,135) -
Increase in market value of equity securities (37,899) -
Changes in assets and liabilities, net of acquired assets and liabilities:
Accounts receivable 1,244,635 125,109
Inventories 158,777 (3,360)
Other current assets 27,595 (6,160)
Purchase of trading securities, net (94,091) -
Other assets (125,793) -
Accounts payable and accruals (1,474,453) (187,951)
Accrued property taxes 86,601 -
- ------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (625,576) (678,282)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale investment securities (134,848) -
Capital expenditures (170,309) (26,262)
Purchase of real estate properties (167,922) -
Notes receivable (116,190) -
Proceeds from disposition of assets 25,000 -
Cash received in acquisitions 1,036,242 -
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 471,973 (26,262)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 2,377,500 403,456
Proceeds from notes payable 121,467 644,878
Repayments of notes payable (83,527) (333,952)
Principal payments on capital lease obligations (137,661) (6,106)
Purchase of treasury stock (37,251) -
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,240,528 708,276
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
FOR THE YEARS ENDED DECEMBER 31, 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net increase in cash 2,086,925 3,732
Cash at beginning of period 62,991 59,259
- ---------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 2,149,916 $ 62,991
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 72,941 $ 62,635
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
NON-CASH TRANSACTIONS:
Acquisition of land for common stock $ 2,401,000 $ 1,800,000
- ---------------------------------------------------------------------------------------------------------------------
Acquisition of property and equipment for note payable $ 79,682 $ -
- ---------------------------------------------------------------------------------------------------------------------
Acquisition of mineral interest for common stock $ - $ 300,000
- ---------------------------------------------------------------------------------------------------------------------
Exchange of common stock for securities $ - $ 40,000
- ---------------------------------------------------------------------------------------------------------------------
Assumption of property taxes on purchase
of land $ 357,518 $ -
- ---------------------------------------------------------------------------------------------------------------------
Purchase of securities on margin $ 195,645 $ -
- ---------------------------------------------------------------------------------------------------------------------
Issuance of note payable in acquisition $ (303,300) $ -
- ---------------------------------------------------------------------------------------------------------------------
Subscriptions of common stock $ 550,000 $ -
- ---------------------------------------------------------------------------------------------------------------------
Purchase of subsidiary assets and liabilities through the issuance of common
stock and options:
Accounts receivable $ 2,632,551 $ -
Inventory 1,096,528 -
Other current assets 112,664 -
Property, plant and equipment 3,806,265 -
Other assets 14,019 -
Non-compete agreements 150,000 -
Goodwill 1,117,913 -
Accounts payable (2,681,466) -
Accrued expenses (514,434) -
Notes payable (975,000) -
Capital lease obligations (1,498,601) -
Long-term debt to related parties (466,381) -
Other liabilities (95,000) -
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-9
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION, In July 1996, a control group of investors ("1996
OWNERSHIP AND Group") purchased 90% of the outstanding shares
BUSINESS of a dormant company (A Black Tie Affair,
Incorporated) ("BTA"). This investor group
changed the name of BTA to Pitt's & Spitt's of
Texas, Inc.("PST").
PST purchased Har-Whit, Inc. ("Har-Whit") and
Pitt's and Spitt's, Inc. ("P&S") on September
30, 1996. The purchase was consummated for
2,527,000 shares of PST common stock valued at
$1.2 million and $500,000 in cash for
noncompete agreements to the previous owners
of Har-Whit and P&S. Har-Whit and P&S were
affiliated by common ownership and were merged
in 1998. The merged entity operates a custom
metal working facility specializing in steel
fabrication, designs and manufactures custom
barbeque and smoker pits and performs welding
services primarily for the oil and gas
industry. Its customer base is located
primarily in Southeast Texas, except for
barbeque pits which are distributed to
customers throughout the United States.
In September 1997 a new investor group ("1997
Group"), unrelated to the 1996 group, acquired
control of Pitts & Spitts of Texas, Inc. and
changed the name to American International
Industries, Inc. (the "Company" or "AIII").
As discussed in Note 3 the Company acquired
two additional businesses in 1998 as part of
its expansion plans. These acquisitions were
accounted for as purchases and the Company
owns 100% of the stock of the acquired
companies. One of the acquired companies sells
wholesale automotive after-market products and
consumer durables throughout the United
States. The second acquired company is in the
post-production film industry with customers
primarily in the Los Angeles, California area.
2. SUMMARY OF Principles of Consolidation - The
SIGNIFICANT consolidated financial statements include the
ACCOUNTING accounts of the Company and all wholly-owned
POLICIES subsidiaries. All significant intercompany
transactions and balances have been eliminated in
consolidation.
Inventories - Inventories are valued at the
lower of cost or market on a first in, first
out basis.
F-10
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES
TRADING
The Company records trading securities and call
options sold on such securities at market value
with any changes in the market value included as
a component of net income for the period. The
Company only sells call options for the number of
shares purchased, with the proceeds of such sales
recorded as a liability. The Company has not
entered into any uncovered option transactions at
December 31, 1998 and 1997.
AVAILABLE-FOR-SALE
Changes in market value of investments in equity
securities available-for- sale are included as a
component of stockholders' equity.
PROPERTY, EQUIPMENT AND DEPRECIATION -
Property and equipment are recorded at cost
less accumulated depreciation. Upon retirement
or sale, the cost of the assets disposed of
and the related accumulated depreciation are
removed from the accounts, with any resultant
gain or loss being recognized as a component
of other income or expense. Depreciation is
computed over the estimated useful lives of
the assets (5-20 years) using the
straight-line method for financial reporting
purposes and accelerated methods for income
tax purposes. Maintenance and repairs are
charged to operations as incurred.
INVESTMENT PROPERTIES - Investment properties
are carried at the lower of cost or fair
market value, net of selling costs.
NATURAL GAS AND MINERALS INTEREST - The
Company valued its interest in a natural gas
royalty interest at cost. Such cost is
amortized on a straight-line basis over the
estimated five year life of the gas well,
which approximates the units of production
method.
INTANGIBLE ASSETS - The Company's intangible
assets represent goodwill acquired in the
acquisitions discussed in Note 3 and the
non-compete agreements. The Company amortizes
goodwill over a 15 year period and the
non-compete agreements over their term of 5 to
6 years on a straight-line basis.
IMPAIRMENT OF LONG-LIVED ASSETS - Realization
of long-lived assets, including goodwill, is
periodically assessed by the management of the
Company. Accordingly, in the event that facts
and circumstances indicate that property and
equipment, and intangible or other assets may
be impaired, an evaluation of recoverability
would be performed. If an evaluation is
required, the estimated future undiscounted
cash flows
F-11
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
associated with the asset are compared to the
asset's carrying amount to determine if a
write-down to market value is necessary. In
management's opinion, there is no impairment of
such assets at December 31, 1998 and 1997.
REVENUE RECOGNITION - The Company recognizes
revenue at the time of shipment of product to its
customers or completion of services provided.
INCOME TAXES - The Company is a taxable entity
and recognizes deferred tax assets and
liabilities for the future tax consequences
attributable to differences between the financial
statement carrying amounts of existing assets and
liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured
using enacted tax rates expected to be in effect
when the temporary differences reverse. The
effect on the deferred tax assets and liabilities
of a change in tax rates is recognized in income
in the year that includes the enactment date of
the rate change. A valuation allowance is used to
reduce deferred tax assets to the amount that is
more likely than not to be realized.
LOSS PER SHARE - The basic net loss per common
share is computed by dividing the net loss by the
weighted average number of shares outstanding
during a period. Diluted net loss per common
share is computed by dividing the net loss,
adjusted on an as if converted basis, by the
weighted average number of common shares
outstanding plus potential dilutive securities.
For the years ended December 31, 1998 and 1997,
potential dilutive securities had an
anti-dilutive effect and were not included in the
calculation of diluted net loss per common share.
These securities include options to purchase
7,720,000 and 3,300,000 shares of common stock at
December 31, 1998 and 1997, respectively, and
subscriptions to purchase 3,900,000 shares of
common stock at December 31, 1998.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS - The
preparation of financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and
assumptions that affect the reported amounts of
assets and liabilities and disclosure of
contingent assets and liabilities at the date of
the financial statements and the reported amounts
of revenues and expenses during the reported
period. Actual results could differ from these
estimates.
F-12
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCK-BASED COMPENSATION - The Company has chosen
to continue to account for stock-based
compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations and to
elect the disclosure option of SFAS No. 123,
"Accounting for Stock-Based Compensation".
Accordingly, compensation cost for stock options
issued to employees is measured as the excess, if
any, of the quoted market price of the Company's
stock at the date of the grant over the amount an
employee must pay to acquire the stock (see Note
11).
CONCENTRATION OF CREDIT RISK - At December
31, 1998, the Company had $1,714,251 in two bank
accounts that exceeded the federally insured
deposit limit.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The
Company estimates the fair value of its
financial instruments using available market
information and appropriate valuation
methodologies. However, considerable judgement
is required in interpreting market data to
develop the estimates of fair value.
Accordingly, the Company estimates of fair
value are not necessarily indicative of the
amounts that the Company could realize in a
current market exchange. The use of different
market assumption and/or estimation
methodologies may have a material effect on
the estimated fair value amounts. The interest
rates payable by the Company on its notes
payable approximate market rates. The Company
believes that the fair value of its financial
instruments comprising accounts receivable,
notes receivable, accounts payable, notes
payable and capital lease obligations
approximate their carrying amounts.
NEW ACCOUNTING PRONOUNCEMENTS:
DERIVATIVE AND HEDGING ACTIVITIES - In June 1998,
the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 requires companies to
recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to
measure them at fair value. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company does not expect
adoption of the new standard on January 1, 2000
to affect its financial statements.
3. ACQUISITIONS In December 1997, the Company purchased the
outstanding stock of Brenham Oil and Gas
("Brenham") for 6,000,000 shares of restricted
common stock. Brenham owns a royalty interest
in a gas well. Also in
F-13
<PAGE>
<TABLE>
<CAPTION>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<S><C>
December 1997, the Company purchased Texas
Real Estate Enterprises, Inc. ("TRE") and
G.C.A. Incorporated ("GCA") for a total,
combined consideration of 16,000,000 shares of
restricted common stock. TRE and GCA jointly
owned a 290 acre parcel of real estate on
Galveston Bay, Texas. These acquisitions were
accounted for as purchases.
Brenham and TRE were acquired from a trust for
the benefit of the son of the Chief Executive
Officer (CEO) of the Company and the brother
of the CEO of the Company. The purchase price
for Brenham was based upon the present value
of estimated future cash flows from this
interest over a 5 year basis. The purchase
price of TRE was based upon fair market values
as determined by independent appraisals. Since
the purchases of these companies were
completed in late December 1997, results of
operations on these acquisitions are included
in the accompanying financial statements
beginning January 1, 1998. The gas well had
production in 1997 that resulted in
approximately $80,000 of royalty payments to
Brenham; TRE and GCA had no material
operations in 1997.
ACQUEREN ACQUISITION - Effective July 1, 1998,
the acquisition by AIII of 100% of the
outstanding stock of Acqueren, Inc. and its
wholly-owned subsidiary, Northeastern Plastics
Inc., (NPI) (collectively referred to as
"Acqueren") was closed and the transaction was
accounted for as a purchase. Operations of
Acqueren have been recorded by the Company
since July 1, 1998 in the accompanying
statement of operations for the year ended
December 31, 1998.
The purchase agreement provides for the two
primary shareholders of Acqueren to receive
5,000,000 and 1,750,000 shares of AIII's
common stock in exchange for their 700,000 and
150,000 shares, respectively, of the
Acqueren's stock. The purchase agreement
further provides for the remaining
stockholders of Acqueren to receive 25.02
shares of AIII's common stock for each share
of the Acqueren's stock. In total, the terms
of the sale required AIII to issue 26,750,000
shares of restricted common stock in exchange
for 100% of the outstanding common stock of
Acqueren. Based upon the estimated fair value
of the restricted common stock of AIII, the
total purchase consideration of the Company
was approximately $2,140,000 ($.08 per share).
As of December 31, 1998, 7,173,059 shares of
AIII's restricted common stock had not been
exchanged by various shareholders of Acqueren
for their share of Acqueren's common stock.
Accordingly, those shares of AIII's common
stock are not considered outstanding for
purposes of EPS calculations.
F-14
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CRC ACQUISITION - On September 24, 1998, the
shareholders of Cinema Research Corporation and
Digital Research Corporation, entities under
common ownership and collectively referred to as
"CRC", completed an agreement to sell 100% of the
outstanding stock to AIII. As a part of the
purchase, AIII acquired Electronic Pictures
Corporation, a company that owned an option to
purchase CRC and D-Rez as its only asset and AIII
exercised this option. Terms of the sale required
AIII to issue 6,300,000 shares of its restricted
common stock and give options to purchase 400,000
shares of the acquirer's common stock exercisable
in whole or in part, over a 5 year period at $.20
per share. In addition, the acquirer issued a
$379,500 non-interest bearing note payable to the
seller due in sixty equal, monthly installments.
Based upon the estimated fair value of AIII's
restricted common stock of $1,260,000 ($.20 per
share), stock options valued at $32,000 and the
discounted present value note payable to selling
shareholder of $303,300, the total purchase
consideration of the Company was $1,595,300.
As a condition to selling CRC, the president
and chief executive officer, and
vice-president of marketing, who were selling
shareholders of CRC, signed five and six year
employment contracts, respectively, which
included covenants not-to-compete with the
Company for the term of the contract. These
contracts require aggregate compensation
payments of approximately $175,000 annually to
these individuals. Further, the contracts
provide for the payment of incentives based
upon individual and operating performance.
ACCOUNTING FOR ACQUISITIONS - The allocation of
the purchase prices in the Acqueren and CRC
acquisitions are shown below and are based upon
the fair market values of the acquired assets
and liabilities assumed.
Acqueren CRC
--------------------------------------------------------------------------------------
Purchase consideration:
Note payable to selling stockholder
(discounted value) $ - $ 303,300
Common stock and options (restricted) 2,140,000 1,292,000
--------------------------------------------------------------------------------------
$ 2,140,000 $ 1,595,300
--------------------------------------------------------------------------------------
F-15
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Acqueren CRC
--------------------------------------------------------------------------------------
Assets acquired and liabilities assumed:
Current assets $ 4,034,626 $ 843,359
Property, plant and equipment 100,000 3,706,265
Other assets - 14,019
Non-compete agreements - 150,000
Goodwill 879,834 238,079
Current liabilities (2,581,079) (709,821)
Capital lease obligations - (1,498,601)
Notes payable - (975,000)
Debt to related parties (293,381) (173,000)
--------------------------------------------------------------------------------------
$ 2,140,000 $ 1,595,300
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
The following presents the unaudited pro forma
results of operation of AIII for the years ended
December 31, 1998 and 1997, as if these purchase
transactions would have been consummated as of
January 1, 1998 and 1997.
DECEMBER 31, 1998 1997
--------------------------------------------------------------------------------------
(unaudited)
Pro forma sales $ 17,375,536 $ 16,808,397
Pro forma operating
(loss) $ (2,806,743) $ (2,182,907)
Pro forma net loss $ (2,796,723) $ (2,448,212)
Pro forma basic and
diluted net loss
per share $ (.03) $ (.04)
Weighted average
shares outstanding 97,097,221 69,171,344
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
F-16
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENT TRADING
SECURITIES
In the third quarter of 1998, the Company began
investing excess funds in marketable equity
securities. In order to reduce the cost of the
investment and associated risk in such
securities, the Company sold call options for
the number of shares purchased. The securities
and related call options are carried at market
value with any changes in market value during
the period of the stock or call option included
as a component of net income. For the year ended
December 31, 1998, the Company recognized a
$37,899 increase in the market value of such
equity securities as a component of net loss.
As of December 31, 1998, the trading securities
and related call options are summarized below.
Security Option
Equity Security Security Market Option Market
(unaudited) Cost Value Proceeds Value
--------------------------------------------------------------------------------------
Billing Concepts Corp.
20,000 shares of
common stock $ 223,256 $ 220,000 $ - $ -
Loral Space and
Communications,
10,000 shares of
common stock 132,289 178,120 18,812 28,750
Ciena Corporation,
2,000 shares of
common stock 25,326 29,250 3,462 2,124
--------------------------------------------------------------------------------------
$ 380,871 $ 427,370 $ 22,274 $ 30,874
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
In addition, the Company purchased such trading
securities under a margin account arrangement. As
of December 31, 1998, the Company owed
approximately $195,645 on such margin account.
F-17
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
AVAILABLE FOR SALE
In accordance with the provisions of SFAS No.
115, the Company's available-for-sale equity
securities are carried at fair value. Unrealized
losses of such securities at December 31, 1998 of
$18,964, are included as part of stockholders'
equity. The Company's cost in these securities,
determined under the average cost method, was
$134,848 at December 31, 1998.
5. INVENTORIES Inventories consisted of the following at
December 31,:
1998 1997
--------------------------------------------------------------------------------------
Raw materials $ 78,683 $ 44,125
Work-in-process 169,618 102,489
Finished goods 806,790 33,408
--------------------------------------------------------------------------------------
$ 1,055,091 $ 180,022
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
6. REAL ESTATE Real estate held for sale includes the following at December 31,:
HELD FOR
SALE 1998 1997
--------------------------------------------------------------------------------------
290 undeveloped acres on
Galveston Bay, Texas (Note 3) $ 1,800,000 $ 1,800,000
42.6 undeveloped acres of land in
Southeast Houston, Texas (1) 1,457,518 -
Commercial properties in Harris
County, Texas (1) 565,000 -
736 undeveloped acres of land in
Anuahauc, Texas (2) 736,000 -
23 acres of undeveloped land in
Harris County, Texas 164,800 -
Other properties 186,822 183,700
--------------------------------------------------------------------------------------
$ 4,910,140 $ 1,983,700
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
(1)In June 1998, AIII purchased a real estate
company, Mid-Towne Properties, Inc. ("Mid-Towne")
for 2,100,000 shares plus the assumption of
property taxes of $357,518. Mid-Towne was 60%
owned by a trust for the benefit of the son of
the CEO of the Company and the recorded values
of these assets were based upon independent
appraisals. These properties had no material
operations in 1998 and 1997.
F-18
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(2)On May 14, 1998, the Company purchased 736
acres of undeveloped land in Anuahauc, Texas
from a company owned by the Chief Executive
Officer of AIII who is also a stockholder in
the Company. The consideration paid for the
land consisted of 8,000,000 shares of newly
issued, restricted common stock of AIII. Since
this land was purchased from a related party
the property was recorded at its fair market
value as determined by independent appraisal.
This acreage had no material operations in
1998 and 1997. Of the 8,000,000 shares issued,
the company controlled by the CEO of the
Company transferred 5,000,000 shares to Elk
International, a company controlled by his
brother for satisfaction of existing debt on
the property.
Management of AIII has made the determination
that it is in the best interest of the
Company's stockholders to continue to hold
such assets until an acceptable offer is
received for these properties or a development
opportunity is identified. The properties are
listed with a sales agent.
7. PROPERTY AND Major classes of property and equipment
EQUIPMENT together with their estimated useful lives,
consisted of the following at December 31,:
Years 1998 1997
---------------------------------------------------------------------------------------
Land - $ 386,812 $ 328,000
Building and improvements 20 876,466 665,246
Machinery and equipment 8 5,144,632 404,117
Office equipment 7 403,640 29,735
Automobiles 5 93,900 25,800
---------------------------------------------------------------------------------------
6,905,450 1,452,898
Less accumulated depreciation
and amortization (1,845,078) (117,185)
---------------------------------------------------------------------------------------
Net property and equipment $ 5,060,372 $ 1,335,713
---------------------------------------------------------------------------------------
Included in the above balances as of December 31,
1998 are assets used by the Company for CRC's
operation under capital leases (see Note 10).
Such leased assets include approximately
$1,896,000 net of accumulated depreciation of
$971,000 of digital film and computer equipment.
F-19
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. NOTES PAYABLE Notes payable to banks consisted of the following at December 31,:
TO BANK 1998 1997
---------------------------------------------------------------------------------------
Note payable to a bank, 9.75% per annum, due in
monthly payments of principal and interest of
$7,895 through February 2003 with remaining
amount due in May 2000 for Har-Whit $ 574,276 $ 644,878
Note payable to a bank, 8% per annum,
due in May 2000 with only
interest due quarterly for CRC 1,000,000 -
Line of credit with a bank for $150,000,
10.5% per annum, interest only due
monthly with payment of principal due
at maturity in March 1999 for Har-Whit 60,000 -
Other notes payable 81,777 -
---------------------------------------------------------------------------------------
1,716,053 644,878
Less-current portion (116,144) (72,962)
---------------------------------------------------------------------------------------
$ 1,599,909 $ 571,916
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
The notes payable are outstanding to a specific
subsidiary and are secured by that subsidiary's
inventory, accounts receivable and property and
equipment. The notes are also guaranteed by AIII
and the $1,000,000 note payable as of December
31, 1998 is further collateralized by AIII's cash
in bank.
On December 31, 1997, the Company's 9.5% note
payable to a bank for the amount of $644,878
matured. In March 1998, the Company refinanced
this loan with a long-term note payable. Due
to the refinancing of the note in 1998, the
amount of note payable to bank reported as
current and long-term portions in the December
31, 1997 balance sheet are based upon the
terms of the refinanced note.
F-20
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Principal repayment provisions of long-term debt
are as follows at December 31,:
Amount
---------------------------------------------------------------------------------------
1999 $ 116,144
2000 1,061,721
2001 63,125
2002 90,565
2003 384,498
---------------------------------------------------------------------------------------
Total $ 1,716,053
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
9. NOTES PAYABLE TO In connection with the acquisitions
RELATED PARTIES discussed in Note 3, the Company has the
following notes payable to related parties at
December 31, 1998, none of which were
outstanding at December 31, 1997:
Amount
---------------------------------------------------------------------------------------
Notes payable to selling stockholders of CRC,
without interest, due in monthly payments
through September 2003 of $6,325, recorded
using an 8% discount rate (discount of $76,200) $ 196,224
Note payable to principal selling stockholder
of Acqueren, 6% per annum, annual payment
of $100,000 due in August 1999 and 2000 with
remainder due in August 2001 300,000
Note payable to officer of CRC, 8% per annum,
due upon demand 284,072
---------------------------------------------------------------------------------------
Total notes payable to related parties 780,296
Less-current portion 459,972
---------------------------------------------------------------------------------------
Notes payable to related parties, long-term portion $ 320,324
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Interest expense for the year ended December 31,
1998 on these related party notes was
approximately $15,356.
F-21
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. CAPITAL LEASES The Company, through its CRC acquisition (Note 3),
has the following future aggregate minimum annual
lease payments required under capital leases as of
December 31, 1998:
Amount
---------------------------------------------------------------------------------------
1999 $ 690,460
2000 644,500
2001 194,684
---------------------------------------------------------------------------------------
Total minimum lease payments 1,529,644
Less amount representing interest (168,704)
---------------------------------------------------------------------------------------
Present value of net minimum lease payments 1,360,940
Less current portion (584,552)
---------------------------------------------------------------------------------------
Long-term portion $ 776,388
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Interest rates on the capitalized leases range
from 7.3% to 22.7%. The leases contain
restrictive covenants regarding various financial
ratios and capital distributions. At December 31,
1998, the Company was in violation of certain
financial ratios and has received a waiver for
those violations from the lessor.
11. CAPITAL STOCK The Company is authorized to issue up to
AND STOCK OPTIONS 10,000,000 shares of Preferred Stock, $.001
par value per share of which none are
presently outstanding. The Preferred Stock may
be issued in one or more series, the terms of
which may be determined at the time of
issuance by the Board of Directors, without
further action by stockholders, and may
include voting rights (including the right to
vote as a series of particular matters),
preferences as to dividends and liquidation,
conversion, redemption rights and sinking fund
provisions. The Company has no present plans
for the issuance of Preferred Stock.
The Company is authorized to issue up to
200,000,000 shares of Common Stock, of which
121,115,971 shares were issued and 120,877,971
were outstanding (including 7,173,059 shares
that have not been exchanged by various
shareholders of Acqueren for their share of
Acqueren's common stock but excluded for EPS
calculation purposes), 3,900,000 shares were
subscribed at December 31, 1998, and 7,720,000
were reserved for issuance pursuant to the
exercise of outstanding stock options as of
December 31, 1998.
In September 1997, the Company sold 5,000,000
newly issued restricted shares to a
corporation controlled by the brother of the
CEO of the Company for $150,000. In connection
with this sale, the Company granted this
related party the option to purchase an
additional 2,000,000 shares at $.02 per share
and such option was for three years and vested
</TABLE>
F-22
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
immediately. In 1998, this option was
exercised by the related party and the Company
received $40,000.
Also during 1997, the Company sold 500,000
restricted common shares to a director of the
Company for $.10 per share. In December 1997,
the Company issued 200,000 shares of common
stock in exchange for shares of another
corporation valued at $40,000. In August 1998,
the Company returned such shares to their
previous owner for $40,000. Further in 1997,
the Company sold an additional 7,278,060
shares of common stock through various private
sales for between $.02 and $.10 per share for
total net proceeds of $203,456.
In connection with the change in control of
the Company to the 1997 Group (Note 1) in
October 1997 the Company issued 500,000
options to each of two individuals as an
enticement to return to manage the operations
of Har-Whit and P&S and also issued 300,000
options to the outside legal counsel of the
Company to purchase common stock of AIII for
legal services performed. These options are
exercisable at $.02 per share through December
2002 and such options were immediately
exercisable. At the date of grant those
options were determined to have no material
value. Further, the two individuals who manage
Har-Whit and P&S were issued 100,000 shares
individually of the Company's common stock in
January 1998 for management services rendered.
This issuance was recorded as $10,000 of
compensation expense in 1998 based on the
market value of the shares ($.05 per share) at
the date of grant. In May 1998, these two
individuals each were granted the right to
purchase 250,000 shares of the Company's
common stock at $.25 per share. These shares
have not been paid for and are classified as
subscribed shares.
In December 1997, the Company issued 1,400,000
shares of restricted common stock to a
consulting firm for strategic planning
assistance rendered to the Company. Such
shares were valued at the market price of $.05
per share resulting in a $70,000 charge to
general and administrative expense in 1997.
In connection with sale of newly issued
restricted common stock in May 1998, the
Company granted an investor the option to
purchase an additional 4,000,000 shares at
$.25 per share, which were immediately
exercisable through the year 2002.
In 1998, the Company issued 200,000 shares of
common stock to its CEO in exchange for
executive and management services rendered.
Such award was recorded at the date of grant
as a $13,000 compensation expense based on the
market value (approximately $.07 per share) of
the shares issued. Further, in accordance with
a May 1998 employment agreement, the Company
granted an option to purchase 2,000,000 shares
at $.12 per share through May 2001, which were
immediately exercisable,
F-23
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
to its Chief Executive Officer. Since the
option price exceeded the market value of
AIII's stock at the time of the grant, there
was no charge to expenses for this option. In
addition, the Company recorded additional paid-
in capital and compensation expense of $56,000
representing the fair value of services
rendered by the CEO to the Company.
In May 1998, the Company sold 3,500,000 newly
issued restricted shares to a corporation
controlled by the brother of the CEO of the
Company for a total consideration of $300,000.
In addition in January and May 1998, the
Company issued 600,000 shares of restricted
common stock to employees and directors for
management advisory services. These awards
were recorded as $32,700 of compensation
expense at the market value (ranging from $.05
to $.08 per share) of the shares issued at the
date of grant.
During 1998, the Company sold 11,660,000 of
restricted common stock through various
private sales for between $.10 and $.40 per
share for total proceeds of $2,023,500. Also
in 1998, holders of 500,000 options exercised
their rights and purchased stock for between
$.02 and $.04 per share. This issuance
resulted in $14,000 being paid to the Company.
At December 31, 1998, the Company had
a total of 4,000,000 shares of stock subscribed
for between $.10 and $.22 per share with expected
total proceeds of $550,000. Subsequent to year
end, the subscription right for $350,000 was
cancelled and accordingly the amount was
eliminated against the related equity balance.
Also, the purchase price of $150,000 for
certain subscribed shares was received during
April 1999.
In July 1998, the Company declared a 10% stock
dividend that was payable to stockholders of
record as of August 30, 1998. Such dividend
resulted in issuance of 9,188,911 shares to
stockholders and was accounted for at the market
value as of August 30, 1998 ($.26 per share).
Effective December 31, 1996, the Company was
required to adopt the disclosure portion of SFAS
No. 123. This statement requires the Company to
provide pro forma information regarding net loss
applicable to common stockholders and loss per
share as if compensation cost for the Company's
stock options granted had been determined in
accordance with the fair value based method
prescribed in SFAS 123. The Company estimates the
fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model
with the following weighted-average assumptions
used for grants in 1998 and 1997 as follows:
F-24
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------------
Dividend yield 0% 0%
Expected volatility 90% 90%
Risk free interest 6.5% 6.5%
Expected lives 5 years 5 years
Under the accounting provisions of SFAS 123, the
Company's net loss applicable to common
stockholders and loss per share would have been
increased to the pro forma amounts indicated
below at December 31,:
1998 1997
---------------------------------------------------------------------------------------
Net loss applicable to common stockholders:
As reported $ (705,973) $ (870,027)
Pro forma $ (850,173) $ (880,027)
Loss per share:
As reported $ (.01) $ (.06)
Pro forma $ (.01) $ (.06)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
A summary of the status of the Company's stock
options to employees as of December 31, 1998 and
1997, and changes during the years ending on
those dates is presented below:
Weighted- Weighted-
Average Average
Exercise Exercise
Price Price
Shares 1998 Shares 1997
---------------------------------------------------------------------------------------
Outstanding at
beginning of period 1,000,000 $ .02 - $ -
Granted 2,020,000 .12 1,000,000 .02
Outstanding and
exercisable at
end of period 3,020,000 $ .10 1,000,000 $ .02
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Weighted-average
fair value of
options granted
during the period 2,020,000 $ .12 1,000,000 $ .01
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
F-25
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes information about
fixed stock options outstanding at December 31,
1998:
Number Out- Weighted
standing and Average
Exercisable at Remaining
Exercise December 31, Contractual
Price 1998 Life (Years)
---------------------------------------------------------------
$ .02 1,000,000 4.25
$ .12 2,000,000 2.42
$ .34 20,000 2.67
---------------------------------------------------------------
$ .02-.34 3,020,000 3.03
---------------------------------------------------------------
---------------------------------------------------------------
12. INCOME TAXES A reconciliation of income taxes at the federal
statutory rate to amounts provided for the
years ended December 31, are as follows:
DECEMBER 31, 1998 1997
---------------------------------------------------------------------------------------
Tax benefit computed at
statutory rate $ (341,000) $ (295,000)
Non-deductible permanent difference 42,896 -
Change in valuation allowance,
net of valuation allowance of
acquired subsidiaries - 295,000
---------------------------------------------------------------------------------------
$ (298,804) $ -
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Deferred taxes are determined based on the
temporary differences between the financial
statement and income tax bases of assets and
liabilities as measured by the enacted tax rates
which will be in effect when these differences
reverse. The components of deferred income tax
assets are as follows:
F-26
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 1997
---------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss $ 1,829,000 $ 295,000
Provision for doubtful accounts 21,000 7,000
Other 18,000 -
---------------------------------------------------------------------------------------
Total deferred tax asset 1,868,000 302,000
Valuation allowance (1,169,000) (302,000)
---------------------------------------------------------------------------------------
Net deferred tax asset 699,000 -
Deferred tax liability:
Capital leases 122,000 -
Difference in carrying value of
property and equipment 577,000 298,804
---------------------------------------------------------------------------------------
Total deferred tax liability 699,000 298,804
---------------------------------------------------------------------------------------
Net deferred tax liability $ - $ 298,804
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
At December 31, 1997, the Company
provided a 100% valuation allowance for the
deferred tax asset because it could not be
determined whether it was more likely than not
that the deferred tax asset would be realized.
The Company has net operating loss carryforwards
of approximately $1,981,000 as of December 31,
1998, to offset future taxable income which
expire through 2018. In addition, the acquired
subsidiaries (Note 3) have individual net
operating loss carryforwards in excess of
$3,400,000. However, such net operating loss
carryforwards are limited due to separate company
limitations in accordance with income tax
regulations.
13. COMMITMENTS As of November 1, 1997, Acqueren relocated its
AND operations from Brooklyn, NY, to Nicholls, GA.
CONTINGENCIES In accordance with the move the Company
executed a lease from an unrelated party for
the Company's new facility for a term of two
years through October 9, 1999 and provides for
annual rent of $39,300. The lease provides for
an option to renew for an additional term of
two years. For the year ended December 31,
1998, $31,600 was recorded as rent expense
under this lease.
In connection with the relocation to Nicholls,
GA in 1997, Acqueren terminated its union
contract in New York. The union has claimed a
deficiency for unfunded pension liabilities.
Management has accrued $125,000 in 1998
relating to this potential liability.
Management estimates
F-27
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
that such an amount will be sufficient to
cover any potential obligation to this union.
Various key officials of the Company have
entered into employment agreements with the
Company. The CEO of the Company entered into a
three-year employment agreement which provides
for a monthly salary of $1,000 plus a bonus as
determined by the Board of Directors. The two
key management personnel of Har-Whit/Pitts and
Spitts, who are also Directors of the Company,
entered into three-year employment contracts
expiring in 2000 that require payments of
$5,000 per month to each director plus a bonus
at the discretion of the Board of Directors.
The president of NPI previously entered into
an at-will employment agreement that provides
an annual salary of $124,000 plus a bonus
based upon operating results of this
subsidiary. The employment agreement also
grants the president of NPI an option to
purchase NPI common stock equal to 5% of
NPI's equity at an exercise price of 5% of
the total stockholder's equity, if NPI conducts
an initial public offering of its common stock
during the time of his employment. The Company
entered into other employment agreements in
connection with the purchase of CRC as discussed
in Note 3.
CRC leases office space, at $13,000 per month,
under a non-cancelable operating lease
expiring November 30, 1999 from the
father-in-law of the prior stockholder of CRC
who became a shareholder in the Company after
the CRC acquisition discussed in Note 3. Prior
to the date of acquisition by AIII, CRC owed
approximately $160,000 of unpaid rent under
this lease. At the date of acquisition, the
Company settled the unpaid rent for $50,000
and renegotiated the lease terms, including
the commitment to make the necessary building
improvements for earthquake compliance. The
Company estimates these costs to be
approximately $150,000. In addition, the
Company acquired for $50,000 an option,
expiring on July 31, 1999, to purchase this
building for $1,170,000, which value
approximates its fair market value.
The Company leases automobiles under operating
leases expiring in various years through June 30,
2001. Future aggregate rental payments under
these non-cancelable operating leases require
annual payments of approximately $20,000 through
2001.
On December 10, 1998, the Company filed an
Original Petition and Request for Temporary
Injunction for breach of contract and common law
and stock fraud in connection with the Company's
acquisition of Acqueren, Inc. against TDA
Industries, Inc. and Fred Friedman in the 56th
Judicial District Court of Galveston, Texas. The
Company has claimed the defendants misrepresented
the amount of Acqueren's equity as of the date of
the purchase agreement. The Company is seeking
actual damages in the amount of not less than
$1,100,000, in addition to further relief which
it may be entitled to.
F-28
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. RELATED In 1998, the Company advanced the Chief
PARTY Executive Officer $32,190. The officer
TRANSACTIONS executed a promissory note to the Company due
upon demand. This note bears interest at prime
and is included in notes receivable as of
December 31, 1998.
Other related party transactions are discussed
in Notes 3, 6, 9, 11 and 13.
15. SEGMENT The Company has four reportable segments and
INFORMATION corporate overhead: industrial/commercial, oil
and gas, real estate and media/entertainment.
The industrial/commercial segment includes a
supplier of automotive after-market products as
well as a manufacturer and distributor of
barbecue pits and custom sheet metal products
for customers predominantly in the energy
industry. The oil and gas segment owns an oil,
gas and mineral royalty interest in Washington
county, Texas. The media/entertainment segment
is a provider of technical, optical and digital
services to the motion picture and television
industry. The corporate overhead includes the
Company's investment holdings including
financing current operations and expansion of
its current holdings as well as evaluating the
feasibility of entering into additional
businesses.
The accounting policies of the segments are
the same as those described in the summary of
significant accounting policies. The Company
evaluates performance based on profit or loss
from operations before income taxes, not
including nonrecurring gains and losses and
foreign exchanges gains and losses.
The Company's reportable segments are
strategic business units that offer different
technology and marketing strategies. Most of
the businesses were acquired as a subsidiary
and the management at the time of the
acquisition was retained.
Consolidated net sales and net operating
losses for the years ended December 31, 1998
and 1997, were as follows:
1998 1997
---------------------------------------------------------------------------------------
Net sales:
Industrial/Commercial $ 8,907,617 $ 2,501,860
Media/Entertainment 1,305,422 -
Oil and gas - -
Real estate - -
Corporate - -
---------------------------------------------------------------------------------------
Consolidated net sales $ 10,213,039 $ 2,501,860
---------------------------------------------------------------------------------------
F-29
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------------
Income(loss) from operations:
Industrial/Commercial $ 249,409 $ (161,250)
Media/Entertainment (192,215) -
Oil and gas 3,763 -
Real estate (115,291) -
Corporate (1,026,646) (646,917)
---------------------------------------------------------------------------------------
Consolidated operating loss $ (1,080,980) $ (808,167)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
A summary of identifiable assets, depreciation
and amortization, and capital additions of
continuing operations for the years ended
December 31, 1998 and 1997:
IDENT- DEPRECIATION
IFIABLE AND CAPITAL
1998 ASSETS AMORTIZATION ADDITIONS
---------------------------------------------------------------------------------------
Industrial/Commercial $ 4,274,845 $ 104,200 $ 68,872
Media/Entertainment 4,391,898 183,687 97,197
Oil and gas 303,763 60,000 1,331
Real estate 4,547,328 - 167,922
Corporate 3,960,903 140,701 82,591
---------------------------------------------------------------------------------------
Consolidated $ 17,478,737 $ 488,588 $ 417,913
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
1997
---------------------------------------------------------------------------------------
Industrial/Commercial $ 2,286,098 $ 194,107 $ 26,262
Media/Entertainment - - -
Oil and gas - - -
Real estate - - -
Corporate 2,271,983 - -
---------------------------------------------------------------------------------------
Consolidated $ 4,558,081 $ 194,107 $ 26,262
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
The Company's areas of operations are principally
in the United States. No single foreign country
or geographic area is significant to the
consolidated financial statements.
F-30
<PAGE>
AMERICAN INTERNATIONAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. SUBSEQUENT UNLIMITED COATINGS ACQUISITION
EVENTS
(UNAUDITED)
In March 1999, the Company acquired 100% of
the outstanding common stock of Marald Inc.
d/b/a/ Unlimited Coatings ("UC"), through the
issuance of 3,500,000 restricted shares of
common stock of AIII valued at fair market
value of approximately $652,000 at $.19 per
share. In addition, a finders fee of $45,000
was paid in part to a party related to the
CEO. This transaction has been accounted for
as a purchase.
UC is a distributor of specialty chemicals, such
as rust proofing, undercoating, fabric
protectants, and fuel additives to the automotive
after-market. Best known for its spray-on bed
liners for truck beds, UC products are marketed
under the "Toro Liner" name through a network of
distributors throughout the United States and
internationally.
The allocation of the purchase price of UC is
shown below and is based upon management's
initial estimation of the fair market values of
the assets acquired and liabilities assumed. Such
estimate is subject to revision as more
information regarding fair market values become
available.
Amount
---------------------------------------------------------------------------------------
Purchase consideration:
Common stock (restricted) $697,000
---------------------------------------------------------------------------------------
Assets acquired and liabilities assumed:
Assets:
Current $129,000
Fixed 43,000
Other 2,000
Liabilities (127,000)
---------------------------------------------------------------------------------------
Excess Purchase Price over Net Assets Acquired $650,000
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
INVESTMENT IN SIGNAL PRODUCTS, INC.
In March 1999, the Company acquired a minority
interest (approximately 20%) in Signal
Products, Inc. (Signal), a California
corporation, which owns the exclusive license to
market handbags and leather accessories bearing
the "Guess" trademark. Signal develops,
manufactures and markets its products throughout
the United States. The investment in Signal was
accomplished through the issuance of 10,000,000
restricted shares of common stock of AIII, valued
at fair market value of approximately $2,000,000.
The shares are placed in escrow pending the
completion of a business valuation of Signal.
The shares will be released from escrow upon
satisfactory determination of Signal's value;
5,000,000 shares to Hardee Capital Partners
and 5,000,000 shares to Elk International, a
related party, both of which had claims
against the shares of Signal. Should the
determination of the value of the Signal shares,
after valuation of the Signal, yield a value
less than $2,000,000, the number of shares to
be released from escrow shall be reduced
accordingly; however, no additional shares
shall be issuable should the valuation
indicate a greater value.
SALE OF REAL ESTATE OPTION
In November 1998, Acqueren deposited $100,000 on
behalf of TRE as earnest money on a contract with
a third party for the option to buy a building in
downtown Houston, Texas. The earnest money
deposit is included in other assets in the
accompanying consolidated balance sheet at
December 31, 1998. TRE exercised its option to
buy the building and, in February 1999, sold such
option to unrelated third parties for $600,000,
realizing a gain on sale of $500,000.
</TABLE>
F-31
<PAGE>
EXHIBIT 10.8
SHABANG! MERCHANT SERVICE AGREEMENT
1.0 ACKNOWLEDGMENT AND ACCEPTANCE OF SERVICE AGREEMENT
The Shabang! Shopping Service ("Shabang!"), owned and operated by Shabang!,
Inc. ("Shabang!") is provided to you ("you" or "Merchant") under the terms
and conditions of this Shabang! Merchant Service Agreement and any amendments
thereto and any operating rules or policies (collectively, the "SMSA" or
"Agreement"). Shabang! reserves the right, in its sole discretion, to change,
modify, add or remove all or part of the SMSA at any time. Merchant will
receive notice of such changes and/or modifications pursuant to Section 14
regarding notices.
1.1 By accepting the terms and conditions of the SMSA, Merchant (a)
represents and warrants that he or she is 18 years old or older; (b) agrees
to provide true, accurate, current and complete information about Merchant as
prompted by the Merchant Application, and (c) agrees to maintain and update
this information to keep it true, accurate, current and complete. If any
information provided by Merchant is untrue, inaccurate, not current or
incomplete, Shabang! has the right to terminate Merchant's account and
refuse any and all current or future use of the Service.
1.2 By completing the merchant application, you agree to be bound by the
SMSA. Nothing in this agreement obligates Shabang! or the Service to list,
link to, accept or otherwise host any merchant anywhere on the Shabang! site.
If these terms and conditions or any future changes are unacceptable to you,
you may cancel your account pursuant to Section 7.1 regarding termination of
service.
2.0 DESCRIPTION OF SHABANG! SERVICE
Shabang! hosts an online shopping service on the World Wide Web and provides
merchants with access to its Shabang! Store Software ("Software") to
facilitate the maintenance of Stores for the sale of goods and services and
the listing of such Stores in the Shabang! Store Listings located at
Shabang.net.
3.0 MERCHANT'S OBLIGATIONS
3.1 Merchant acknowledges and agrees that it shall be responsible for the
timely processing of orders for goods and services offered by Merchant and
shall communicate with buyer via e-mail within 24 hours stating order
acknowledgement, anticipated shipping date, anticipated arrival date, and
contact information for questions.
3.2 Merchant acknowledges and agrees that it shall maintain the
confidentiality of the consumer's personal information supplied by Shabang!
for the processing of orders and shall not use the consumer's personal
information for any purpose other than processing the order without the
consent of the consumer, including selling of personal information to third
parties.
3.3 Merchant acknowledges and agrees that it shall be responsible for all
goods and services offered at Merchant's Store, all materials used or
displayed at the Store, and all acts or omissions that occur at the Store or
in connection with Merchant's account or password. Certain Stores may be
subject to additional requirements.
3.3.1 Merchant agrees to display in the Store Merchant's contact
information, including but not limited to Merchant's company name, address,
telephone number, fax number and e-mail address. Merchant also agrees to
update such information to keep it true, accurate, current and complete.
3.3.2 Merchant represents and warrants that it has full power and authority
under all relevant laws and regulations:
- - to offer and sell the goods and services offered at the Store, including
but not limited to holding all necessary licenses from all necessary
jurisdictions to engage in the advertising and sale of the goods or
services offered at the Store.
- - to copy and display the materials used or displayed at the Store, and,
- - to provide for credit card payment and delivery of goods or services as
specified at the Store.
3.3.3 Merchant represents and warrants that it will not engage in any
activities:
- - that constitute or encourage a violation of any applicable law or
regulation, including but not limited to the sale of illegal goods or
the violation of export control or obscenity laws;
- - that defame, impersonate or invade the privacy of any third party or
entity;
- - that infringe the rights of any third party, including but not limited to
the intellectual property, business, contractual, or fiduciary rights of
others; and,
- - that are in any way connected with the transmission of "junk mail" "spam"
or the unsolicited mass distribution of e-mail, or with any unethical
marketing practices.
3.4 Shabang! reserves the right to refuse to host or continue to host any
Store which it believes, in its sole discretion: (1) offers for sale goods or
services, or uses or displays materials, that are illegal, obscene, vulgar,
offensive, dangerous, or are otherwise inappropriate including tobacco
products, firearms and weapons of war; (2) received a significant number of
complaints for failing to be reasonably accessible to customers or timely
fulfill customer orders; (3) has become the subject of a government complaint or
investigation; or (4) has violated or threatens to violate the letter or spirit
of the SMSA.
4.0 PROPRIETARY RIGHTS
4.1 Software License. Shabang! hereby grants Merchant a non-exclusive,
non-transferable license to use the Software in object code form only on a
server controlled by Shabang! for the sole purpose of maintaining Stores on
such server. Merchant is not being granted any right to copy the Software or
to use it on computers other than a server controlled by Shabang!. Merchant
acknowledges and agrees that the Software is intended for access and use by
means of web browsing software, and that Shabang! does not commit to support
any particular browsing platform. Shabang! reserves the right at any time to
revise and modify the Software, release subsequent versions thereof and to
alter features, specifications, capabilities, functions, and other
characteristics of the Software, without notice to Merchant. If any revision
or modification to the Software materially changes Merchant's ability to
conduct business, Merchant's sole remedy is to terminate the SMSA pursuant to
Section 7.1 regarding termination of service.
4.2 Shabang! Intellectual Property. Merchant acknowledges and agrees that
content available from Shabang! or the Service, including but not limited to
text, software, music, sound, logos, trademarks, service marks, photographs,
graphics, or video, is protected by copyright, trademark, patent, or other
proprietary rights and laws, and may not be used in any manner other than as
specified in Section 4.1 above.
4.3 Merchant's Property. Merchant agrees that by using the Service, Merchant
grants Shabang!, and its successors and assigns, a non-exclusive, worldwide,
royalty-free, perpetual, non-revocable license under Merchant's copyrights or
other intellectual property rights, if any, in such material to use,
distribute, display, reproduce, and create derivative works from such
material in any and all media, for purposes of promoting Shabang! or Shabang!
Stores generally or Merchant's Store in particular. Merchant also grants
Shabang! the right to maintain such content on Shabang!'s servers during the
term of the SMSA and to authorize the downloading and printing of such
material, or any portion thereof, by end-users for their personal use.
4.4 Unauthorized Access. Merchant shall not attempt to gain unauthorized
access to any servers controlled by Shabang!
5.0 FEES
5.1 Merchant shall pay Shabang! in advance a monthly fee as set forth in the
Shabang! Store fee schedule. All such fees are payable in U.S. dollars to
Shabang! and shall be charged on the anniversary date of each month from the
date Shabang! lists the Store in the Shabang! Store Listings. Shabang! may
also, upon 30 days prior notice to Merchant, alter its fee schedules and
terms of the SMSA.
5.2 Merchant acknowledges and agrees that a separate setup fee may be
charged by a Shabang! Technical Service Provider ("TSP") to initially setup
the merchant's product information and pictures. The TSP may also provide
additional e-commence services as needed and commissioned by the merchant.
5.3 Merchant hereby authorizes Shabang! to initiate credit and debit entries
for payments and appropriate adjustments to the bank account at the
depository specified on the Merchant Application. This authorization is to
remain in force until Shabang! has received written notification from the
Merchant of its termination in such time and in such manner as to afford
Shabang! and the depository reasonable opportunity to act upon it.
6.0 TERMS
6.1 Term. The term of the SMSA shall begin on the date Shabang! lists the
Store in the Shabang! Store Listings and continue for the indicated duration.
The term shall automatically renew for successive durations at renewal rates
applicable at the time, unless notice of non-renewal is provided in
accordance with Section 6.2, below; provided, however, that to qualify for
each renewal Merchant must at the time of renewal be in substantial
compliance with the material terms and conditions of the SMSA. Shabang! shall
have the right, but not the obligation, to review any Store for compliance
with the SMSA as part of the renewal process, or at any time.
6.2 Non-Renewal. Either party, in its sole and absolute discretion, may give
notice of nonrenewal with or without cause and without stating any reason
therefor. Any notice of nonrenewal must be given at least thirty (30) days
prior to the end of the term then in effect and in the manner described in
Section 14 regarding notice.
7.0 TERMINATION
7.1 Termination. Either party may terminate the SMSA on thirty (30) days
notice if the other party has materially breached or is otherwise not in
compliance with any provision of the SMSA, and such breach or noncompliance
is not cured within such thirty (30) day period. Shabang! reserves the right
to immediately suspend any customer access to the Store until such breach or
noncompliance is cured.
7.2 Early Termination. Any refund or balance due will be adjusted to reflect
the actual duration of the service according to the original fee schedule.
<PAGE>
7.3 Termination for illegal or Other Activity. Notwithstanding the foregoing,
Shabang! may, but has no duty to, immediately terminate Merchant and remove it
from Shabang! servers if Shabang! in its sole discretion concludes that
Merchant is engaged in illegal activities or the sales of illegal or harmful
goods or services, or is engaged in activities or sales that may damage the
rights of Shabang! or others. Any termination under this Section 7.2 shall
take effect immediately and Merchant expressly agrees that it shall not have
any opportunity to cure.
7.4 Waiver. Merchant expressly waives any statutory or other legal protection
in conflict with the provisions of this Section 7.
7.5 Deletion of Information. Upon termination, Shabang! reserves the right
to delete from its servers any and all information contained in Merchant's
account, including but not limited to store information, order processing
information, and any product information.
7.6 The provisions of Section 4 (Proprietary Rights). Section 10 (Indemnity),
and Section 11 (Disclaimer of Warranties and Liabilities) of this Agreement
shall survive any termination of the Agreement.
8.0 MERCHANT PRIVACY
8.1 Merchant Information. Shabang! maintains information about Merchant and
the Store on Shabang! servers, including but not limited to Merchant's account
registration information, Merchant's customer order information and sales
information. Merchant agrees that Shabang! may use Merchant Information in
aggregate form for marketing or other promotional purposes.
8.1.1 Merchant agrees that Shabang! may disclose Merchant Information in the
good faith belief that such action is reasonably necessary: (a) to comply
with the law; (b) to comply with legal process; (c) to enforce the SMSA; (d)
to respond to claims that the Merchant or Store is engaged in activities that
violate the rights of third parties; or (e) to protect the rights or
interests of Shabang!, Shabang! Store or others; provided, however, that
nothing in this section shall impose a duty on Shabang! to make any such
disclosures.
8.2 Password. Merchant shall receive a password from Shabang! to provide
access to and use the Software and Online Store Services. Merchant is entirely
responsible for any and all activities which occur under Merchant's account
and password. Merchant agrees to keep its password confidential, to allow no
other unauthorized person or company to use its account, and to notify
Shabang! promptly if Merchant has any reason to believe that the security of
its account has been compromised.
8.3 Technical Access. Merchant acknowledges and agrees that technical
processing of Merchant Information is and may be required: (a) for the
Service to function; (b) to conform to the technical requirements of
connecting networks; (c) to conform to the technical requirements of the
Service; or (d) to conform to other, similar technical requirements. Merchant
also acknowledges and agrees that Shabang! may access Merchant's account and
its contents as necessary to identify or resolve technical problems or
respond to complaints about the Service.
9.0 MAINTENANCE AND SUPPORT
9.1 Merchant can obtain assistance with any technical difficulty that may
arise in connection with Merchant's utilization of the Software or Online
Store Services by requesting assistance at [email protected]. Shabang!
reserves the right to establish limitations on the extent of such support,
and the hours at which it is available.
9.2 Merchant is responsible for obtaining and maintaining all telephone,
computer hardware and other equipment needed for its access to and use of
the Software and Online Store Services and Merchant shall be responsible for
all charges related thereto.
10.0 INDEMNITY
Merchant agrees to indemnify and hold harmless Shabang!, and its parents,
subsidiaries, affiliates, officers, directors, shareholders, employees and
agents, from any claim or demand, including reasonable attorneys fees, made
by any third party due to or arising out of Merchant's conduct. Merchant's
use of the Service, the goods or services offered at Merchant's Store, any
alleged violation of the SMSA, or any alleged violation of any rights of
another, including but not limited to Merchant's use of any content,
trademarks, services marks, trade names, copyrighted or patented material, or
other intellectual property used in connection with Merchant's Store. Shabang!
reserves the right at its own expense, to assume the exclusive defense and
control of any matter otherwise subject to indemnification by Merchant, but
doing so shall not excuse Merchant's indemnity obligations.
11.0 DISCLAIMER OF WARRANTIES AND LIABILITIES
The service and software are provided on an "as is" and "as available" basis
without warranties of any kind, either express or implied, including but not
limited to warranties of merchantability, fitness for a particular purpose or
non-infringement. Neither this agreement or any documentation furnished under
it is intended to express or imply any warranty that the online store
services will be uninterrupted, timely or error-free or that the software
will provide uninterrupted, timely or error free service.
Merchant acknowledges and agrees that any material and/or data downloaded or
otherwise obtained through the use of the service is done at its own
discretion and risk and that merchant will be solely responsible for any
damages to its computer system or loss of data that results from the download
of such material and/or data.
Shabang!. And its parents, subsidiaries, affiliates, officers, directors,
shareholders, employees and agents, shall not be liable, under any
circumstances or legal theories whatsoever, for any loss of business, profits
or goodwill, loss of use or data, interruption of business, or for any
indirect, special, incidental or consequential damages of any character, even
if Shabang! is aware of the risk of such damages, that result in any way from
merchant's use or inability to use the online store services or the software,
or that result from errors, defects, omissions, delays in operation or
transmission, or any other failure of performance of the online store
services or the software. Shabang!'s liability to merchant shall not, for any
reason, exceed the aggregate payments actually made by merchant to Shabang!
over the course of the existing term.
Some jurisdictions do not allow the exclusion of certain warranties or
liabilities, so some of the above exclusions may not apply to you.
12.0 NO RESALE OR ASSIGNMENT OF SERVICE
Merchant agrees not to resell or assign or otherwise transfer its rights or
obligations under the SMSA without the express written authorization of
Shabang!
13.0 FORCE MAJEURE
Neither party shall be liable to the other for any delay or failure in
performance under the SMSA resulting directly or indirectly from acts of
nature or causes beyond its reasonable control.
14.0 NOTICES
Any notices or communications under the SMSA shall be by electronic mail or
in writing and shall be deemed delivered upon receipt to the party to whom
such communication is directed, at the addresses specified below. If to
Shanbang!, such replies shall be addressed to [email protected] or
1301 Arapaho Rd., Richardson, Texas 75081, USA. If to Merchant, such notices
shall be addressed to the electronic or mailing address specified when
Merchant opens an account with Shabang!, or such other address as either
party may give the other by notice as provided above.
15.0 ENTIRE AGREEMENT
The SMSA constitutes the entire agreement between the parties with respect to
the subject matter hereof and supersedes all previous proposals, both oral
and written, negotiations, representations, writings and all other
communications between the parties.
16.0 GENERAL
The SMSA and the relationship between Merchant and Shabang! shall be governed
by the laws of the state of Texas without regard to its conflict of law
provisions. Merchant and Shabang! agree to submit to the personal and
exclusive jurisdiction of the District Court of Dallas County, Texas or the
United States Federal District Court for Northern District of Texas, Dallas
Division. Shabang's failure to exercise or enforce any right or provision of
the SMSA shall not constitute a waiver of such right or provision. If any
provision of the SMSA is found by a court of competent jurisdiction to be
invalid, the parties nevertheless agree that the court should endeavor to
give effect to the parties intentions as reflected in the provision, and
agree that the other provisions of the SMSA remain in full force and effect.
Merchant agrees that regardless of any statute or law to the contrary, any
claim or cause of action arising out of or related to use of the Service or
the SMSA must be filed within one (1) year after such claim or cause of
action arose, or be forever barred.
The section titles in the SMSA are for convenience only and have no legal or
contractual effect.
- -------------------------------------------------------------------------------
My signature indicates that I have read and accepted all the terms and
conditions regarding privileges and obligations as outlined on this
agreement. I have completed and submitted a Merchant Application to Shabang!.
All signatures to this application must be affirmed personally. Merchant
must be of legal age in his/her state of residence.
Printed Name D. W. WHITWORTH Store Name Pitt's & Spitt's
---------------------- ------------------------------
Signature /s/ D. W. Whitworth Date 12-9-98
------------------------- ------------------------------------
<PAGE>
EXHIBIT 10.9
LEASE
BY AND BETWEEN
KEMAH DEVELOPMENT CORPORATION
(LANDLORD)
AND
ENERGY DRILLING INDUSTRIES, INC.
(TENANT)
<PAGE>
LEASE
This Lease is entered into between Kemah Development Corporation
("Landlord"), a Texas corporation, and Energy Drilling Industries, Inc.
("Tenant"), a Nevada corporation.
In consideration of the mutual covenants and agreements of this lease, and
other good and valuable consideration, Landlord demises and leases to Tenant,
and Tenant leases from Landlord, the premises situated at 601 Hanson Road,
Kemah, Texas 77565, (collectively referred to as "the premises" or "the leased
premises" in this lease).
ARTICLE 1. TERM
TERM OF LEASE
Section 1.01. The term of this lease is 1 year, beginning on May 1, 1998,
and ending on May 1, 1999, unless terminated sooner as provided in this lease.
OPTION TO EXTEND TERM
Section 1.02. Tenant may extend the term of this lease beyond the
expiration date provided in Section 1.01 by giving Landlord notice of its
intention to do so not later than one month before the then current lease term
expires, in the case of the initial option to extend, or the extended lease
term, in the case of successive options to extend. Notice of an intention to
exercise an option under this lease must, to be effective, be sent by mail or
fax to Landlord and must be postmarked no later than the latest date provided in
this section for Tenant's exercising the option.
HOLDOVER
Section 1.03. If Tenant holds over and continues in possession of the
premises after the lease term (or any extension) expires, other than as provided
in Section 1.02, Tenant will be considered to be occupying the premises on a
month-to-month tenancy, subject to all the terms of this lease.
ARTICLE 2. RENT
FIXED RENT
Section 2.01. Tenant will pay Landlord $750 per month on or before the
first day of each month as a fixed rent for the next month. Rent for any
fractional month at the beginning or end of the lease term will be prorated on a
per-day basis.
ARTICLE 3. USE OF PREMISES
Section 3.01. [Reserved]
COMPLIANCE WITH LAWS
Section 3.02. a. Tenant may not use, or permit using, the premises in any
manner that results in waste of premises or constitutes a nuisance or for any
illegal purpose. Tenant, at its own expense, will comply, and will cause its
officers, employees, agents, and invitees to comply, with all applicable laws,
ordinances, and governmental rules and regulations concerning the use of the
premises, including Hazardous Materials Laws.
b. Tenant, at its sole cost, must comply with all Hazardous Materials Laws
in connection with Tenant's use of the premises.
c. "Hazardous Materials" means any substance, material, or waste that is
or becomes regulated by any local governmental agency, the State of Texas, or
the federal government.
<PAGE>
ARTICLE 4. REPAIRS AND MAINTENANCE
REPAIRS AND MAINTENANCE BY TENANT
Section 4.01. Tenant will, throughout the lease term and any extensions of
it, at its own expense and risk, maintain the premises and all improvements on
them in good order and condition, including but not limited to making all
repairs and replacements necessary to keep the premises and improvements in that
condition. All maintenance, repairs, and replacements required by this section
must be performed promptly when required.
ARTICLE 5. UTILITIES AND GARBAGE REMOVAL
UTILITY CHARGES
Section 5.01. Tenant will pay all utility charges for water, electricity,
heat, gas, and telephone service used in and about the premises during the lease
term. Tenant will pay the charges directly to the utility company or
municipality furnishing the service before the charges are delinquent.
GARBAGE REMOVAL
Section 5.02. Tenant will pay for all garbage removal from the premises
during the lease term.
ARTICLE 6. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS
CONSENT OF LANDLORD
Section 6.01. Tenant may not make any alterations, additions, or
improvements to the premises without Landlord's prior written consent. Landlord
may not unreasonably withhold consent for nonstructural alterations, additions,
or improvements.
PROPERTY OF LANDLORD
Section 6.02. All alterations, additions, or improvements made by Tenant
will become Landlord's property when the lease terminates. However, Landlord
may, when the lease terminates, remove any alterations, additions, and
improvements made by Tenant and any other property it placed in the premises,
and charge Tenant the cost of removal plus interest.
ALTERATIONS REQUIRED BY ACCESSIBILITY LAWS
Section 6.03. If any alterations, additions, or improvements to the
premises are mandated by legal requirements related to accessibility by persons
with disabilities ("accessibility alterations"), Tenant is responsible for
making them. This allocation of responsibility for compliance with such legal
requirements is a material inducement for the parties to enter this lease.
ARTICLE 7. TRADE FIXTURES AND SIGNS
TRADE FIXTURES
Section 7.01. Tenant may, at all times, erect or install shelves, bins,
machinery, equipment, or other trade fixtures, in, on, or about the premises, if
Tenant complies with all applicable governmental laws, ordinances, and
regulations regarding the fixtures. Tenant may remove all trade fixtures when
this lease terminates, if Tenant is not in default under the lease and the
fixtures can be removed without structural damage to the building. Tenant must
repair any damage to the premises caused by removing trade fixtures, and all the
repairs must be completed before the lease terminates. Any trade fixtures not
removed by Tenant when this lease terminates are considered abandoned by Tenant
and will automatically become Landlord's property. If any trade fixture
installed by Tenant is abandoned when the lease terminates, Tenant must pay
Landlord any reasonable expense actually incurred by Landlord to remove the
fixture from the premises, less the fair market value of the fixture once
removed, if the fixture is removed within 30 days after Tenant has surrendered
possession of the premises OR before any subsequent tenant enters the premises
OR Landlord uses the trade fixtures.
<PAGE>
ARTICLE 8. MECHANIC'S LIEN
Tenant will not permit any mechanic's lien to be placed on the premises or
improvements on the premises. Tenant will promptly pay any mechanic's lien that
is filed on the premises or on improvements located on the premises. If default
in payment of the lien continues for 20 days after Landlord's written notice to
Tenant, Landlord may, at its option, pay the lien or any portion of it without
inquiring into its validity. Any amounts Landlord pays to remove a mechanic's
lien caused by Tenant to be filed against the premises or improvements on them,
including expenses and interest, are due from Tenant to Landlord and must be
repaid to Landlord immediately on rendition of notice, together with interest at
fifteen percent annually until repaid.
ARTICLE 9. INSURANCE AND INDEMNITY
PROPERTY INSURANCE
Section 9.01. Tenant must, at its own expense during the lease term, keep
all buildings and improvements on the premises reasonably insured against loss
or damage by fire or theft, with extended coverage if obtainable at a reasonably
price, to include direct loss by windstorm, hail, explosion, riot or riot
attending a strike, civil commotion, aircraft, vehicles, and smoke, in the total
amounts of not less than the full fair insurable value of the buildings and
improvements. The insurance is to be carried by one or more insurance companies
authorized or admitted to do business in Texas. The insurance policy or policies
must name both Landlord and Tenant as insureds. The policies must provide that
any proceeds for loss or damage to buildings or to improvements are payable to
solely to Landlord, who will use the sum for repair and restoration purposes.
LIABILITY INSURANCE
Section 9.02. Tenant, at its own expense, must provide and maintain in
force during the lease term, reasonable liability insurance. This insurance is
to be carried by one or more insurance companies authorized or admitted to
transact business in Texas. The policy must cover Landlord as well as Tenant,
for any liability for property damage or personal injury arising from Tenant's
occupying or Landlord's owning the premises.
REMEDY FOR FAILURE TO PROVIDE INSURANCE
Section 9.03. If Tenant allows any insurance required under this article
to lapse, Landlord may, at its option, take out and pay the premiums on the
necessary insurance to comply with Tenant's obligations under this article.
Landlord is entitled to reimbursement from Tenant for all amounts spent to
procure and maintain the insurance, with interest at the rate of fifteen percent
annually from the date Tenant receives Landlord's notice of payment until
reimbursement.
Section 9.04. [Reserved]
Section 9.05. [Reserved]
Hold-Harmless Clause
Section 9.06. Tenant will indemnify and hold Landlord harmless against any
claims, demands, damages, costs, and expenses, including reasonable attorney's
fees for defending claims and demands, arising from the conduct or management of
Tenant's business on the premises or its use of them; from any breach by Tenant
of any conditions of this lease; or from any act of negligence of Tenant, its
agents, contractors, employees, subtenants, concessionaires, or licensees in or
about the premises. If any action or proceeding is brought against Landlord by
reason of any such claim, Tenant, on notice from Landlord, will defend the
action or proceeding by counsel acceptable to Landlord.
<PAGE>
ARTICLE 10. DAMAGE OR DESTRUCTION OF PREMISES
NOTICE TO LANDLORD
Section 10.01. If the premises, or any structures or improvements on them,
are damaged or destroyed by fire, tornado, or other casualty, Tenant must
immediately give Landlord written notice of the damage or destruction, including
a general description of the damage and, as far as known to Tenant, the cause of
the damage.
TOTAL DESTRUCTION
Section 10.02. If the building on the premises is totally destroyed by
fire, tornado, or other casualty by other than the negligence, gross negligence,
or intentional tort of Tenant or any person in or about the premises with
Tenant's express or implied consent, or if it is so damaged that rebuilding or
repairs cannot reasonably, and the damage exceeds the insurance recovery, this
lease will terminate, and rent will be abated for the unexpired portion of this
lease, effective as of the date of written notification as provided in Section
10.01.
PARTIAL DESTRUCTION
Section 10.03. If the building or other improvements on the premises are
damaged by fire, tornado, or other casualty by other than the negligence, gross
negligence, or intentional tort of Tenant or any person in or about the premises
with Tenant's express or implied consent, but not to such an extent that
rebuilding or repairs cannot reasonably be completed and the damage exceeds the
insurance recovery, this lease will not terminate except as follows:
a. If the premises are partially destroyed, Landlord must, at its sole
cost and risk, proceed immediately to rebuild or repair the damaged buildings
and improvements to substantially the condition they were in before the damage.
If the damage renders the premises untenantable in whole or in part, the rent
payable during the period in which they are untenantable will be adjusted
equitably. If Landlord fails to complete the rebuilding or repairs within six
months from the date of Tenant's written notification to Landlord of the damage,
Tenant may terminate this lease by written notification to Landlord. On the
notification, all rights and obligations under this lease will cease.
ARTICLE 11. CONDEMNATION
TOTAL CONDEMNATION
Section 11.01. If, during the lease term or any extension or renewal of
it, all of the premises are taken for any public or quasi-public use under any
governmental law, ordinance, or regulation, or by right of eminent domain, or
are sold to the condemning authority under threat of condemnation, this lease
will terminate, and the rent will be abated during the unexpired portion of this
lease, effective as of the date the condemning authority takes the premises.
PARTIAL CONDEMNATION
Section 11.02. If less than all, but more than fifty percent, of the
premises is taken for any public or quasi-public use under any governmental law,
ordinance, or regulation, or by right of eminent domain, or is sold to the
condemning authority under threat of condemnation, Tenant may terminate the
lease by giving Landlord written notice within 30 days after the entity
exercising the power of condemnation takes possession of the condemned portion.
In addition, if fifty percent of the parking area, or all of the signage, of the
premises is taken for any public or quasi-public use under any governmental law,
ordinance, or regulation or by right of eminent domain, or is sold to the
condemning authority under threat of condemnation, Tenant may terminate the
lease by giving Landlord written notice within 30 days after the entity
exercising the power of condemnation takes possession of the condemned portion.
If the premises are partially condemned and Tenant fails to exercise the
option to terminate the lease under this section, or if less than fifty percent
of the premises is condemned, this lease will not terminate, but Tenant may, at
its sole expense, restore and reconstruct the building and other improvements
situated on the premises to make them reasonably tenantable and suitable for the
uses for which the premises are leased. The fixed rent payable under Section
2.01 of this lease will be adjusted equitably during the unexpired portion of
this lease.
<PAGE>
CONDEMNATION AWARD
Section 11.03. Landlord is entitled to receive and retain the entire award
in any condemnation proceedings, except for any portion attributable to trade
fixtures, which Tenant is entitled to receive and retain. The termination of
this lease will not affect the right to this award.
ARTICLE 12. DEFAULT
TENANT'S DEFAULT
Section 12.01. If Tenant allows the rent to be in arrears more than ten
days after payment is due, or remains in default under any other condition of
this lease for ten days, Landlord may, at its option, without notice to Tenant,
terminate this lease, or, in the alternative, Landlord may reenter and take
possession of the premises and remove all persons and property without being
considered guilty of any manner of trespass and may (but is not required to)
relet the premises (or any part of them) for all or any part of the remainder of
the lease term, to a party satisfactory to Landlord and at the monthly rental as
Landlord can secure with reasonable diligence. If Landlord cannot relet after
reasonable efforts to do so or if the monthly rental is less than the rental
Tenant was obligated to pay under this lease (or any renewal of it) plus the
expense of reletting, then Tenant must pay Landlord the amount of the
deficiency.
Section 12.02. [Reserved]
CUMULATIVE REMEDIES
Section 12.03. All Landlord's and Tenant's rights and remedies under this
Article are cumulative, and none will exclude any other right or remedy provided
by law or any other provision of this lease. All the consistent rights and
remedies may be exercised and enforced concurrently and whenever occasion for
their exercise arises.
WAIVER OF BREACH
Section 12.04. All Landlord's or Tenant's waiving a breach of this lease
by the other party does not constitute a continuing waiver or a waiver of any
subsequent breach.
ARTICLE 13. INSPECTION BY LANDLORD
Tenant will permit Landlord and its agents, representatives, and employees
to enter the premises at all reasonable times for the purpose of inspection or
any other purpose necessary to protect Landlord's interest in the premises or to
perform Landlord's duties under this lease.
ARTICLE 14. MISCELLANEOUS
NOTICES AND ADDRESSES
Section 14.01. [RESERVED]
PARTIES BOUND
Section 14.02. This agreement binds, and inures to the benefit of, the
parties to the lease and their respective heirs, executors, administrators,
legal representatives, successors, and assigns when this agreement permits.
TEXAS LAW TO APPLY
Section 14.03. This agreement is to be construed under Texas law, and all
obligations of the parties created by this lease are performable in Harris
County, Texas.
<PAGE>
LEGAL CONSTRUCTION
Section 14.04. If one or more of the provisions contained in this
agreement are for any reason held by a court of competent jurisdiction to be
invalid, illegal, or unenforceable in any respect, the invalidity, illegality,
or unenforceability will not affect any other provision of the agreement, which
will be construed as if it had not included the invalid, illegal, or
unenforceable provision.
PRIOR AGREEMENTS SUPERSEDED
Section 14.05. This agreement constitutes the parties' sole agreement and
supersedes any prior understandings or written or oral agreements between the
parties with respect to the subject matter.
AMENDMENT
Section 14.06. No amendment, modification, or alteration of this agreement
is binding unless in writing, dated subsequent to the date of this agreement,
and duly executed by the parties.
RIGHTS AND REMEDIES CUMULATIVE
Section 14.07. The rights and remedies provided by this lease are
cumulative, and either party's using any right or remedy will not preclude or
waive its right to use any other remedy. These rights and remedies are in
addition to any other rights the parties may have by law, statute, ordinance, or
otherwise.
ATTORNEY'S FEES AND COSTS
Section 14.08. If, as a result of either party's breaching this agreement,
the other party employs an attorney to enforce its rights under this lease, then
the breaching or defaulting party will pay the other party the reasonable
attorney's fees and costs incurred to enforce the lease.
FORCE MAJEURE
Section 14.09. Neither Landlord nor Tenant is required to perform any term
or covenant in this lease so long as performance is delayed or prevented by
FORCE MAJEURE, which includes acts of God, strikes, lockouts, material or labor
restrictions by any governmental authority, civil riot, floods, and any other
cause not reasonably within Landlord's or Tenant's control and that Landlord or
Tenant cannot, by exercising due diligence and paying money, prevent or
overcome, in whole or part.
TIME OF ESSENCE
Section 14.10. Time is of the essence of this agreement.
The undersigned Landlord and Tenant execute this agreement on this 1st day of
April 1998.
LANDLORD: TENANT:
KEMAH DEVELOPMENT CORPORATION ENERGY DRILLING INDUSTRIES, INC.
- ------------------------------------- -----------------------------------
By: Rebekah Laird-Ruthstrom, Sec./Treas. By: D. Wayne Whitworth, Treasurer
<PAGE>
VOL 0887 PAGE 802 EXHIBIT 10.10
MINERAL DEED
THE STATE OF TEXAS
KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF WASHINGTON
THAT THE UNDERSIGNED, BRENHAM OIL & GAS, INC., acting by and through the
undersigned duly authorized officer, hereinafter referred to as "Grantor",
whether one or more, for and in consideration of the sum of TEN DOLLARS
($10.00) cash, and other good and valuable consideration in hand paid by the
Grantee, herein named, the receipt and sufficiency of which is hereby fully
acknowledged and confessed, has GRANTED, SOLD and CONVEYED, and by these
presents does hereby GRANT, SELL and CONVEY unto DANIEL DROR II 1976 TRUST,
herein referred to as the "Grantee", whether one or more, all of Grantors
interest in and to all oil, gas and other minerals, including royalties, with
the specific exception that the Grantor does hereby reserve and maintain the
rights to production from the first well only (known as the "EBERLE UNIT 1"),
in and under the following described real property, to wit:
TRACT I:
All that certain 15.032 acres of land situated in Washington County,
Texas out of the E. Gordon Survey, A-49 and being the same tract of land
called 15.001 acres in a deed from Guy W. Adriance, et ux to Caroline A.
Finch, et vir as recorded in Volume 257, Page 346, Deed Records of
Washington County, Texas, more particularly described in Exhibit "A"
attached hereto and made a part hereof for all purposes pertinent.
TRACT II:
All that certain 9.495 acre tract or parcel of land situated in
Washington County, Texas out of the E. Gordon Survey, A-49 and being
the same tract of land called 8-4/5 acres of land in a deed dated July
30, 1970 from E.L. Baker, et ux to Hubert Finch, et ux as recorded
in Volume 300, Page 555, Deed Records of Washington County, Texas,
more particularly described in Exhibit "B" attached hereto and made
a part hereof for all purposes pertinent.
This conveyance, however, is made and accepted subject to any and all
restrictions, encumbrances, easements, covenants and conditions, if any,
relating to the hereinabove described property as the same are filed for
record in the County Clerk's Office of Washington County, Texas.
TO HAVE AND TO HOLD the above described premises, together with all and
singular the rights and appurtenances thereto in anywise belonging unto the
said Grantee, Grantee's heirs, executors, administrators, successors and/or
assigns, to WARRANT AND FOREVER DEFEND all and singular the said premises
unto the said Grantee, Grantee's heirs, executors, administrators, successors
and/or assigns, against every person whomsoever claiming or to claim the same
or any part thereof, except as to the reservations from and exceptions to
conveyance and warranty.
Current ad valorem taxes on said property having been prorated, the
payment thereof is assumed by Grantee.
EXECUTED on this the 2nd day of December, 1997.
BRENHAM OIL & GAS, INC.
/s/ Daniel Dror II
-----------------------------------
By: Daniel Dror II, President
STATE OF TEXAS
COUNTY OF GALVESTON
The foregoing instrument was acknowledged before me on the 2nd day of
December, 1997 by Daniel Dror II, President for Brenham Oil & Gas, Inc.
/s/ Rebekah S. Laird
-----------------------------------
NOTARY PUBLIC, STATE OF TEXAS
After filing, Mail to: Brenham Oil & Gas, Inc.
601 Hanson Rd. [SEAL]
Kemah, TX 77565-2701
<PAGE>
VOL 0880 PAGE 562
MINERAL DEED
THE STATE OF TEXAS
KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF WASHINGTON
THAT THE UNDERSIGNED, DANIEL DROR II 1976 TRUST, acting by and through the
undersigned duly authorized officer, hereinafter referred to as "Grantor",
whether one or more, for and in consideration of the sum of TEN DOLLARS
($10.00) cash, and other good and valuable consideration in hand paid by the
Grantee, herein named, the receipt and sufficiency of which is hereby fully
acknowledged and confessed, has GRANTED, SOLD and CONVEYED, and by these
presents does hereby GRANT, SELL and CONVEY unto BRENHAM OIL AND GAS, INC.,
herein referred to as the "Grantee", whether one or more, all of Grantors
interest in and to all oil, gas and other minerals, including royalties,
in and under the following described real property, to wit:
TRACT I:
All that certain 15.032 acres of land situated in Washington County,
Texas out of the E. Gordon Survey, A-49 and being the same tract of land
called 15.001 acres in a deed from Guy W. Adriance, et ux to Caroline A.
Finch, et vir as recorded in Volume 257, Page 346, Deed Records of
Washington County, Texas, more particularly described in Exhibit "A"
attached hereto and made a part hereof for all purposes pertinent.
TRACT II:
All that certain 9.495 acre tract or parcel of land situated in
Washington County, Texas out of the E. Gordon Survey, A-49 and being
the same tract of land called 8-4/5 acres of land in a deed dated July
30, 1970 from E.L. Baker, et ux to Hubert Finch, et ux as recorded
in Volume 300, Page 555, Deed Records of Washington County, Texas,
more particularly described in Exhibit "B" attached hereto and made
a part hereof for all purposes pertinent.
This conveyance, however, is made and accepted subject to any and all
restrictions, encumbrances, easements, covenants and conditions, if any,
relating to the hereinabove described property as the same are filed for
record in the County Clerk's Office of Washington County, Texas.
TO HAVE AND TO HOLD the above described premises, together with all and
singular the rights and appurtenances thereto in anywise belonging unto the
said Grantee, Grantee's heirs, executors, administrators, successors and/or
assigns, to WARRANT AND FOREVER DEFEND all and singular the said premises
unto the said Grantee, Grantee's heirs, executors, administrators, successors
and/or assigns, against every person whomsoever claiming or to claim the same
or any part thereof, except as to the reservations from and exceptions to
conveyance and warranty.
Current ad valorem taxes on said property having been prorated, the
payment thereof is assumed by Grantee.
EXECUTED on this the 1st day of December, 1997.
DANIEL DROR II 1976 TRUST
/s/ Daniel Dror
-----------------------------------
By: Daniel Dror, Trustee
STATE OF TEXAS
COUNTY OF GALVESTON
The foregoing instrument was acknowledged before me on the 1st day of
December, 1997, by Daniel Dror, Trustee for Daniel Dror II 1976 Trust.
/s/ Rebekah S. Laird
-----------------------------------
NOTARY PUBLIC, STATE OF TEXAS
After filing,
Mail to: Brenham Oil & Gas, Inc.
601 Hanson Rd. [SEAL]
Kemah, TX 77565-2701
<PAGE>
VOL 0880 PAGE 563
Muzzy - Pledger & Associates, Inc. - Land Surveying
J.E. Pledger & Associates - Consulting Engineering
H. B. FINCH
15.032 ACRE TRACT
ALL THAT TRACT OR PARCEL OF LAND situate in Washington County, Texas out of
the E. Gordon Survey A-49 and being the same tract of land called 15.001
acres in a deed from Guy W. Adriance, et ux to Caroline A. Finch, et vir as
recorded in Volume 257, Page 346 of the Washington County Deed Records, more
particularly described as follows:
BEGINNING at an old iron pin and fence corner lying in the Southwest line of
County Road #46 at the Northmost corner of the original tract called
15.001 acres;
THENCE S 44DEG 04' 13" E, 554.78 ft. with the Southwest line of County Road
#46 to a gate post;
THENCE S 44DEG 20' 54" E, 260.45 ft. with said County Road line to a fence
line angle;
THENCE S 9DEG 03' 20" E, 15.06 ft. to a fence line angle in the Northwest
line of County Road #30;
THENCE S 43DEG 21' W, 510.29 ft. with the Northwest line of County Road #30,
as fenced, to a fence corner intersection;
THENCE S 43DEG 08' 29" W, 270.81 ft. with said County Road line to a set
iron pin and tree fence corner;
THENCE N 43DEG 44' 51" W, 841.02 ft. to an old iron pin and fence corner
marking the Westmost corner of the original tract;
THENCE N 44DEG 16' 09" E, 783.23 ft. with the Northwest line of the original
tract to the PLACE OF BEGINNING and containing 15.032 acres of land.
July 30, 1980
W. O. #6946
John E. Pledger, III [SEAL]
Registered Public Surveyor #2183 /s/ John E. Pledger, III
EXHIBIT A
<PAGE>
VOL 0880 PAGE 564
Muzzy - Pledger & Associates, Inc. - Land Surveying
J.E. Pledger & Associates - Consulting Engineering
H. B. FINCH
9.495 ACRE TRACT
ALL THAT TRACT OR PARCEL OF LAND situate in Washington County, Texas out of
the E. Gordon Survey A-49 and being the same tract of land called 8-4/5 acres
of land in a deed dated July 30, 1970 from E. L. Baker, et ux to Hubert B.
Finch, et ux as recorded in Volume 300, Page 555 of the Washington County
Deed Records, more particularly described as follows:
BEGINNING at an old iron pin and fence corner lying in the Southeast line of
the W. J. Schmidt Tract at the Northmost corner of the original tract
called 8-4/5 acres;
THENCE S 37DEG 46' 43" E, 316.69 ft. with the Northeast line of the original
tract, same being the Southwest line of a private road, to a set iron
pin and fence corner lying in the Northwest line of County Road #30;
THENCE S 48DEG 19' 09" W, 396.57 ft. with the Northwest line of County Road
#30 to a fence line angle;
THENCE S 44DEG 45' 52" W, 720.27 ft. with said line to a fence line angle;
THENCE S 88DEG 00' 15" W, 16.08 ft. to a fence line angle lying in the
Northeast line of County Road #46;
THENCE 46DEG 09' 49" W, 226.67 ft. with said County Road line to a fence
line angle and gate post;
THENCE N 42DEG 47' 40" W, 32.52 ft. to a gate post and fence line angle;
THENCE N 43DEG 36' 48" W, 148.13 ft. with the Northeast line of County Road
#46 to a set iron pin and fence corner at the Southwest corner of the
W. J. Schmidt Tract;
July 30, 1980
W. O. #6946
Page 1 of 2
EXHIBIT B
<PAGE>
VOL 0880 PAGE 565
H. B. FINCH
9.495 ACRE TRACT (Cont.)
THENCE N 51DEG 03' 45" E, 1174.07 ft. with the Southeast line of the W. J.
Schmidt Tract, as fenced, to the PLACE OF BEGINNING and containing 9.495
acres of land.
July 30, 1980
W. O. #6946
John E. Pledger, III [SEAL]
Registered Public Surveyor #2183 /s/ John E. Pledger, III
Page 2 of 2
[SEAL]
<PAGE>
EXHIBIT 10.11
OIL, GAS & MINERAL LEASE
THIS LEASE AGREEMENT is made effective the 6th day of April, 1995
between DANIEL DROR II 1976 TRUST, DANIEL DROR, TRUSTEE as Lessor (whether
one or more), whose address is 601 Hanson Road, Kemah, Texas 77565 and UNION
PACIFIC RESOURCES COMPANY, as Lessee, whose address is P.O. Box 7, Fort
Worth, Texas 76101. All printed portions of this lease were prepared by
Lessee, but all other provisions (including the completion of blank spaces)
were prepared jointly by Lessor and Lessee.
1. DESCRIPTION. Lessor, in consideration of Ten dollars and other good
and valuable consideration Dollars ($10.00), in hand paid, of the royalties
herein provided and the covenants herein contained, hereby grants, leases and
lets exclusively to Lessee, for the purpose of exploring for, developing,
producing and marketing oil and gas, along with all hydrocarbon and
nonhydrocarbon substances produced in association therewith including helium,
carbon dioxide and other commercial gases as well as hydrocarbon gases
(referred to herein as "covered minerals"), the following described land (the
"leased premises") in Washington County, Texas, to-wit:
24.527 acres of land, more or less, out of the E. GORDON SURVEY, A-49,
Washington County, Texas, and being the same land described as Tract One of
15.032 acres, more or less and Tract Two of 9.495 acres, more or less, in a
Deed dated March 24, 1995, from D.N.T.X., Inc. formerly: Denitex
International Corporation to Daniel Dror, II 1976 Trust, recorded in Volume
776, page 540 of the Official Records of Washington County, Texas.
This lease also covers accretions and any small strips or parcels of
land now or hereafter owned or claimed by Lessor which are contiguous or
adjacent to the leased premises whether or not such parcels are known to
exist by Lessor or Lessee, and for the aforementioned consideration, Lessor
agrees to execute at Lessee's request any additional or supplemental
instruments for a more complete or accurate description of the land so
covered. For the purpose of determining the amount of any rentals and shut-in
royalties hereunder, said land shall be deemed to be comprised of 24.527
acres, whether it actually comprises more or less.
2. TERM OF LEASE. This lease shall be in force for a primary term of
three (3) years from the effective date hereof, and for as long thereafter as
a covered mineral is produced in paying quantities from the leased premises
or this lease is otherwise maintained in effect pursuant to the provisions
hereof.
3. ROYALTY. Royalties on covered minerals produced and saved hereunder
shall be paid by Lessee to Lessor as follows: (a) For oil and other liquid
hydrocarbons separated at Lessee's field separator facilities, the royalty
shall be one-sixth (1/6) of such production, to be delivered at Lessee's
option to Lessor at the wellhead or to Lessor's credit at the oil purchaser's
transportation facilities, provided that Lessee shall have the continuing
right to purchase such production at the wellhead posted price then
prevailing in the same field (or if there is no such price then prevailing
in the same field, then in the nearest field in which there is such a
prevailing price) for production of similar grade and gravity less a
proportionate part of ad valorem taxes and production, severance, or other
excise taxes, (b) for gas (including casinghead gas) and all other covered
minerals, the royalty shall be one-sixth (1/6) of the net proceeds realized
by Lessee from the sale thereof, less a proportionate part of ad valorem
taxes and production, severance, or other excise taxes, provided that Lessee
shall have the continuing right to purchase such production at the prevailing
wellhead market price paid for production of similar quality in the same
field (or if there is no such price then prevailing in the same field, then
in the nearest field in which there is such a prevailing price) less a
proportionate part of ad valorem taxes and production, severance, or other
excise taxes and (c) if during or after the primary term one or more wells on
the leased premises or lands pooled therewith are capable of producing oil or
gas or other substances covered hereby in paying quantities, but such well or
wells are either shut-in or production therefrom is not being sold by Lessee
for a period of 90 consecutive days, then Lessee may pay shut-in royalty of
one dollar per acre of land then covered by this lease, such payment to be
made to Lessor on or before the end of said 90-day period and thereafter on or
before each anniversary of the end of said 90-day period while the well or
wells are shut-in and it shall be considered that such well is producing in
paying quantities for all purposes hereof during any period for which such
shut-in royalty is tendered; provided that if this lease is otherwise being
maintained by the payment of rentals or by operations, or if a well or wells
on the leased premises is producing in paying quantities, no shut-in royalty
shall be due until the end of the 90-day period next following the end of the
rental period or the cessation of such operations or production, as the case
may be. Lessee shall have free use of oil, gas, water, and other substances
produced from said land, except water from Lessor's wells or ponds, for all
operations hereunder, and Lessor's royalty shall be computed after deducting
any so used.
4. OPERATIONS. If, after expiration of the primary term, Lessee drills
a dry hole on the leased premises or if all production of covered minerals
should permanently cease from any cause either voluntary or involuntary (and
if this lease is not otherwise being maintained), this lease shall remain in
effect if Lessee commences drilling, reworking or other operations on the
leased premises within 90 days thereafter. If, at or after expiration of the
primary term, this lease is not otherwise being maintained but Lessee is then
engaged in drilling, reworking or other operations calculated to obtain or
restore production from the leased premises, this lease shall remain in
effect so long as such operations are conducted with no cessation of more
than 90 consecutive days and, if such operations result in the production of
a covered mineral, as long thereafter as there is production from the leased
premises. After production has been established on the leased premises,
Lessee shall drill such additional wells as a reasonably prudent operator
would drill under the same or similar circumstances to (a) develop the leased
premises as to formations then capable of producing in paying quantities on
the leased premises or (b) protect the leased premises from uncompensated
drainage by a well producing a covered mineral in paying quantities located
within 330 feet of and draining the leased premises. There shall be no
covenant to drill exploratory wells or any additional wells except as
expressly provided herein.
5. POOLING. Lessee shall have the continuing and recurring right, but
not the obligation, to pool all or any part of the leased premises or
interest therein with any other lands, leases or interests, as to any or all
depths or zones, and as to any or all covered minerals, either before or
after the commencement of production, whenever Lessee deems it necessary or
proper to do so in order to prudently explore, develop or operate the leased
premises, whether or not similar pooling authority exists with respect to
such other lands, leases or interests. A unit formed by such pooling for an
oil well which is not a horizontal completion shall not exceed 80 acres plus
a maximum acreage tolerance of 10%, and for an oil well which is a horizontal
completion or a gas well shall not exceed 640 acres plus a maximum acreage
tolerance of 10%; provided that larger units may be formed for an oil well or
a gas well, whether or not horizontally completed, in order to conform to any
well spacing or density pattern permitted by any governmental authority
having jurisdiction over such matters. The terms "oil well" and "gas well"
shall have the meanings prescribed by applicable law or by regulations of the
governmental authority which has jurisdiction over such matters. The term
"horizontal completion" shall mean an oil well or a gas well in which the
horizontal component of the gross completion interval exceeds 100 feet in
length. Lessee may pool or combine land covered by this lease or any
portions thereof, as above provided as to oil in any one or more strata and
as to gas in any one or more strata. Units formed by pooling as to any
stratum or strata need not conform in size or area with units formed as to
any other stratum or strata, and oil units need not conform as to area with
gas units. To exercise its pooling rights hereunder, Lessee shall file of
record a written declaration describing the unit, and the effective date of
pooling shall be the date of filing unless provided otherwise in such
declaration. Lessee wholly at its option may exercise its authority to pool
either before or after commencing operations for or completing an oil or gas
well on lands lying within a unit and any unit may include, but is not
required to include, lands or leases upon which a well producing or capable of
producing oil or gas in paying quantities has theretofore been completed, or
upon which operations have theretofore been commenced. Production, drilling
or reworking operations anywhere on a unit which includes all or any part of
the leased premises, regardless of whether such production was secured or
such drilling or reworking operations were commenced before or after the
execution of this lease or the instrument designating the pooled unit, shall
be treated for all purposes (except the payment of royalties on production
from the pooled unit) as if they were production, drilling or reworking
operations on the leased premises and references herein to production from or
operations on the leased premises shall be deemed to include production from
or operations on any portion of such pooled unit; provided that if after
creation of a pooled unit a well is drilled on land within the unit area
(other than the leased premises) which well is not classified as the type of
well for which the unit was created (oil, gas or other minerals as the case
may be), such well shall be considered a dry hole for purposes of applying
the additional drilling and reworking provisions hereof. If a gas well on a
gas unit, which includes all or a portion of the leased premises, is
reclassified as an oil well, with respect to all lands which are included
within the unit (other than the lands on which the well is located), the date
of such reclassification shall be considered as the date of cessation of
production for purposes of applying the provisions of this lease covering
additional drilling and reworking. The production on which Lessor's royalty
is calculated shall be that proportion of the total unit production which the
net acreage covered by this lease and included in the unit bears to the
total gross acreage in the unit, but only to the extent that such proportion
of unit production is sold by Lessee. Pooling in one or more instances shall
not exhaust Lessee's pooling rights hereunder, and Lessee shall, without the
joinder of Lessor, have the recurring right but not the obligation to revise
any unit formed hereunder by expansion or contraction or both, either before
or after commencement of production, in order to conform to the well spacing
or density pattern permitted by the governmental authority having
jurisdiction, or to conform to any productive acreage determination made by
such governmental authority, or court order, or when to do so would, in the
judgment of Lessee, promote the conservation of covered minerals in and under
and that
<PAGE>
may be produced from the leased premises. In making such a revision, Lessee
shall file of record a written declaration describing the revised unit and
the effective date of revision shall be the date of filing unless provided
otherwise in such declaration. To the extent any portion of the leased
premises is included in or excluded from the unit by virtue of such revision,
the proportion of unit production on which royalties are payable hereunder
shall thereafter be adjusted accordingly, and such adjustment shall be made
effective as of the effective date of the revision. Lessee may at any time
dissolve any unit formed hereunder by filing a written declaration describing
the unit, and the effective date of dissolution shall be the date of filing
unless provided otherwise in such declaration. If this lease now or
hereafter covers separate tracts, no pooling or unitization or royalty
interests as between any such separate tracts is intended or shall be implied
or result merely from the inclusion of such separate tracts within this lease
but Lessee shall nevertheless have the right to pool or unitize as provided in
this paragraph with consequent allocation of production as herein provided.
As used herein the words "separate tract" mean any tract with royalty
ownership differing, now or hereafter, either as to parties or amounts, from
that as to any other part of the leased premises. Pooling hereunder shall not
constitute a cross-conveyance of interests.
6. ANCILLARY RIGHTS. In exploring for, developing, producing and
marketing oil, gas and other substances covered hereby on the leased
premises, in primary or enhanced recovery, Lessor hereby grants and conveys
to Lessee the right of ingress and egress along with the right to conduct such
operations on the leased premises as may be reasonably necessary for such
purposes, including but not limited to geophysical operations, the drilling of
wells, and the construction and use of roads, canals, pipelines, tanks, water
wells, disposal wells, injection wells, pits, electric and telephone lines,
power stations, and other facilities deemed necessary by Lessee to discover,
produce, store, tread and transport production. In exploring, developing,
producing or marketing from the leased premises, the ancillary rights granted
herein shall apply (a) to the entire leased premises described in Paragraph 1
above, notwithstanding any partial release or other partial termination of
this lease; and (b) to any other lands in which Lessor now or hereafter has
authority to grant such rights in the vicinity of the leased premises. No
surface location for a well shall be located less than 200 feet from any
house or barn now on the leased premises or other lands used by Lessee
hereunder without Lessor's consent, and Lessee shall pay for actual damage
caused by its operations to buildings and other improvements now on the
leased premises, or such other lands, and to commercial timber and growing
crops thereon. Lessee shall have the right at any time to remove its
fixtures, equipment and materials, including well casing, from the leased
premises or such other lands during the term of this lease or within 180 days
following the expiration thereof.
7. OWNERSHIP CHANGES. The interest of either Lessor or Lessee
hereunder may be assigned, devised or otherwise transferred in whole or in
part, by area or by depth or zone, and the rights and obligations of the
parties hereunder shall extend to their respective heirs, devisees, executors,
administrators, successors and assigns. No change in Lessor's ownership
shall have the effect of reducing the rights or enlarging the obligations of
Lessee hereunder, and no change in ownership shall be binding on Lessee until
60 days after Lessee has been furnished the original or certified or duly
authenticated copies of the documents establishing such change of ownership
to the satisfaction of Lessee. In the event of the death of any person
entitled to shut-in royalties hereunder, Lessee may pay or tender such
shut-in royalties to the credit of decedent or decedent's estate. If at any
time two or more persons are entitled to shut-in royalties hereunder, Lessee
may pay or tender such shut-in royalties to such persons, either jointly or
separately, in proportion to the interest which each owns. If Lessee
transfers its interest hereunder in whole or in part, Lessee shall be relieved
of all obligations thereafter arising with respect to the transferred
interest, and failure of the transferee to satisfy such obligations with
respect to the transferred interest shall not affect the rights of Lessee
with respect to any interest not so transferred. If Lessee transfers a full
or undivided interest in all or any portion of the area covered by this
lease, the obligation to pay or tender shut-in royalties hereunder shall be
divided between Lessee and the transferee in proportion to the net acreage
interest in this lease then held by each.
8. WARRANTY OF TITLE. Lessor hereby warrants and agrees to defend
title to the interest conveyed to Lessee hereunder. Lessee, at its option,
may pay or discharge any tax, mortgage or lien existing against the leased
premises and, in the event that it does so, Lessee shall be subrogated to the
rights of the party to whom payment is made and, in addition to its other
rights, may reimburse itself out of any royalties or shut-in royalties
otherwise payable to Lessor hereunder. If Lessor owns less than the full
mineral estate in all or any part of the leased premises, payment of
royalties and shut-in royalties hereunder shall be reduced proportionately to
the amount that Lessor's interest in the leased premises bears to the entire
mineral estate in the leased premises.
9. RELEASE OF LEASE. Lessee may, at any time and from time to time,
deliver to Lessor or file of record a written release of this Lease as to a
full or undivided interest in all or any portion of the leased premises or
any depths or zones thereunder, and shall thereupon be relieved of all
obligations thereafter arising with respect to the interest so released. If
Lessee releases all or an undivided interest in less than all of the area
covered hereby, Lessee's obligation to pay or tender shut-in royalties shall
be proportionately reduced in accordance with the net acreage interest
retained hereunder.
10. REGULATION AND DELAY. Lessee's obligations under the lease,
whether express or implied, shall be subject to all applicable laws, rules,
regulations and orders of any governmental authority having jurisdiction
including restrictions on the drilling and production of wells.
Notwithstanding the provisions of paragraph 2 above, when drilling,
reworking, production or other operations are prevented or delayed by such
laws, rules, regulations or orders, or by inability to obtain necessary
permits, equipment, services, material, water, electricity, fuel, access or
easements, or by fire, flood, adverse weather conditions, war, sabotage,
rebellion, insurrection, riot, strike or labor disputes, or by inability to
obtain a satisfactory market for production or failure of purchasers or
carriers to take or transport such production, or by any other cause not
reasonably within Lessee's control (commonly referred to as "force majeure"),
this lease shall not terminate because of such prevention or delay and, at
Lessee's option, the period of such prevention or delay shall be added to the
term hereof. Lessee shall not be liable for breach of any express or implied
covenants of this lease when drilling, production or other operations are so
prevented, delayed or interrupted.
11. BREACH OR DEFAULT. An alleged breach or default by Lessee of any
obligation hereunder or the failure of Lessee to satisfy any condition or
limitation contained herein shall not work a forfeiture or termination of
this lease nor cause a termination or reversion of the estate created hereby
nor be grounds for cancellation hereof in whole or in part, and no litigation
shall be initiated by Lessor with respect to any alleged breach or default by
Lessee hereunder, for a period of at least ninety (90) days after Lessor has
given Lessee written notice fully describing the breach or default, and then
only if Lessee fails to remedy or commence to remedy the breach or default
within such period. In the event the matter is litigated and there is a
final judicial determination that a breach or default has occurred, this
lease shall not be forfeited or cancelled in whole or in part unless Lessee is
given a reasonable time after said judicial determination to remedy the
breach or default and Lessee fails to do so. Nothing in this instrument or
in the relationship created hereby shall be construed to establish a
fiduciary relationship, a relationship of trust or confidence or a principal
- - agent relationship between Lessor and Lessee for any purpose.
IN WITNESS WHEREOF, this lease is executed effective the date first
written above, and upon execution shall be binding upon the signatory whether
or not the lease has been executed by all parties named herein as Lessor.
SS # AND/OR TAX ID# X LESSOR:
76-6059657 Daniel Dror II 1976 Trust
----------------------------------- -----------------------------------
BY: /s/ Daniel Dror
----------------------------------- -----------------------------------
Daniel Dror, Trustee
STATE OF Texas )
------------------- ) ss.
COUNTY OF Harris )
-------------------
This instrument as acknowledged before me this 10th day of April,
1995, by Daniel Dror,
/s/ Rebekah S. Shults
----------------------------------------
Notary Public
My Commission Expires: [SEAL]
12/19/95
----------------------
STATE OF )
------------------- ) ss.
COUNTY OF )
-------------------
This instrument as acknowledged before me this ___day of ____________,
19___, by ________________________________.
----------------------------------------
My Commission Expires: Notary Public
- ---------------------
<PAGE>
EXHIBIT 10.12
[LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--NET
(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, June 1, 1996, is made by and between Lexington Owners Association
("LESSOR") and Cinema Research 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 6860 Lexington Ave,
located in the County of Los Angeles, State of California, and generally
described as (describe briefly the nature of the property) 2 story commercial
office/production facility ("PREMISES"). (See Paragraph 2 for further
provisions.)
1.3 TERM: three (3) years and 0 months ("ORIGINAL TERM")
commencing June 1, 1996 ("COMMENCEMENT DATE") and ending May 30, 1999
("EXPIRATION DATE"). (See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: NA ("EARLY POSSESSION DATE"). (See
Paragraphs 3.2 and 3.3 for further provisions.)
1.5 BASE RENT: $20,000 per month ("BASE RENT"), payable on the
first 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.
1.6 BASE RENT PAID UPON EXECUTION: $20,000 as Base Rent for the
period June 1, 1996 - June 30, 1996.
1.7 SECURITY DEPOSIT: $ none ("SECURITY DEPOSIT"). (See Paragraph
5 for further provisions.)
1.8 PERMITTED USE: office & production as permitted by local
governing agencies. (See Paragraph 6 for further provisions.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY" unless otherwise
stated herein. (See Paragraph 6 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):
NA represents
- -----------------
/ / Lessor exclusively ("Lessor's Broker"); / / both Lessor and Lessee, and
represents
- -----------------
/ / Lessee exclusively ("Lessee's Broker"); / / both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.11 GUARANTOR. The obligations of the Lessee under this Lease are
to be guaranteed by NA ("GUARANTOR"). (See Paragraph 37 for further
provisions.)
1.12 ADDENDA. Attached hereto is an Addendum or
Addenda consisting of Paragraphs ____ through ____ and Exhibits
_______________________ ______________________________, 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 clean
and free of debris 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 the 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 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 described in Paragraph 7.3(o)) 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.
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.
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, (including but not limited to the obligations to pay
Real Property Taxes and Insurance premiums and to maintain the Premises)
shall be in effect during such period. Any such early possession shall not
affect nor advance the Expiration Date of the Original Term.
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<PAGE>
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 moneys 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 not to unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's 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 a 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
affect, 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, 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 in 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 8.3), 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),
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<PAGE>
7.2 (Lessor's obligations to repair), 8 (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, structural and non-structural (whether or not such portion of the
Premises requiring repairs, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for
such repairs occurs as a result of Lessee's use, any prior use, the elements
or the age of such portion of the Premises, including, without limiting the
generality of the foregoing, of 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), foundations,
ceilings, roofs, 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. 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. If Lessee occupies the Premises
for seven (7) years or more, Lessor may require Lessee to repaint the
exterior of the buildings on the Premises as reasonably required, but not
more frequently than once every seven (7) years.
(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. Except for the warranties and agreements
of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises),
2.3 (relating to compliance with covenants, restrictions and building code),
9 (relating to destruction of the Premises) and 14 (relating to condemnation
of the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, the
improvements located thereon, or the equipment therein, whether structural or
non structural, all of which obligations are intended to be that of the
Lessee under Paragraph 7.1 hereof. 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
Premises (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 expeditious 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 38 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 its sole
expense defend and protect itself, Lessor and the Premises against the same
and shall pay and satisfy any such adverse judgment that may be rendered
thereon before the enforcement thereof 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 wear and tear excepted. "Ordinary wear and tear" shall not
include any damage or deterioration that would have been prevented by good
maintenance practice or 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 FOR INSURANCE. Regardless of whether the Lessor or
Lessee is the Insuring Party, Lessee shall pay for all Insurance required
under this Paragraph 8 except to the extent of the cost attributable to
liability insurance carried by Lessor in excess of $1,000,000 per
occurrence. Premiums for policy periods commencing prior to or extending
beyond the Lessee term shall be prorated to correspond to the Lease term.
Payment shall be made by Lessee to Lessor within ten (10) days following
receipt of an invoice for any amount due.
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.
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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. If Lessor is the Insuring
Party, however, Lessee Owned Alterations and Utility Installations shall be
insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage
is available and commercially appropriate, such policy or policies shall
insure against all risks of direct physical loss or damage (except the perils
of flood and/or earthquake unless required by a Lender), including coverage
for 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. Said policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance clause, waiver of subrogation, and
inflation guard protection causing an increase in the annual property
insurance coverage amount by a factor of not less than the adjusted U.S.
Department of Labor Consumer Price Index for All Urban Consumers for the city
nearest to where the Premises are located. If such insurance coverage has a
deductible clause, the deductible amount shall not exceed $1,000 per
occurrence, and Lessee shall be liable for such deductible amount in the
event of an Insured Loss, as defined in Paragraph 9.1(c).
(b) RENTAL VALUE. The Insuring Party 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. Lessee shall be liable for any deductible amount in the
event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or 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. If the 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. If Lessee is the Insuring Party, the
policy carried by Lessee under this Paragraph 8.3 shall Insure Lessee Owned
Alterations and Utility Installations.
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 5.3. 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 a least 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 this Paragraph 8.
If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of such insurance with the insureds and loss payable
clauses as required by this Lease. No such policy shall be cancellable 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. If the insuring Party shall fail to procure and maintain
the insurance required to be carried by the Insuring Party under this
Paragraph 8, the other Party may, but shall not be required to, procure and
maintain the same, but at Lessee's expense.
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 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; provided, however, that
Lessee shall, at Lessor's election, make the repair of any damage or
destruction the total cost to repair of which is $10,000 or less, and, in
such event, Lessor shall make the insurance proceeds available to Lessee on a
reasonable basis for that purpose. Notwithstanding the foregoing, if the
required insurance was not in force or the insurance proceeds are not
sufficient to effect such repair, the Insuring Party shall promptly
contribute the shortage in proceeds (except as to the deductible which is
Lessee's responsibility) as and when required to complete said repairs. In
the event, however, 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
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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 3). 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 solely 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 9.5(e) 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. Lessee shall pay the Real Property Taxes,
as defined in Paragraph 10.2, applicable to the Premises during the term of
this Lease. Subject to Paragraph 10.1(b). all such payments shall be made at
least ten (10) days prior to the delinquency date of the applicable
installment. 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. If Lessee shall fail to pay any Real
Property Taxes required by this Lease to be paid by Lessee, Lessor shall have
the right to pay the same, and Lessee shall reimburse Lessor therefor upon
demand.
(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 Real Property
Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum
amount equal to the installment due, at least twenty (20) days prior to the
applicable delinquency date, or (ii) monthly in advance with the payment of
the Base Rent. If Lessor elects to require payment monthly in advance, the
monthly payment shall be 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 installment
of taxes to be paid. When the actual amount of the applicable tax bill is
known, the amount of such equal monthly advance payment shall be adjusted as
required to provide the fund needed to pay the applicable taxes 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 Real Property Taxes as the same become due, Lessee shall pay to Lessor,
upon Lessor's demand, such additional sums as are necessary to pay such
obligations. All moneys paid to Lessor under this Paragraph may be
intermingled with other moneys of Lessor and shall not bear interest. In the
event of a Breach by Lessee in the performance of 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.
10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the 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 charges 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
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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 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
obsolescense, 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 formulae 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 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 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 subletting 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 an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not
limited to the intended use and/or required modification of the Premises, if
any, together with a 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 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" is
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"
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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 fulfil 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 6.5, (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 18 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. Section
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 by 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 terms 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 any 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 Paragraphs 13.1(b), (c) or (d) were
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 hereinafter 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 such 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 thereinafter 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
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title or possession, whichever first occurs. If more than ten percent (10%)
of the floor area of the Premises, or more then twenty-five percent (25%) of
the land area not occupied by any building, is taken by condemnation, Lessee
may, at Lessor'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
awards 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 awards 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. BROKERS' 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 a 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 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 of 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 1.10.
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 statement 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
thirty (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 term 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
guarantee next day delivery shall be deemed given twenty-four (24) hours
after delivery of the 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.
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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 this 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 to 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 hereof. 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 give written notice thereof to Lessee, this Lease and such Options
shall be deemed prior to such Security Device, notwithstanding the relative
dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not:
(i) be liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership, (ii) be subject to any
offsets or defenses which Lessee might have against any prior lessor, or
(iii) be bound by prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into
by Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving 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. ATTORNEYS' FEES. If any Party or Broker brings an action or
proceeding to enforce the terms hereof or to declare rights hereunder, the
Prevailing Party (as hereafter defined) or Broker in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees.
Such fees may be awarded in the same suit or recovered in a separate suit,
whether or not such action or proceeding is pursued to decision or judgment.
The term, "Prevailing Party" shall include, without limitation, a Party or
Broker who substantially obtains or defeats the relief sought, as the case
may be, whether by compromises, settlement, judgment, or the abandonment by
the other Party or Broker of its claim or defense. The attorneys' fees award
shall not be computed in accordance with any court fee schedule, but shall be
such as to fully reimburse all attorneys' fees reasonably incurred. Lessor
shall be entitled to attorneys' fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's
agents shall have the right to enter the Premises at any time, in the case of
an emergency, and otherwise at reasonable times for the purpose of showing
the same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises 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 any ordinary "For Sale"
signs and Lessor may 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's election 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
acknowledgement 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 the Lessor, or the
right of first offer to purchase other property of the 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.
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39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple
Options to extend or renew this Lease, a later Option cannot be exercised unless
the prior Options 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 a 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.
<TABLE>
<S> <C>
Executed at Los Angeles, CA Executed at Los Angeles, CA
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on June 1, 1996 on June 1, 1996
---------------------------------------------- ----------------------------------------------
By LESSOR: By LESSEE:
- ------------------------------------------------- -------------------------------------------------
- ------------------------------------------------- -------------------------------------------------
By /s/ Salomon Lowi By
---------------------------------------------- ----------------------------------------------
Name Printed: Salomon Lowi Name Printed: David Miller
------------------------------------- -------------------------------------
Title: Owner Title:
------------------------------------------- -------------------------------------------
By By
---------------------------------------------- ----------------------------------------------
Name Printed: Name Printed:
------------------------------------- -------------------------------------
Title: Title:
------------------------------------------- -------------------------------------------
Address: P. O. Box 217 Address: 6860 Lexington Ave.
- ------------------------------------------------- -------------------------------------------------
B. M. CA 90213 L. A. CA 90038
- ------------------------------------------------- -------------------------------------------------
Tel. No. ( ) Fax No. ( ) Tel. No. (213) 460 4111 Fax No. ( )
--------------- ------------------ ----------------- ---------------
</TABLE>
NET PAGE 10
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.
-C-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 204N-R-12/91
<PAGE>
OPTION AGREEMENT
PREAMBLE
This Agreement made this 14th day of September, 1998, at Los Angeles,
California, by THE SALOMON AND RITA LOWI 1981 REVOCABLE TRUST doing business
as LEXINGTON OWNERS ASSOCIATION (the "Owner") and MODERN FILM EFFECTS, INC.,
doing business as CINEMA RESEARCH CORPORATION (the "Optionee").
RECITALS
WHEREAS, Owner is the owner of the real property commonly known as 6860
Lexington Avenue, Los Angeles, California (the "Property").
WHEREAS, Optionee desires to acquire the right to purchase, without
becoming obligated to purchase, the Property at an agreed price and under
specified terms and conditions;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are acknowledged by both parties hereto, the parties
agree as follows:
GRANT OF OPTION
1. Owner hereby grants to Optionee, the right to purchase the Property
for the following price:
The purchase price shall be the lesser of (A) One Million One
Hundred Seventy Thousand Dollars ($1,170,000) or (B) the then-existing
balance of the Note secured by the First Deed of Trust (including any
principal prepayments made subsequent to the execution hereof) plus Three
Hundred Seventy Thousand Dollars ($370,000). Notwithstanding the foregoing,
in no event shall the purchase price be less than One Million One Hundred
Thousand Dollars ($1,100,000).
OPTION PERIOD
2. This option shall commence on the day and year first above written
and terminate on April 1, 1999.
1
<PAGE>
CONSIDERATION
3. This option is granted in consideration of Optionee's payment to
Owner of the sum of Fifty Thousand Dollars ($50,000) concurrent with the
mutual execution of this Agreement, and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged by Owner. This
payment of Fifty Thousand Dollars ($50,000) to Owner shall not in any fashion
further reduce the purchase price set forth in Paragraph 1, above.
RETENTION OF CONSIDERATION
4. In the event this option is not exercised, all sums paid and
services rendered to Owner by Optionee shall be retained by Owner in
consideration of the granting of this option.
EXERCISE OF OPTION
5. Optionee may exercise the option granted hereunder only if it is in
compliance with the following: (A) Optionee is not in breach of this
Agreement, (B) Optionee has commenced and is duly performing the earthquake
building code compliance repairs on the Property as mandated by the City of
Los Angeles pursuant to the LABC, Division 91, at Optionee's exclusive
expense, (C) Optionee is not in default under that certain lease between
Owner and Optionee dated on or about 6/1/96, as subsequently modified, (D) no
litigation or claims are pending against Owner arising from Optionee's
occupancy, use or repair of the Property.
In order for Optionee to exercise the option granted hereunder, Optionee
must tender to Owner a written notice of its intention to purchase the
Property pursuant to the terms hereof AND actually consummate such purchase
within the period of time specified in Section 2, above. All notices
intended to be served upon Owner by Optionee pursuant to this Agreement shall
be sent by certified mail, return receipt requested, as follows:
Salomon Lowi, Trustee
c/o Stephen R. Kuntz, Esq.
12304 Santa Monica Blvd.
Third Floor
Los Angeles, CA 90025
2
<PAGE>
AUTOMATIC TERMINATION
6. If Optionee fails to exercise this option in accordance with its
terms and within the option period, then this option and the rights of
Optionee shall automatically and immediately terminate without notice.
ASSIGNABILITY OF OPTION
7. The option granted hereunder is personal to Optionee and may not be
assigned without the express written consent of Owner.
ENTIRE AGREEMENT
8. This instrument contains the entire Agreement between the parties
relating to the option herein granted. Any oral representations or
modifications concerning this instrument shall be of no force and effect
excepting a subsequent modification in writing, signed by the party to be
charged.
ATTORNEYS' FEES
9. In the event of any controversy, claim, or dispute between the
parties hereto, arising out of or relating to this Agreement or the breach
thereof, the prevailing party shall be entitled, in addition to such other
relief as may be granted, to a reasonable sum as and for attorney's fees in
such litigation which shall be determined by the court in such litigation or
in a separate action brought for that purpose.
BINDING EFFECT
10. This Agreement, except as otherwise set forth above, shall bind and
inure to the benefit of the respective heirs, personal representatives,
successors, and assigns of the parties hereto.
TIME IS OF THE ESSENCE
11. Time is of the essence in respect to all provisions of this Agreement
that specify a time for performance. Optionee's failure to comply with the
requirements set forth in Section 5, above, or the other provisions of this
Agreement, shall not in any manner extend the period of time which Optionee
has been granted to exercise said option.
3
<PAGE>
EXECUTION
IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement
in Los Angeles, California, the day and year first above written.
"Owner" "Optionee"
THE SALOMON AND RITA LOWI MODERN FILM EFFECTS, INC.,
1981 REVOCABLE TRUST, doing doing business as CINEMA
business as LEXINGTON OWNERS RESEARCH CORPORATION
ASSOCIATION
/s/ Salomon Lowi /s/ Jordan Friedberg, President
- ---------------------------------- ------------------------------------
Salomon Lowi, Trustee Jordan Friedberg, President
4
<PAGE>
MODIFICATION OF LEASE
This Modification of Lease is made this 14th day of September, 1998, by
and between THE SALOMON AND RITA LOWI 1981 REVOCABLE TRUST doing business as
LEXINGTON OWNERS ASSOCIATION ("Lessor"), and MODERN FILM EFFECTS, INC.,
doing business as CINEMA RESEARCH CORPORATION ("Lessee").
A. On or about June 1, 1996, Lessor and Lessee entered into a lease
entitled "Standard Industrial/Commercial Single-Tenant Lease - Net (the
"Lease"), in connection with real property located in Los Angeles,
California, commonly known as 6860 Lexington Avenue. A true and correct copy
of that Lease is attached hereto and made a part hereof.
B. The Lessor and Lessee, each in exchange for good and valuable
consideration, the receipt and sufficient of which is acknowledged by each
party, desire to modify and reaffirm the Lease as follows:
1. Paragraph 1.5 of the Lease is hereby modified to provide that the
Base Rent, beginning on August 1, 1998, and continuing throughout the term of
the Lease (i.e. through and including November 30, 1999) is $13,000 (thirteen
thousand dollars), per month.
1
<PAGE>
2. Immediately prior to the execution of this Modification of Lease,
Lessee shall deliver to Lessor, in U.S. funds, the sum of $50,000 (fifty
thousand dollars). Payment of said sum is in consideration of delinquent rent
owing by Lessee to Lessor pursuant to the Lease.
3. Pursuant to Article 12 of the Lease, Lessor hereby consents to the
sale of Lessee's capital stock made immediately prior to the execution of
this Modification of Lease.
In all other respects, the Lease shall continue in full force and effect.
Executed at Los Angeles, California, as of the date specified in the first
paragraph of this Modification of Lease.
"Lessor" "Lessee"
THE SALOMON AND RITA LOWI MODERN FILM EFFECTS, INC.,
1981 REVOCABLE TRUST, doing doing business as CINEMA
business as LEXINGTON OWNERS RESEARCH CORPORATION
ASSOCIATION
/s/ Salomon Lowi /s/ Jordan Friedberg
- ---------------------------------- ------------------------------------
Salomon Lowi, Trustee Jordan Friedberg, President
2
<PAGE>
LEASE AND MANAGEMENT
STATE OF GEORGIA
COUNTY OF COFFEE
THIS LEASE AND AGREEMENT made and entered into this 10th day of October,
1997, by and between THE STREAT CORP. and NORTHEASTERN PLASTICS, INC.
W I T N E S S E T H:
In consideration of the representations and agreements herein
contained, the parties hereto agree as follows:
ARTICLE I
"Lessor" means The Streat Corp., its representatives, successors and
assigns.
"Lessee" means Northeastern Plastics, Inc., its representatives,
successors and assigns.
"Premises" means 30,000 square feet in the southern section of a
building owned by Lessor and more commonly referred to as "Streat Garments".
Said building is located on real property owned by Lessor lying and being on
Ga. Highway #32 West in Coffee County, Georgia Nicholls, Georgia. Said
premises shall include one (1) front loading dock, one (1) 10' x 10' side
door and Lessee shall have the right to use one (1) 12' x 12' unloading dock
located in the northern end of the building. Also, said premises shall
include an office area with a minimum of 1000 square feet which shall
adequate heating and air conditioning shall include two (2) bathrooms. Said
office area shall have finished walls and
LEASE AND AGREEMENT BETWEEN THE
STREAT CORP. AND NORTHEASTERN
PLASTICS, INC.
PAGE 1 OF 7 PAGES
<PAGE>
floors and shall include two windows, with one window at the south side of
the building looking out toward Ga. Highway #32 and the other window shall
give an unobstructed view of the interior of the warehouse area. Said area
shall be completed, at Lessor's expense, prior to Lessee occupying said
building. Lessor shall, at its sole expense, have a 8 foot high chain link
fence erected so as to separate the areas of the building used by Lessor and
the area used by Lessee.
ARTICLE II
This Lease shall become effective on the 10th day of October, 1997 and
the leasehold estate created in this Lease shall then begin and subject to
the provisions of this Agreement, shall expire on the 9th day of October,
1999. Lessor agrees to deliver to Lessee sole and exclusive possession of
the Premises above-described. Commencing on the effective date of this Lease
and continuing on the 1st day of each month thereafter, Lessee shall pay to
Lessor the sum of Two Thousand Eight Hundred Seventy Five Dollars ($2,875.00)
per month during the initial term of this Lease for rental on the 30,000 sq.
ft. building space ($1.15 x 30,000 sq. ft per year = $34,500.00 per year).
Also, commencing on the effective date of this Lease and continuing on the
1st day of each month thereafter, Lessee shall pay to Lessor the sum of Four
Hundred Dollars ($400.00) per month during the initial term of this Lease for
rental on the 1,000 square foot office area ($4.80
LEASE AND AGREEMENT BETWEEN THE
STREAT CORP. AND NORTHEASTERN
PLASTICS, INC.
PAGE 2 OF 7 PAGES
<PAGE>
x 1,000 sq. ft. per year - $4800.00 per year). Said 1,000 square foot office
area will be built by Lessor for the benefit and use of Lessee during the
initial term of this Lease and any renewal thereof. Said rental amount
includes all water and sewerage charges incurred by Lessee on Premises during
the term of this Lease.
ARTICLE III
The initial term of this Lease shall be for a period of two (2) years
from the effective date and Lessee shall have the option to renew said Lease
for an additional two (2) year period after the initial term with the monthly
rental to be increased based on the CPI. Lessee shall notify Lessor at least
sixty (60) days in advance, in writing, prior to the expiration of the initial
term of the exercise of this option to renew.
ARTICLE IV
Lessor agrees that during the term of this Lease it will, at its own
expense, keep the premises in as reasonably safe condition as is possible and
to keep said premises in good repair, making from time to time all necessary
repairs thereto.
Lessee may, at its own expense, make from time to time any additions,
modifications or improvements to the premises as it may deem desirable upon
giving Lessor thirty (30) days written notice. Lessee shall not permit any
mechanic's liens, materialman's liens, security interest or other encumbrance
to remain against the
LEASE AND AGREEMENT BETWEEN THE
STREAT CORP. AND NORTHEASTERN
PLASTICS, INC.
PAGE 3 OF 7 PAGES
<PAGE>
premises for labor or materials furnished in connection with any additions,
modifications, improvements, repairs or replacements so made by them.
ARTICLE V
Lessor shall be responsible for maintaining fire and casualty insurance
on the Premises. It is further understood that all ad valorem (property)
taxes assessed against the Premises shall be promptly paid by Lessor.
However, Lessee may, if it so desires, maintain insurance coverage on the
contents of said building which are the sole and exclusive property of Lessee.
ARTICLE VI
If the premises are destroyed (in whole or in part) or is damaged by
fire or other casualty, Lessor may, at Lessor's expense, promptly repair,
rebuild or restore the property damaged or destroyed to substantially the
same condition as it existed prior to the event causing such damage or
destruction. Lessor shall repair, rebuild or restore said property no later
than forty five (45) days from the date of fire or other casualty.
In the event any governmental agency initiates condemnation proceedings
under the provisions of eminent domain, Lessor shall give Lessee at least six
months' notice to vacate said premises and this Lease shall be null and void.
ARTICLE VII
This Lease may not be assigned in whole or in part, nor may
LEASE AND AGREEMENT BETWEEN THE
STREAT CORP. AND NORTHEASTERN
PLASTICS, INC.
PAGE 4 OF 7 PAGES
<PAGE>
the premises be subleased as a whole or in part, by the Lessee without the
prior written consent of the Lessor.
ARTICLE VIII
The following shall be "events of default" under this Lease and the
terms "event of default" or "default" shall mean, whenever they are used in
this Lease, any one or more of the following events:
(a) Failure of the Lessor to pay the rents required to be paid under
Article II and continuance of such failure for a period of ten (10) days
after written notice by the Lessor to the Lessee.
(b) Failure by Lessee to observe and perform any covenant, condition or
agreement on its part to be observed or performed, other than as required in
subsection (a) of this section, for a period of ten (10) days after written
notice, specifying such failure and requesting that it be remedied, given to
Lessee by Lessor.
(c) Lessee shall apply for or consent to the appointment of or the
taking of possession by a receiver, custodian, trustee or liquidator of the
Lessee of all or substantial part of their property or commence a voluntary
case under the Federal Bankruptcy Code.
ARTICLE IX
Whenever any event of default referred to in Article VIII above shall
have happened or be subsisting, Lessor may take any one
LEASE AND AGREEMENT BETWEEN THE
STREAT CORP. AND NORTHEASTERN
PLASTICS, INC.
PAGE 5 OF 7 PAGES
<PAGE>
or more of the following remedial steps:
(a) Lessor may re-enter and take possession of the premises and declare
this agreement and any provisions thereof to be null and void.
(b) Lessor may take whatever action at law or in equity may appear
necessary or desirable to collect the rent and any other amounts payable by
Lessee hereunder, then due and thereafter to become due, or to enforce
performance and observance of any obligation, agreement or covenant of Lessee
under this Agreement.
In the event any agreement contained in this Lease shall be breached by
either party and thereafter waived by the other party, such waiver shall be
limited to the particular breach so waived and shall not be deemed to waive
any other breach hereunder.
ARTICLE X
All notice, certificates or other communications hereunder shall be
sufficiently given and shall be deemed given when mailed by registered or
certified mail, return receipt requested, postage pre-paid addressed as
follows:
To Lessor: The Streat Corp.
Mr. Wilbur Streat
11600 Highway 32
Nicholls, GA 31554
To Lessee: Northeastern Plastics, Inc.
Mr. Marc Fields
420 Carroll Street
Brooklyn, N.Y. 11215
LEASE AND AGREEMENT BETWEEN THE
STREAT CORP. AND NORTHEASTERN
PLASTICS, INC.
PAGE 6 OF 7 PAGES
<PAGE>
ARTICLE XI
This Lease shall inure to the benefit of and shall be binding upon the
Lessor, the Lessee and its respective successors and assigns. In the event
any of the provisions of this Lease shall be held invalid or unenforceable by
any Court of competent jurisdiction, such holding shall not invalidate or
render unenforceable any other provisions hereof. It is understood and
agreed that this Lease & Agreement shall be governed by the laws of the State
of Georgia.
TIME IS OF THE ESSENCE OF THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have executed this Lease and
Agreement the day and year first above written.
THE STREAT CORP., LESSOR
By: Wilbur Streat
-----------------------------------
Wilbur Streat, President
Signed, sealed and delivered
in the presence of:
Carla Porter
- ------------------------------
Witness
Diane Streat
- ------------------------------
Notary Public
2-22-99
NORTHEASTERN PLASTICS, INC., LESSEE
By: Marc E. Fields
-----------------------------------
Marc E. Fields, President
Signed, sealed and delivered
in the presence of:
MARISA C. PALMA
(Illegible) Notary Public, State of New York
- ------------------------------ No. 4879674
Witness Qualified in Rockland County
Commission Expires December 15, 1998
Marisa C. Palma
- ------------------------------
Notary Public
LEASE AND AGREEMENT BETWEEN THE
STREAT CORP. AND NORTHEASTERN
PLASTICS, INC.
PAGE 7 OF 7 PAGES
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1998
1. Har-Whit/Pitt's & Spitt's, Inc., a Texas corporation
2. Brenham Oil & Gas, Inc., a Texas corporation
3. Texas Real Estate Enterprises, Inc., a Texas corporation
4. Acqueren, Inc., a Delaware corporation
a. Northeastern Plastics, Inc., a New York corporation (wholly-owned
subsidiary of Acqueren, Inc.)
5. Modern Film Effects, Inc., a California corporation, doing business as,
Cinema Research Corporation
a. Digital Research Corporation, a California corporation (wholly-owned
subsidiary of Modern Film Effects, Inc.)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AT 12-31-98 & 97 STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS,
STOCKHOLDERS EQUITY AND CASH FLOWS FOR THE YEARS ENDED 12-31-98 AND 97 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 2,149,916 62,991
<SECURITIES> 534,654 0
<RECEIVABLES> 1,936,659 272,553
<ALLOWANCES> (179,000) (19,000)
<INVENTORY> 1,055,091 180,022
<CURRENT-ASSETS> 5,639,316 542,726
<PP&E> 8,606,080 1,452,898
<DEPRECIATION> (3,545,126) (117,185)
<TOTAL-ASSETS> 17,478,737 4,558,081
<CURRENT-LIABILITIES> 3,733,376 198,633
<BONDS> 0 0
0 0
0 0
<COMMON> 121,116 46,117
<OTHER-SE> 10,927,624 3,442,611
<TOTAL-LIABILITY-AND-EQUITY> 17,478,737 4,558,081
<SALES> 10,213,039 2,501,860
<TOTAL-REVENUES> 10,213,039 2,501,860
<CGS> 8,120,515 1,635,855
<TOTAL-COSTS> 11,217,816 3,301,887
<OTHER-EXPENSES> 76,203 (61,860)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 104,044 63,908
<INCOME-PRETAX> (1,004,777) (870,027)
<INCOME-TAX> (298,804) 0
<INCOME-CONTINUING> (705,973) (870,027)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (705,973) (870,027)
<EPS-PRIMARY> (.01) (.06)
<EPS-DILUTED> (.01) (.06)
</TABLE>
