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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-25273
LAUNCH MEDIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-4463753
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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2700 PENNSYLVANIA AVENUE, SANTA MONICA, CALIFORNIA 90404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(310) 526-4300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS:
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. Yes [X] No
The aggregate market value of shares of Common Stock held by non-affiliates
of the Registrant as of February 29, 2000, was approximately $232,940,000 based
on the $18.25 closing price for the Common Stock on The NASDAQ National Market
on such date. For purposes of this computation, all executive officers and
directors of the registrant have been deemed to be affiliates. Such
determination should not be deemed to be an admission that such directors and
officers are, in fact, affiliates of the registrant.
The number of shares of Common Stock of the registrant outstanding as of
February 29, 2000 was 13,496,373.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to its
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year covered by
this report, are incorporated by reference into Part III of this report.
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LAUNCH MEDIA, INC.
INDEX TO ITEMS
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PART I
Item 1. Business.................................................... 3
Item 2. Facilities.................................................. 15
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 17
Item 6. Selected Consolidated Financial Data........................ 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 39
Item 8. Financial Statements and Supplementary Data................. 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 39
Item 11. Executive Compensation...................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 40
Item 13. Certain Relationships and Related Transactions.............. 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 40
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PART I
ITEM 1. BUSINESS
OVERVIEW
Launch is a media company that offers a compelling online music discovery
experience for consumers and provides a valuable marketing platform for record
labels, artists, advertisers and merchants. We create engaging music content
focused on both new and established artists, spanning almost all musical genres.
Launch's consumers are not confined to receiving music content in the
programmed, linear sequences broadcast by radio and television. Instead, we
deliver personalized music content to our users in an interactive format based
on their musical tastes and preferences. As part of our strategy to attract and
retain registered members from our target audience, we have created a vibrant
community of users who help each other discover new music by virtual
word-of-mouth. Our music content encourages our members to engage in community
activities, such as creating home pages, chatting online, listing friends and
favorite artists and developing online friendships with others sharing similar
tastes. Because our content is designed to attract and retain an audience
composed principally of consumers who are 12 to 34 years old, including the 12
to 20 year old segment that is part of Generation Y, advertisers on Launch can
target a valuable and elusive group of consumers. We currently deliver our
content on the Internet at www.launch.com and on the monthly Launch on CD-ROM.
As broadband access to the Internet achieves greater consumer acceptance and
enables us to add our richest audio and video content to launch.com, we intend
to phase out delivery of Launch on CD-ROM. We also reach music consumers through
the Online Music Group (OMG), a consolidation of music sites on the web designed
to increase traffic for launch.com and other OMG member sites.
We commenced operations in February 1994 as 2Way Media, Inc. and changed
our name to Launch Media, Inc. in March 1998.
As of December 31, 1999, launch.com had approximately 2.8 million
registered users. Double Click, Inc., our third-party ad server, reported that,
in December 1999, Launch reached approximately 4.7 million unique visitors. A
unique visitor is defined as an unduplicated web site user within a given time
period. As of December 1999, Launch on CD-ROM had approximately 265,000
subscribers.
We believe that Launch offers the active music consumer access to a greater
selection of music and artists than is typically available through traditional
media. In addition, our user-generated content provides an additional source of
music discovery and encourages regular, active participation in our community of
users. Launch offers record labels the opportunity to promote and sell new music
to a broad market that can be difficult to reach through traditional media. We
work closely with most independent and major record labels, including those of
Sony Music Entertainment, Warner Music Group, Universal Music Group, EMI Music,
and BMG. Through these relationships, we have featured several of the biggest
names in music, including Alanis Morissette, Smashing Pumpkins, Matchbox 20,
Wyclef Jean, Seal, R.E.M., and Jewel, and have introduced our audience to many
new artists. In December 1999, we streamed more than 2 million music videos on
launch.com.
Original and Compelling Music Content. Launch creates exclusive and
original music content, including video interviews and performances, news,
biographies and album and concert reviews. Launch also offers on-demand music
videos, localized concert and tour information as well as radio station play
lists. Our musical coverage spans all genres, including country, blues, jazz,
rap, R&B, folk, and rock, excluding only classical. We can offer this broad
range of music content because digital media permit users to navigate to content
that interests them. As a marketing channel for the music industry, Launch has
regular access to a broad range of artists who are the subjects of exclusive
video and audio content for Launch. We also have an editorial staff of more than
thirty in offices in Los Angeles, New York and Nashville, which gives us in
depth music content across most genres. We believe that our relationships with
the music industry as well as our expertise in digital media production will
provide us a strategic advantage in offering broadband music content to our
users as broadband distribution systems gain greater consumer acceptance.
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Personalization of Content Based on Music Preference. Digital media enables
personalization that allows our members to focus on musical genres that interest
them and to avoid unappealing types of music without exiting Launch. Our members
register free with launch.com by providing zip code, age and gender information.
They also actively add information about their music preferences by rating
artists and albums and indicating favorites. We collect this data in a database
that grows as our members spend more time on the site. We use this information
to personalize our content for our members based on their stated musical
preferences. For example, a member interested in country music but not heavy
metal would receive targeted features and reviews on country artists to the
exclusion of heavy metal. We believe that personalization increases the time a
user spends on launch.com and discourages changing to another music site. In
February 2000, we introduced the commercial release of LAUNCHcast, a streaming
music player that provides our users with the ability to listen to the music
they want to hear. By rating songs, albums, artists and sampling other community
members' stations, users instruct LAUNCHcast to play the types of music they
want. Utilizing Windows Media technology, LAUNCHcast offers high quality audio
streams of a diverse mix of music.
Active Membership and Community Participation. We have created a vibrant
community of users who help each other discover new music by virtual
word-of-mouth. We believe that active music consumers consider musical tastes to
be an important part of personal identity. Music is a shared experience and a
powerful catalyst for community formation. Our music content encourages our
members to engage in community activities, such as creating home pages, chatting
online, listing friends and favorite artists and developing online friendships
with others sharing similar tastes. As of December 31, 1999, there were
approximately 2.8 million registered members of launch.com. Our members can also
post their favorite artists and albums on their personalized launch.com home
pages and write their own reviews. This user-generated content provides an
additional source of music discovery and encourages regular, active
participation in the community. We believe that members with strong ties to the
community tend to spend significant amounts of time interacting with others and
are less likely to switch to a different music site.
Powerful Promotional Outlet for Record Labels and Artists. Record labels
and artists can work with Launch to promote their new releases to the large
group of active music buyers who make up the Launch user community. Because
consumers can avoid music they dislike but still remain in the Launch
environment, Launch can cover a broader spectrum of musical genres and expose
users to a greater number of artists. Record companies, including Sony, Warner,
Universal, BMG and EMI, use Launch to introduce users to a variety of new
artists and to inform them of new releases from established artists. We often
feature established artists in order to draw users in to discover new names.
Because of the synergistic relationships we have developed with the record
labels, we have access to high-profile personalities in music. Since May 1995,
we have featured exclusive interviews and performances by popular recording
artists such as Alanis Morissette, Jewel, Smashing Pumpkins, R.E.M., Sheryl
Crow, Aqua, Matchbox 20, No Doubt, Wyclef Jean, Counting Crows, Dave Matthews
Band, Britney Spears, Blink182, Live, Filter, Bush, Eminem, and Smash Mouth.
Attractive, Targeted Demographic Group. Launch focuses on the valuable 12
to 34 year old audience, including the 12 to 20 year old segment that is part of
Generation Y, who has begun spending more time using the Internet. Our research,
conducted by the audience research firm Mediamark Research Inc. (MRI) in
December 1998, demonstrates that our audience is principally composed of members
of Generation Y and others in the 12 to 34 age group. We believe that our
audience members generally:
- spend substantial amounts of time learning about and listening to music;
- identify strongly with music they like;
- value being the first to discover new music;
- enjoy being a member of a community built around music; and
- adopt technological advancements early.
Advertisers who have difficulty reaching this audience can turn to Launch
for targeted advertising and direct marketing to this valuable, yet elusive
group.
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Effective Environment for Advertising and Commerce. Launch provides
advertisers with access to a highly desirable group of consumers in an active
entertainment environment. The Launch environment captures consumers for long
periods of time, and advertisements can be targeted to specific users. Launch
collects demographic and music preference information from its users that can be
used to target advertising and commerce opportunities. We believe that Launch's
access to a large audience of targeted demographics may also provide us a
strategic advantage in selling a variety of products through e-commerce
partners.
Revenue and Traffic Opportunity from Content Syndication. We leverage the
content we create for launch.com by licensing it to various online and off-line
customers. For example, we generate revenue by syndicating our music and
entertainment news to approximately 1,000 radio stations across the U.S. Our
online syndication relationships are often crafted to drive traffic to
launch.com.
THE LAUNCH MEDIA PROPERTIES
Launch seeks to create the premier online destination for music. In
addition to launch.com, we distribute a monthly CD-ROM, which will be eliminated
as its content can be streamed over broadband networks such as cable and DSL
modems and satellite data broadcast. We already have a broadband version of the
CD-ROM experience available on launch.com called LAUNCHcity.
Launch.com
Launch.com is the place for active music consumers to discover new music
and meet other music fans with similar tastes. The music content we produce for
launch.com consists of streaming audio of full-length songs, music videos, audio
samples, text and photographs. Launch.com enables users to personalize the
content they view to focus on music that appeals to them individually. Further,
registered members of launch.com can share their tastes and preferences with
other members of the community by creating reviews, rating songs, artists and
albums and setting up personalized homepages that other members can visit.
Launch covers all musical genres other than classical. Some of the key features
available on launch.com include the following:
- music videos;
- streaming audio;
- digital downloads;
- music news updated multiple times per day;
- artists interviews and feature articles;
- concert reviews;
- album reviews;
- artist biographies, photographs and discographies;
- album artwork, track listings and song samples;
- new and upcoming album release information;
- concert tour information;
- radio station playlists; and
- CD and cassette purchasing.
As more consumers gain faster access to the Internet through broadband
distribution systems, we intend to increase the amount of higher-quality audio
and video content available on launch.com. Because we have created, and continue
to produce, exclusive, high-quality audio and visual content, we believe that
Launch will have a strategic advantage in offering broadband music content to
our users as broadband distribution systems gain greater consumer acceptance.
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Launch believes a large and active membership base is critical to its
success. Membership is free and available to launch.com visitors who disclose
their e-mail address, zip code, age and gender, and choose a member name and
password to be used throughout the site. Members form launch.com's core audience
and are its most valuable users. Launch recognizes the importance of maintaining
confidentiality of member information and has established a privacy policy to
protect such information.
Registered members have the ability to enhance their Launch experience
through LAUNCHcast. In creating their LAUNCHcast stations, members rate artists,
songs and albums according to their preferences. This process provides Launch
with confidential, voluntary data based on musical tastes and allows members to
enrich their own content experience when interacting with the site. This
information also creates a robust community rating base.
We believe that active music consumers consider musical tastes to be an
important part of personal identity. Music is a shared experience and a powerful
catalyst for community formation. Our goal is to make each registered member an
active participant in the Launch community. Key elements of our community
services that are available free to registered users include the following:
- personal home pages, plus simple tools for customizing the page;
- ability to mark artists or albums as favorites and display them on your
homepage;
- ability to mark other users as friends, list them on your home page, and
display when they, or their friends, are online;
- chats with artists and other users;
- instant messaging;
- internal message boxes; and
- ability to write and post artist or album reviews both on the page
dedicated to the artist/album and on your home page.
A key benefit of our community is that user-generated content is obtained
at minimal cost to us. In addition, we believe that users who have invested
considerable amounts of time developing community ties are less likely to switch
to another site for music content.
In November 1999, Launch created OMG and has consolidated selected music
sites on the web, offering fans the ability to find many types and genres of
music in one location. Through a system of cross-member site marketing and
promotions, OMG provides member sites the opportunity to grow their businesses
through an expected increase in overall traffic. Within the structure of OMG,
Launch purchases the advertising inventory of all participating sites and
utilizes Launch's national sales force to sell the aggregated advertising
inventory.
Launch on CD-ROM
Because fixed media such as CD-ROM do not share the Internet's bandwidth
limitations, we can offer rich graphics, CD-quality audio and full-motion video
in Launch on CD-ROM. The interface for Launch on CD-ROM is a graphically rich
virtual city where users navigate to particular content by visiting different
buildings. Various buildings such as "The Hang," housing most music content, and
devices such as "The Vibreaker," which contains album reviews, have become
consistent, recognized features of Launch's environment. Advertising on the
CD-ROM is principally in the form of television commercials, product placements
and interactive advertisements. The city environment permits conspicuous yet
natural advertising placements. The familiar look of billboards within the city
or, for example, candy in a theater concession stand encourages users to click
the branded icons to view the advertising. Many of the advertisements pop up in
the environment on video billboards. We track how users spend time within the
CD-ROM and which advertisements they see. Users voluntarily send this
information back to Launch, along with basic demographic information, so that we
can provide advertisers with a profile of our audience and which advertisements
they saw. Launch offers prizes and other incentives for users who furnish this
information.
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Each issue of Launch on CD-ROM includes the following:
- album reviews with CD-quality song samples, photographs and album
artwork;
- exclusive video performances by popular recording artists;
- exclusive video interviews with recording artists presented in
distinctive three-dimensional environments where users can choose
interview topics;
- direct links to the Internet for downloading additional content, chatting
with other users, visiting launch.com or viewing an advertiser's Web site
related to an advertisement on the CD-ROM;
- interactive video interviews with movie actors, directors or producers;
- video game demonstrations; and
- television-quality advertisements.
We published the first issue of Launch on CD-ROM in May 1995, and have
distributed it monthly since August 1998. We sell subscriptions to Launch on
CD-ROM for $19.95 annually. As of December 1999, total monthly distribution for
the CD-ROM was approximately 300,000 units, including 265,000 subscription
units. We intend to phase out CD-ROM delivery as more efficient broadband
distribution systems achieve more widespread consumer acceptance and enable us
to migrate our richest audio and video content to launch.com. LAUNCHcity, a
broadband version of the CD-ROM experience, is currently accessible through
launch.com.
Other Distribution Opportunities
We are committed to maximizing Launch's distribution through all viable
distribution systems for digital media. The proliferation of high-speed access
to the Internet through cable or DSL modem presents new opportunities to
distribute our most compelling content, including personalization and community
features, directly to consumers without publishing a CD-ROM. Since March 1999 we
have been providing our content under an agreement with Serviceco LLC, doing
business as Road Runner. Under this agreement, we provide Road Runner with music
related content for its high speed, cable modem service. The content we provide
appears on co-branded pages which link back to launch.com. We believe that by
leveraging our access to content and video production expertise, Launch will
have a strategic advantage in providing true broadband content. In addition,
satellite data broadcasting of digital media content downloaded directly to a
consumer's hard drive will, when available, allow Launch to deliver customized
versions of its rich media content.
CONTENT DEVELOPMENT AND SYNDICATION
We have developed strong working relationships with most of the major and
independent record labels, including those of Sony Music, Warner Music,
Universal Music, EMI Music, and BMG, and with many popular artists. Our core
editorial team is in regular contact with record labels and with independent
publicists who arrange for artists to spend time filming interviews and
performances for use in Launch. The Launch editorial team has extensive
experience in many facets of music journalism and also uses a diverse group of
freelance writers to contribute many of the written features in Launch. Our
strategy is to employ core groups of editors, artists, video producers and other
content creators on a full time basis and also capitalize on a talented network
of freelancers as needed. Although we create most of Launch's content, from time
to time we license content from third parties. We entered into licensing
agreements with EMI Music Group and Warner Music Group, on a non-exclusive
basis, for Internet distribution rights to stream their catalog and new release
music videos on demand. These agreements are multi-year and provide selected
worldwide rights as well. In addition, on a non-exclusive basis, we have
licensed from Sony Music the rights to stream their music videos in
pre-programmed music video channels.
At our headquarters in Santa Monica, California we operate a production
stage that doubles as a recording studio. We use this space to film and record
many of the artists appearing in Launch. Each session with an artist typically
results in content that we can use on both launch.com and Launch on CD-ROM. This
allows us to minimize our production costs while providing the artist with the
broadest possible exposure.
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Launch has created exclusive video interviews and video performances with a
variety of new and established artists across multiple genres, including:
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311 Goo Goo Dolls Sarah McLachlan
Tori Amos Buddy Guy Alanis Morissette
Filter Natalie Imbruglia No Doubt
Ben Folds Five Chris Isaak Smashing Pumpkins
Blues Traveler Wyclef Jean Radiohead
Bush Jewel R.E.M.
The Cardigans B.B. King Joshua Redman
Paula Cole Korn Seal
Sheryl Crow Jonny Lang Third Eye Blind
Des'ree Live The Verve Pipe
Everclear Matchbox 20 Counting Crows
The Cure Dave Matthews Band Eminem
Britney Spears Blink 182 Smash Mouth
Brian McKnight Stone Temple Pilots
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Our acquisition and integration of SW Networks, JBTV and National Video
Subscriptions, Inc. (NVS) has increased the quantity and expanded the scope of
Launch's music content and allowed us to package and syndicate our content to
third parties. We provide music news and information in various format-specific
genres, such as country, adult contemporary and urban, to radio stations
(through SW Networks which was renamed Launch Radio Networks) and to
Internet-based companies. Launch's reporting and news gathering infrastructure
consists of over 30 full-time staff based at three bureaus located in New York,
Los Angeles and Nashville. Launch has significantly increased the number of
music videos offered on launch.com by encoding videos from NVS and JBTVs'
library and adding them to the site. JBTV produces content for a one-hour cable
access and broadcast music video television program. NVS produces and licenses
music video programming for third parties. Both JBTV and NVS provide
opportunities to syndicate content and enhance the Launch brand through
traditional media platforms.
ADVERTISING AND TRANSACTION FEES
We sell advertising and sponsorships against the cumulative audience
viewing content on Launch. We sell advertisements that include placement on
launch.com, Launch on CD-ROM and OMG. In addition, Launch receives transaction
fees for product sales made through referrals. Specific placement within Launch
depends on the particular advertiser's media and creative goals. We negotiate
pricing based on the size of the unique audience, the extent of the placement
and the length of the agreement. See "Risk Factors -- If we fail to increase the
size of our audience, we may not be able to attract advertisers or strategic
alliances." Launch's strategy is to focus on large, consumer brand advertisers
who seek to reach the active music consumer in a relevant environment. Launch
understands that advertisers aiming to reach young consumers making first time
brand decisions desire advertising capable of making an emotional connection
with the viewer. Launch offers advertisers the opportunity to make such
connections with their potential consumers by delivering engaging advertising to
a targeted audience or sponsoring a relevant content area. Advertisers derive
significant value from targeted users who choose to spend time interacting with
the content and the advertisement. Our research indicates that users who view
advertisements in Launch tend to remember those advertisements more than
advertisements appearing on traditional media. See "Risk
Factors -- Effectiveness and acceptance of digital media for advertising are
unproven, which discourages some advertisers from advertising on Launch."
Launch derives a portion of its advertising revenues from banner
advertisements that are prominently displayed at the top of pages throughout
launch.com and OMG. Banner advertisements are typically sold based on a
cost-per-thousand-impressions (CPM) basis. Targeted banners typically sell for
higher CPM's than run-of-site banners. From each banner advertisement, viewers
can hyperlink directly to the advertiser's own Web site, thus providing the
advertiser the opportunity to directly interact with an interested customer.
Advertisers have the opportunity to purchase either run-of-site banners or
banners specifically targeted to a subset of Launch members based on zip code,
age, gender or musical preference. Launch charges premium
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advertising rates for any level of targeting. Launch has also begun trial runs
of serving audio advertisements within LAUNCHcast.
Launch has a strategic partnership with Checkout.com to make the Wherehouse
Online Stores the exclusive e-commerce provider for pre-recorded CDs and
cassettes, videos and video games. Through other partnerships with leading
merchants, Launch also intends to offer its users a variety of music-related
products such as concert tickets and artist merchandise. In addition, Launch
intends to pursue opportunities to sell other lifestyle products relevant to its
audience. We believe that aggregating active music consumers and understanding
their tastes by leveraging our substantial database of information about our
users positions Launch to be a valuable channel for merchants who are focused on
the 12 to 34 year old demographic group. In many of these relationships Launch
receives a percentage of completed transactions.
Launch has derived a significant amount of its revenues to date from the
sale of advertising. In 1998, advertising sales accounted for 60.6% of our
revenues, and in 1999 they accounted for 53.9% of our revenues. Advertising
orders are short term and subject to cancellation without penalty until shortly
before the advertisement runs. Launch employs a direct sales force of twenty-six
professionals, and we intend to increase our staff in 2000. For the year ended
December 31, 1999, sales to one advertiser were 13% of revenues. We depend upon
a limited number of advertisers in any quarterly period. The loss of a key
advertising relationship or the cancellation or deferral of even a limited
number of orders could adversely affect our quarterly financial performance. See
"Risk Factors -- We depend on a limited number of advertisers, and the loss of a
number of these advertisers could adversely affect our operating results."
Advertisers in Launch in 1997, 1998 and, or 1999 include the following:
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AT&T Heinz Motorola
Certs Hotjobs.com Nestle
Citibank IBM Nintendo
Coca-Cola Intel Procter & Gamble
Dentyne Jack Daniels Qualcomm
Discover Card Jim Beam RCA/Thompson
Dr. Pepper Kellogg's Sony
eBay Lee Jeans Toyota
Ford Levi's Universal Pictures
The GAP Mazda VH-1
Gateway Merck Visa
General Motors Microsoft Wrigley's
Gillette Miller
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CONTENT SYNDICATION
We generate revenue through content licensing to online and offline
sources. We syndicate our music and entertainment news to radio stations in
exchange for on-air inventory of radio advertisements or direct cash payments
from a small number of radio stations. Launch sells such on-air inventory
through Global Media, a third-party advertising agency. We also syndicate this
content to various online partners. Through NVS, we produce, license and
distribute music video programming for third parties such as retailers,
restaurants, hotels, nightclubs, theme parks and airlines.
STRATEGIC ALLIANCES
Launch pursues strategic relationships to increase audience, build brand
recognition and enhance content and distribution opportunities. We currently
have strategic relationships in three principal areas: Distribution and Content,
Sponsorship and Technology. Our future success depends to a significant extent
upon the success of these alliances and the achievement of their strategic
objectives.
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Distribution Agreements
In October 1999, Launch entered into an agreement to become the exclusive
music content partner for NetZero, Inc., a leading provider of free internet
access and free email to over 3 million registered users in the U.S. As part of
the two-year, exclusive music partner agreement, Launch is a featured button on
The ZeroPort. The ZeroPort is a compact ad window/navigational tool that
provides users with instant speed-dial to sites on the Internet for
entertainment, shopping, auction, e-commerce and other services.
In June 1999, Launch entered into a distribution agreement with Yahoo! Inc.
that brings launch.com's music content to Yahoo! Music. Music enthusiasts on
Yahoo! can also customize their My Yahoo! page to include "Music News from
LAUNCH." All content is featured on co-branded pages with links to launch.com.
In February 1999, Launch entered into an agreement with Snap! LLC, an
Internet search and portal service, to provide Snap! with music content for
Snap!'s Project Cyclone, Snap's enhanced, high-speed version of its general
Internet search and portal service that focuses on rich media content. All
Launch music links and portions of content on Cyclone take the user to either a
Launch branded area on Cyclone or to a Launch page.
In January 1999, Launch entered into further agreements with Snap! LLC
pursuant to which Launch provides Snap with links to certain music content. The
Launch content headlines can be found on both My Snap (Snap's personalized home
page) and on the Snap Entertainment news headlines page. All links take the user
to a co-branded Launch page. Either agreement may be terminated by either party
upon 30 days notice.
In January 1999, Launch entered into a strategic relationship with
Microsoft pursuant to a promotion agreement that provides, among other things,
for Launch to be the primary provider of content for the music category on the
MSN Entertainment Channel. This agreement promotes launch.com on the MSN
Entertainment Channel and encourages users to visit launch.com. Launch provides
music content headlines on MSN which link to launch.com for the full story.
Certain pages where Launch provides content are co-branded and Microsoft retains
the advertising revenue. Launch pays Microsoft a fee and provides certain
promotion on Launch on CD-ROM. The agreement terminates in April 2000 and may be
extended by mutual agreement. In addition, launch.com is embedded in Microsoft's
Windows Media Player.
In February 1999, Launch entered into a strategic alliance with AOL
pursuant to an interactive services agreement, which provides, among other
things, for Launch to be an anchor tenant on the AOL Music Channel and its genre
specific sub-channels. Launch has also been assigned specific keywords within
the AOL service. Launch pays AOL a fee and AOL guarantees Launch a minimum
number of impressions per year. In addition, the contract entitles AOL to a
portion of advertising revenues from the transition page between the AOL service
and launch.com. The agreement has a 14-month term.
In July 1999, Launch entered into a distribution agreement with
RealNetworks that brings launch.com's video and other music content to a Launch
RealChannel. Consumers who express a preference for music content when
downloading the RealPlayer G2 will receive the Launch RealChannel automatically.
The Launch RealChannel will also be available to existing RealPlayer users
through the RealChannels customization page, accessed directly from their
RealPlayer G2 and from Realguide. Users of RealPlayer G2 will have the ability
to select from these videos available on demand. The agreement has a one year
term.
Launch is the exclusive branded music content provider for the
entertainment areas of NBC.com. Launch is also the primary provider of music
purchasing services for NBC Interactive Neighborhood. The alliance is designed
primarily to provide visitors to NBC.com a more robust entertainment experience
and to provide Launch with promotion and traffic for launch.com. NBC retains the
rights to publish music content that it owns or controls and to accept
sponsorships other than from identified competitors. In addition, the agreement
provides that NBC is the exclusive television network to which Launch has the
right to provide online music content. As consideration for this agreement, NBC
received 392,156 shares of Launch Series D stock in February 1998. The agreement
expires in April 2000 and can be extended by mutual consent of the parties.
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Content, Sponsorship and Technology
In 1999, Launch and Sony Music entered into a sponsorship and content
license agreement and a music video license. Under the sponsorship content
license, Launch grants to Sony Music a nonexclusive license to the content
generated by SW Networks and supplied by Launch to radio stations. In return,
Sony Music will pay Launch a quarterly license fee of $50,000. In addition, this
license agreement provides that Sony Music and its affiliates will purchase
advertising and promotional spots on Web sites or other media properties owned
by Launch, in a minimum aggregate amount of $800,000 in the first year of the
agreement, $1.3 million in the second year of the agreement and $1.3 million in
each additional year of the agreement if renewed. Any advertising or promotional
purchases by Sony Music or certain affiliates of Sony Music in excess of such
minimum amounts shall be applied towards the next year's minimum commitment. The
initial term of this agreement is two years, with extensions of three successive
one-year terms at the option of Sony Music.
The music video license involves the nonexclusive license by Sony Music to
Launch of certain music videos for streaming video channels that Sony Music
makes generally available to third parties for exhibition. As part of this
license, Launch shares advertising, sponsorships and e-commerce revenues
generated in connection with Launch's music video content on launch.com. The
term of this Agreement is 12 months from the initial viewing of music videos
provided by Sony Music on launch.com, but in no event longer than 13 months from
the date of the initial execution of the agreement.
In 1999, we entered into licensing agreements with EMI Music Group and
Warner Music Group, on a non-exclusive basis for Internet distribution rights to
stream their catalog and new release music videos. These agreements are
multi-year and provide selected worldwide rights as well.
The music videos and audio channels available on launch.com use Microsoft's
Windows Media Player technology for displaying content. Launch.com also uses
RealNetworks' streaming media technology to stream Launch's extensive music
video content.
MARKETING AND BRAND AWARENESS
Launch employs a variety of methods to increase its audience and build
brand recognition and loyalty. We believe that the most effective means of
consumer marketing is creating programs that allow a potential user the
opportunity to sample the product. As a result, Launch has used various direct
marketing techniques, such as the distribution agreements described above for
launch.com, and Internet and direct response television advertisements offering
no-risk subscriptions to Launch on CD-ROM. A portion of our marketing staff is
dedicated to these types of direct marketing programs.
In addition to direct marketing, certain of our marketing staff focuses on
other forms of brand awareness including traditional media advertising such as
print, radio and outdoor. Launch also has a dedicated public relations team
focused on generating press coverage in both trade and consumer media.
Launch is developing a half-hour, entertainment show for television. The
primary purposes of the show are to build brand awareness for Launch and to
drive traffic to our digital media properties. Much of the video production that
we create is similar to television production, and we believe that we can
effectively leverage our access to content and production resources to create a
high-quality television show that increases Launch's audience. As of this date,
no television network has agreed to broadcast the television show.
OPERATIONS AND INFRASTRUCTURE
Launch.com's operating infrastructure has been designed and implemented to
support the reliable and swift delivery of millions of page views a day. Key
attributes of this infrastructure include scalability, performance and service
availability.
Web pages are generated and delivered, in response to end-users requests,
by front-end Web and applications servers, and database servers. Some of
Launch's servers run on the Microsoft Windows NT operating system and
Microsoft's IIS Web server software. Launch also utilizes Sun Enterprise class
servers, which run on Solaris operating system. Launch uses a variety of
Web-based applications software to provide
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the services it offers. These currently include Koz.com, formerly iChat Inc.,
for real-time chat, NetPerceptions Inc. for collaborative filtering, although
originally built on Firefly, Accrue Insight and Vista for Web-traffic
measurements, and Microsoft's SQL 7.0 for databases. Launch utilizes
DoubleClick's DART technology to deliver its advertisements. Launch is also
using Vignette Story Server 4.0, a content managing and publishing system.
Launch maintains all of its launch.com production servers at the Marina Del
Rey, California data center of PSINet. Launch's operations are dependent upon
PSINet's ability to protect its systems against damage from fire, hurricanes,
power loss, telecommunications failure, break-ins and other events. PSINet
provides comprehensive facilities management services including human and
technical monitoring of all production servers 24 hours per day, seven days per
week. PSINet provides the means of connectivity for Launch's servers to
end-users via the Internet through multiple DS3 and OC12 connections. These
connections link to many different parts of the Internet via a combination of
public and private peering agreements. The facility is connected to two
independent power grids, has two independent uninterruptible power supplies
("UPS"), which are battery-powered, as well as two independent diesel generators
designed to provide power to the UPS systems within seconds of a power outage.
Launch recently leveraged the technology of iBEAM Broadcasting, Microsoft
and Sonic Foundry to bring LAUNCHcast to consumers. The Company utilized the
unique architecture of the iBEAM Network, which currently allows quality
delivery of 300,000 simultaneous streams to viewers and listeners globally.
Microsoft's Windows Media is the exclusive media platform for LAUNCHcast and is
invaluable for its high quality audio compression technology. Sonic Foundry
Media Services is utilized for their state-of-the-art encoding technologies to
encode and digitize audio CD's for launch.com.
All of Launch's production data are copied to backup tapes each night and
stored at a third-party, off-site storage facility. Launch is in the process of
developing a comprehensive disaster recovery plan to respond to system failures.
Launch keeps all of its production servers behind firewalls for security
purposes and does not allow outside access, at the operating systems level,
except via special secure channels. Strict password management and physical
security measures are followed. Computer Security Response Team alerts are read,
and, where appropriate, recommended action is taken to address security risks
and vulnerabilities. See "Risk Factors -- We rely upon third parties for our Web
site hosting facilities and Internet connectivity. If these systems fail, they
could disrupt or delay user traffic, which could impair our business."
Launch services its subscribers to the CD-ROM through Centrobe, a full
service fulfillment company located in Boulder, Colorado. As our fulfillment
vendor, Centrobe is responsible for processing orders, generating billings and
renewals, processing payment, and providing effective customer service. Centrobe
manages the complete database of Launch on CD-ROM subscribers. Centrobe
generates detailed fulfillment, customer service, and circulation reports that
allow us to effectively analyze our direct marketing efforts.
COMPETITION
Competition among media companies seeking to attract the active music
consumer is intense. Traditional media companies such as television
broadcasters, magazine publishers and radio stations are constantly refining
their content and strategies to increase their audiences and capture advertising
expenditures. Further, the number of Web sites competing for the attention and
spending of members, users and advertisers has increased, and we expect it to
continue to increase, particularly because there are so few barriers to entry on
the Web. We compete for members, users and advertisers with the following types
of companies:
- publishers and distributors of traditional media, such as television,
radio and print, including MTV, Clear Channel, CMT, Rolling Stone and
Spin, and their Internet affiliates;
- online services or Web sites targeted at music consumers, such as
mp3.com, Artistdirect, MTVi, emusic.com and musicmaker.com;
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<PAGE> 13
- Web retrieval and other Web "portal" companies, such as Excite@Home,
Inc., Infoseek Corporation, Lycos, Inc. and Yahoo! Inc.; and
- online music retailers, such as CDNow and Amazon.com.
Launch believes that the primary competitive factors in creating a music
destination that attracts a large audience composed of our target demographic
group are the following:
- quality and diversity of content;
- ability to personalize content;
- community experience; and
- brand awareness.
Increased competition could result in advertising price reductions, reduced
margins or loss of market share, any of which could adversely affect our
business. Because we compete for advertisers with traditional advertising media,
our business could suffer if advertisers do not view digital media as effective
for advertising. Competition is likely to increase significantly as new
companies enter the market and current competitors expand their services. Many
of these potential competitors are likely to enjoy substantial competitive
advantages, including the following:
- larger technical, production and editorial staffs;
- greater name recognition;
- better access to content;
- more established Internet presence;
- larger customer bases; and
- substantially greater financial, marketing, technical and other
resources.
If we fail to compete effectively or if we experience any pricing
pressures, reduced margins or loss of market share resulting from increased
competition, our business could be adversely affected.
GOVERNMENTAL REGULATION
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. The United States Congress
has enacted Internet laws regarding children's privacy, copyrights and taxation.
Such legislation could dampen the growth in use of the Internet generally and
decrease the acceptance of the Internet as a communications, commercial and
advertising medium. Although our transmissions originate in California, the
governments of other states or foreign countries might attempt to regulate our
transmissions or levy sales or other taxes relating to our activities. The
European Union recently enacted its own privacy regulations that may result in
limits on the collection and use of certain user information. The laws governing
the Internet, however, remain largely unsettled, even in areas where there has
been some legislative action. It may take years to determine whether and how
existing laws such as those governing intellectual property, privacy, libel and
taxation apply to the Internet and Internet advertising.
The growth and development of the market for Internet commerce may prompt
calls for more stringent consumer protection laws, both in the United States and
abroad, that may impose additional burdens on companies conducting business over
the Internet. Furthermore, the Federal Trade Commission has recently
investigated the disclosure of personal identifying information obtained from
individuals by Internet companies. In the event the Federal Trade Commission or
other governmental authorities adopt or modify laws or regulations relating to
the Internet, our business, results of operations and financial condition could
be adversely affected. See "Risk Factors -- Governmental regulation of the Web
related to communication, commerce and other issues may limit the growth of our
business and decrease our market opportunity."
Launch does not collect sales or other taxes in respect of goods sold to
users on launch.com. However, one or more states may seek to impose sales tax
collection obligations on out-of-state companies, such as Launch, which engage
in or facilitate online commerce. A number of proposals have been made at the
state
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and local level that would impose additional taxes on the sale of goods and
services through the Internet. Such proposals, if adopted, could substantially
impair the growth of electronic commerce and could adversely affect our
opportunity to derive financial benefit from electronic commerce. Moreover, if
any state or foreign country were to successfully assert that Launch should
collect sales or other taxes on the exchange of merchandise on its system, our
results of operations could be adversely affected.
Legislation limiting the ability of states to impose taxes on
Internet-based transactions has been proposed in the U.S. Congress. We cannot
assure you that this legislation will ultimately become law or that the tax
moratorium in the final version of this legislation will be ongoing. Failure to
enact or renew this legislation, once enacted, could allow various states to
impose taxes on Internet-based commerce, which could adversely affect our
business. See "Risk Factors -- Imposition of sales and other taxes on e-commerce
transactions may impair our ability to derive financial benefits from
e-commerce."
INTELLECTUAL PROPERTY
The music and music videos featured in Launch are copyrighted works of
third parties, including record labels, artists and songwriters. Each piece of
music or music video content may have multiple copyright owners, some with
rights in the sound recording, covering the particular performance, others with
rights in the musical composition, covering the lyrics and music, and in the
case of music videos, others with rights to the visual content. Launch has
different licensing arrangements with these parties depending on how the song or
music video is used by Launch and the length of the part of the song included.
In certain cases, we use content without a license because we do not believe a
license is required; however, the laws in this area are uncertain. Our
arrangements range from formal contracts to informal agreements based on the
promotional nature of the content. In some cases, Launch pays a fee to the
licensor for use of the music or music video and in other cases the use is free.
Launch also uses other content, including images that are copyrighted works of
others. We rely on our positive working relationships with copyright owners to
obtain licenses on favorable terms. Any changes in the nature or terms of these
arrangements, including any requirement for Launch to pay significant fees for
the use of the content, could have a negative impact on the availability of
content or our business.
Copyrighted material that Launch develops internally, as well as trademarks
relating to the Launch brand and other proprietary rights are important to our
success and our competitive position. We seek to protect our copyrights,
trademarks and other proprietary rights, but these actions may be inadequate. We
generally enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and generally control access to and
distribution of our proprietary information. We cannot assure you that the steps
we have taken will prevent misappropriation of our proprietary rights,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights as fully as in the United States. If third
parties were to use or otherwise misappropriate our copyrighted materials,
trademarks or other proprietary rights without our consent or approval, our
competitive position could be harmed, or we could become involved in litigation
to enforce our rights. It is also possible that we could become subject to
infringement actions based upon the content licensed from third parties. Any
such claims or disputes could subject us to costly litigation and the diversion
of our financial resources and technical and management personnel. Further, if
our efforts to enforce our intellectual property rights are unsuccessful or if
claims by third parties against Launch are successful, we may be required to
change our trademarks, alter the content and pay financial damages. We cannot
assure you that such changes of trademarks, alteration of content or payment of
financial damages will not adversely affect our business. See "Risk
Factors -- We depend upon licensed music content that may not continue to be
available on reasonable terms."
EMPLOYEES
As of December 31, 1999, Launch had 209 full-time employees. Our future
performance depends in significant part on our ability to continue to attract,
retain and motivate highly qualified technical and management personnel, for
whom competition is intense. From time to time, Launch also employs independent
contractors to support our research and development, marketing, sales and
support and administrative organizations. None of Launch's employees is
represented by any collective bargaining unit, and we have never experienced a
work stoppage. We believe that our relations with our employees are good.
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EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David B. Goldberg..................... 32 Chairman of the Board of Directors and
Chief Executive Officer
Robert D. Roback...................... 32 President and Director
Jeffrey M. Mickeal.................... 39 Chief Financial Officer and Secretary
James E. Hughes....................... 42 Senior Vice President, General
Manager, launch.com
Spencer A. McClung, Jr................ 33 Senior Vice President, Advertising and
Business Development
</TABLE>
David B. Goldberg has served as Launch's chairman of the board and chief
executive officer since he co-founded Launch in February 1994. Prior to that
time, from October 1991 to December 1993, Mr. Goldberg was director of marketing
strategy and new business development at Capitol Records, a major record label
in Hollywood, California. Mr. Goldberg was a consultant at Bain & Co., a major
strategy consulting firm, from September 1989 to September 1991. Mr. Goldberg is
a member of the National Academy of Recording Arts and Sciences. Mr. Goldberg
holds an A.B. in history and government from Harvard University.
Robert D. Roback has served as Launch's president and a director since he
co-founded Launch in February 1994. Prior to that time, from October 1992 to
February 1994, Mr. Roback was a securities attorney at Mayer, Brown & Platt, a
major international law firm in Chicago, Illinois. Mr. Roback holds a B.S. in
economics from The Wharton School of the University of Pennsylvania and is a
graduate of the University of Minnesota Law School.
Jeffrey M. Mickeal has served as Launch's chief financial officer and
secretary since April 1995. Prior to that time, from September 1982 to March
1995, Mr. Mickeal was a senior manager at PricewaterhouseCoopers LLP in Los
Angeles, California in their entrepreneurial advisory services group. Mr.
Mickeal holds a B.A. in business/economics from the University of California,
Santa Barbara and is a Certified Public Accountant.
James E. Hughes has served as Launch's senior vice president and general
manager, launch.com since July 1998. From its creation in April 1996 until July
1998, Mr. Hughes was vice president of marketing and creative development of E!
Online, LLC, an Internet entertainment company. Mr. Hughes was one of the
founders of the CNET/E! Entertainment Television joint venture. From 1992 until
April 1996, Mr. Hughes was employed by E! Entertainment Television, first as a
writer/producer in the programming department, then as manager, news projects,
and finally as director, promotions, in the marketing department. From 1986
until 1991, Mr. Hughes served as media communications consultant at Aetna Life &
Casualty in Hartford, Connecticut. Mr. Hughes holds a B.S. from Southern
Connecticut State University.
Spencer A. McClung, Jr. has served as Launch's senior vice president,
advertising and business development, since July 1997. From July 1996 to June
1997, he served as Launch's senior vice president, marketing. From January 1996
to July 1996, Mr. McClung served as Launch's vice president, marketing. From
July 1995, when he joined Launch, to January 1996, he served as Launch's senior
director, marketing. From July 1991 to July 1993, he served as a senior
financial analyst at the Walt Disney Company. From June 1989 to July 1991, he
served as a financial analyst at Trammell Crow Ventures, a real estate
development company. Mr. McClung holds a B.A. from Texas A&M University and an
MBA from Harvard Business School.
ITEM 2. FACILITIES
Our principal administrative, sales, marketing and production facilities
are located at our headquarters, which consists of three buildings and
approximately 43,000 square feet of office and studio production space in Santa
Monica, California. Our leases for the Santa Monica facilities provide for
rental payments of approximately $812,000 per year and expire from June 2003
through February 2005. We have the option to renew our main production facility
sublease for one additional four year period. We also lease office space in
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<PAGE> 16
New York City for use as an East Coast production, sales and marketing office.
Effective July 2000, our New York operations will be moved to a new 12,000
square foot facility in New York City. This new lease provides for rental
payments of $240,000 per year and expires in June 2008. We believe that our
current facilities will be adequate to meet our needs for the foreseeable
future. We believe that suitable additional facilities will be available in the
future as needed on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Launch may be involved in litigation relating to claims
arising out of its operations. As of the date of this report, we are not engaged
in any legal proceedings that are expected, individually or in the aggregate, to
have a material adverse effect on our business, financial condition, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal
quarter ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET PRICES FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the NASDAQ National Market
under the symbol "LAUN" since April 23, 1999. The following table sets forth for
the year ended December 31, 1999 the range of high and low closing prices per
share of Common Stock, as reported by the NASDAQ National Market:
<TABLE>
<CAPTION>
Q1 Q2 Q3 Q4
--- ------- ------- -------
<S> <C> <C> <C> <C>
Closing Price
Low......................................... N/A $15.500 $10.500 $10.500
High........................................ N/A $29.125 $18.500 $19.750
</TABLE>
On February 29, 2000, there were 1,218 holders of record of our Common
Stock.
CHANGES IN SECURITIES AND USE OF PROCEEDS
During the IPO, a total of 3,500,000 shares of common stock were sold at a
price of $22 per share. On May 19, 1999, the underwriters exercised their
over-allotment to purchase an additional 510,000 shares of common stock. The net
proceeds to Launch after deducting underwriting discounts and commissions and
offering expenses, were $80.9 million. Our use of proceeds through December 31,
1999 conformed to the intended use of proceeds described in our prospectus
relating to the IPO. From the date of the IPO through December 31, 1999, Launch
has spent $18.1 million of the net proceeds on sales and marketing, $8.8 million
of the net proceeds on content and product development expenses, $3.5 million on
general and administrative expenses, $3.2 million on capital expenditures and
$500,000 on acquisitions. The balance of the net proceeds of the IPO have been
invested in investment grade, interest bearing securities.
Upon the closing of the IPO all of the then outstanding shares of the
Company's Mandatory Redeemable Convertible Preferred Stock automatically
converted into shares of common stock on a one-for-one basis. In addition, on
February 15, 1999, Launch entered into a note purchase agreement in which it
agreed to issue a convertible subordinated promissory note in the amount of $1.0
million to Avalon Technology LLC, a stockholder, and a convertible subordinated
promissory note in the amount of $500,000 to Goran Enterprises Limited, a
stockholder. The notes accrued interest at 8.5% per annum from the issuance date
and were due February 29, 2000. The notes automatically converted into shares of
Launch common stock upon the Company's IPO.
In addition, in connection with the IPO, the Company effected a
one-for-five reverse stock split. All share and per share information in the
accompanying consolidated financial statements have been retroactively restated
to reflect the effect of this reverse stock split.
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. Launch
currently intends to retain future earnings, if any, to fund the development and
growth of its business.
The aggregate market value of shares of Common Stock held by non-affiliates
of the Registrant as of February 29, 2000, was approximately $232,940,000 based
on the $18.25 closing price for the Common Stock on The NASDAQ National Market
on such date. For purposes of this computation, all executive officers and
directors of the registrant have been deemed to be affiliates. Such
determination should not be deemed to be an admission that such directors and
officers are, in fact, affiliates of the registrant. The number of shares of
Common Stock of the registrant outstanding as of February 29, 2000 was
13,496,373.
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SALES OF UNREGISTERED SECURITIES DURING THE YEAR ENDED DECEMBER 31, 1999
During the year ended December 31, 1999, the Company issued and sold the
following securities without registration under the Securities Act:
On February 28, 1999, the Company acquired all the partnership interests of
AreohveeOnline Partnership, dba Musicvideos.com. Musicvideos.com is a provider
of music videos over the Internet. The total purchase price of approximately
$9.3 million was comprised of 875,556 shares of the Company's common stock with
an estimated fair value of approximately $8.9 million, and a cash payment of
approximately $300,000.
On April 22, 1999, the Company acquired all the outstanding shares of SW
Networks Inc. SW Networks is a provider of entertainment information/news
content to radio stations and Internet-based entertainment companies. The
purchase agreement relating to this acquisition required that the Company pay
Sony Music a stated consideration of $12.0 million in shares of the Company's
common stock. For purposes of the agreement, the shares issued to Sony Music
were valued at 80% of the initial public offering price. Accordingly, the
Company issued 681,818 shares of common stock to Sony Music. For accounting
purposes, the Company valued such shares to be equal to the initial public
offering price less 5% due to the restrictions on resale. Accordingly, the
Company, for accounting purposes, has estimated the purchase price of SW
Networks to be $14.3 million.
In addition, during 1999 the Company acquired a company and the net assets
of another company. The total combined purchase price of approximately $3.1
million was comprised of 123,191 shares of the Company's common stock and cash
payments of approximately $800,000.
No underwriter was involved in any of the above sales of securities. All of
the above securities were issued in reliance upon the exemption set forth in
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") on
the basis that they were issued under circumstances not involving a public
offering, or, in the case of certain options and warrants to purchase Common
Stock, Rule 701 of the Securities Act.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data presented below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this report and has
been derived from the consolidated financial statements of Launch, which have
been audited by PricewaterhouseCoopers LLP, independent accountants. The
consolidated financial statements as of December 31, 1999 and 1998 and for each
of the years in the three year period ended December 31, 1999 are included
elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Advertising.................................. $ 720 $ 837 $ 1,859 $ 3,038 $ 8,958
Content licensing............................ -- -- -- -- 5,442
Subscription and other....................... 400 538 1,278 1,976 2,226
------- ------- ------- -------- --------
Total net revenues................... 1,120 1,375 3,137 5,014 16,626
Operating expenses:
Cost of revenues............................. 373 812 1,735 3,185 3,493
Sales and marketing.......................... 1,593 3,189 4,225 9,011 24,234
Content and product development.............. 330 1,006 2,454 4,407 11,029
General and administrative................... 787 1,021 1,255 1,893 4,416
Depreciation and amortization................ 72 115 144 322 7,971
Cost of warrants issued...................... -- -- -- -- 4,964
------- ------- ------- -------- --------
Loss from operations........................... (2,035) (4,768) (6,676) (13,804) (39,481)
Interest income (expense), net................. (16) 167 (14) 389 1,988
------- ------- ------- -------- --------
Loss before provision for income taxes......... (2,051) (4,601) (6,690) (13,415) (37,493)
Provision for income taxes..................... (1) (2) (3) (4) (12)
------- ------- ------- -------- --------
Net loss....................................... (2,052) (4,603) (6,693) (13,419) (37,505)
Accretion of mandatory redeemable convertible
preferred stock.............................. -- (456) (608) (1,851) (766)
------- ------- ------- -------- --------
Net loss attributable to common stockholders... $(2,052) $(5,059) $(7,301) $(15,270) $(38,271)
======= ======= ======= ======== ========
Basic and diluted net loss per share........... $ (2.38) $ (5.50) $ (7.89) $ (16.35) $ (4.15)
======= ======= ======= ======== ========
Weighted average shares outstanding used in
basic and diluted per share calculation...... 862 920 925 934 9,218
======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.............................. $ 78 $ 808 $ 644 $ 6,728 $ 55,886
Working capital (deficit)................... (141) 3,038 (3,724) 4,366 56,985
Total assets................................ 932 4,784 1,790 13,164 94,218
Long-term obligations, net of current
portion.................................. 32 58 77 639 999
Mandatory redeemable convertible preferred
stock.................................... 2,403 10,458 11,065 36,707 --
Total stockholders' equity (deficit)........ (2,053) (7,006) (14,186) (27,826) 86,041
</TABLE>
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with Launch's
financial statements and the notes thereto and the other financial information
appearing elsewhere in this report. In addition to historical information, the
following discussion and other parts of this report contain forward-looking
information that involves risks and uncertainties. Launch's actual results could
differ materially from those anticipated by such forward-looking information due
to factors discussed under "Risk Factors," "Business" and elsewhere in this
10-K.
OVERVIEW
Launch is a media company that offers a compelling online music discovery
experience for consumers and provides a valuable marketing platform for record
labels, artists, advertisers and merchants. We create engaging music content
focused on both new and established artists, spanning almost all musical genres.
We currently deliver our content on the Internet at www.launch.com and on the
monthly Launch on CD-ROM. As broadband access to the Internet achieves greater
consumer acceptance and enables us to add our richest audio and video content to
launch.com, we intend to phase out delivery of Launch on CD-ROM. We also reach
music consumers through the Online Music Group (OMG), a consolidation of music
sites on the web designed to increase traffic for launch.com and other OMG
member sites.
Launch commenced operations in February 1994 as 2Way Media, Inc. and
changed our name to Launch Media, Inc. in March 1998. As of December 31, 1999,
launch.com had approximately 2.8 million registered users. Double Click, Inc.,
our third-party ad server, reported that, in December 1999, Launch reached
approximately 4.7 million unique visitors. A unique visitor is defined as an
unduplicated web site user within a given time period. As of December 1999,
Launch on CD-ROM had approximately 265,000 subscribers. In December 1999, we
also streamed more than 2 million music videos on launch.com.
Launch has incurred significant net losses and negative cash flows from
operations since its inception, and as of December 31, 1999, had an accumulated
deficit of approximately $65.1 million. Launch intends to continue to make
significant financial investments in marketing and promotions, content
development, technology and infrastructure development. As a result, we believe
that we will incur operating losses and negative cash flows from operations for
the foreseeable future, and that such losses and negative cash flows will
increase for at least the next year.
To date, Launch's revenues have been derived primarily from the sale of
advertising, including sponsorships, content licensing, and to a lesser extent,
from annual subscriptions relating to Launch on CD-ROM. Launch derives revenue
from advertising sales against the total audience viewing content on both
launch.com and Launch on CD-ROM. Launch expects that future growth, if any, in
advertising revenue will largely depend upon increasing the launch.com audience.
Advertising revenues for sponsorships across the Launch media properties
are recognized ratably over the sponsorship term, which is typically one month.
Revenues from advertisements for Launch on CD-ROM are recognized upon the
release date of the issue in which the advertisement appears. With respect to
launch.com, revenues from advertisements are recognized ratably in the period in
which the advertisement is displayed, provided that no significant Launch
obligations remain.
Content licensing primarily relates to the Launch Radio Networks' content
syndication. Launch obtains on-air radio advertising inventory in exchange for
music and entertainment news content. Launch sells this inventory for cash and
recognizes revenue when the radio stations broadcast the advertisement. Other
content licensing revenues includes online and additional offline opportunities.
We derive subscription revenues from annual subscription fees for Launch on
CD-ROM. Advance payments for Launch on CD-ROM subscriptions are recorded as
deferred revenue and recognized as revenue ratably over the term of the
subscription.
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Advertising revenues also include barter revenues, which represent an
exchange by Launch of advertising space on Launch on CD-ROM for advertising
space on other Web sites. Revenues and expenses from barter transactions are
recorded at the lower of estimated fair value of the advertisements received or
delivered based on advertising rates currently in effect. Barter revenues are
recognized when the advertisements are run on the Launch media properties.
Barter expenses are recognized when Launch's advertisements are run on the
reciprocal Web sites or other advertising medium, which is typically in the same
period as when the advertisements are run on the Launch media properties.
Although we believe these barter transactions have been important in the
marketing of the Launch brand, we expect these transactions will decrease as a
percentage of total net revenues in the future. In 1999, revenues recognized
from barter transactions represented 7.3% of total revenues.
We have entered into various license arrangements, strategic alliances and
business acquisitions in order to build our audience, provide music-specific
content, generate additional online traffic, increase subscriptions and
memberships and establish additional sources of revenue. These acquisitions,
arrangements and alliances have resulted in a variety of non-cash charges that
will affect our operating results over the next several fiscal periods. The
Company has made four acquisitions during 1999 resulting in intangible assets of
$24.6. These intangible assets are being amortized over estimated useful lives
of 12 to 60 months.
SIGNIFICANT EVENTS
Initial Public Offering
On April 23, 1999, Launch effected an initial public offering (IPO) of
3,500,000 shares of its common stock at a price of $22 per share. On May 19,
1999, the underwriters exercised their over-allotment to purchase an additional
510,000 shares of common stock. The net proceeds to the Company, after deducting
underwriting discounts and commissions and estimated offering expenses, were
$80.9 million.
Musicvideos.com
On February 26, 1999, the Company acquired all of the partnership interests
of Areohvee Online Partnership, d.b.a. Musicvideos.com. Musicvideos.com is a
provider of music videos over the Internet. The acquisition was accounted for
using the purchase method of accounting and, accordingly, the purchase price has
been allocated to the tangible and intangible assets acquired and liabilities
assumed on the basis of their respective fair values on the acquisition date.
The total purchase price of approximately $9.4 million is comprised of
875,556 shares of the Company's common stock with an estimated fair value at
issuance of approximately $8.9 million, a cash payment of approximately $300,000
and assumed liabilities and transaction costs of approximately $200,000. The
excess purchase price over net tangible assets acquired was approximately $9.2
million and is being amortized over an average useful life of 36 months.
Launch Radio Networks (formerly SW Networks, Inc.)
On April 28, 1999, concurrently with its IPO, Launch acquired all of the
outstanding shares of SW Networks (renamed Launch Radio Networks) an
entertainment information/news content provider to radio stations and
Internet-based entertainment companies. The Company paid Sony Music
Entertainment, Inc., the sole stockholder of Launch Radio Networks, $12.0
million in shares of the Company's common stock. In accordance with the purchase
agreement the shares issued to Sony Music were valued at 80% of the IPO price.
Accordingly, the Company issued 681,818 shares of common stock to Sony Music at
an effective discount of 20% from the initial public offering price. Sony Music
has the right to require registration of such shares beginning September 28,
1999. Absent registration, Sony Music must hold such shares for a minimum of one
year from April 28, 1999. For accounting purposes, the Company computed the per
share value to equal the IPO price less 5%, due to the restrictions on resale or
$20.90 per share. Accordingly, for accounting purposes, the Company recorded the
purchase price of Launch Radio Networks as $14.3 million. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible and intangible assets acquired
and liabilities assumed on the basis of their
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<PAGE> 22
respective fair values on the acquisition date. The excess purchase price over
net tangible assets acquired was approximately $12.7 million and is being
amortized over an average useful life of 4 years.
EMI
On December 2, 1999, Launch and EMI Recorded Music signed an agreement
granting Launch the first nonexclusive worldwide license to stream music videos
from EMI's video library over the Internet. In connection with the deal, EMI is
being paid a license fee for the streaming of its videos and has received a
small equity stake in Launch. With this agreement, Launch has the right to
stream online music video selections from EMI labels, including Capitol Records,
Virgin, Astralwerks, Priority, Angel and Blue Note on the launch.com website.
Warner Music Group
Signed in December 1999, Launch received the first nonexclusive Internet
video licensing deal from the Warner Music Group (WMG) to stream catalog and new
release music videos from WMG artists on launch.com. As part of the
non-exclusive multi-year deal, WMG is being paid a license fee based on
advertising revenues received for the streaming of its videos and has received a
small equity stake in Launch.
NVS
On December 24, 2000, Launch acquired NVS, a company that produces and
licenses music video programming for third parties such as retailers,
restaurants, hotels, nightclubs, theme parks and airlines. NVS currently creates
video compilations viewed by millions of consumers each year. NVS maintains a
video library of over 24,000 music videos, with more videos added to the library
monthly. NVS produces programs representing a broad variety of music genres
including Top 40, Alternative, Modern Rock, Urban, Hip Hop, Jazz, Blues,
Country, Pop, Dance and Latin music. Launch has re-branded NVS as a Launch
property and the video programs will then serve as a method of building the
Launch brand in the offline marketplace, driving people to launch.com.
Tourdates.com
On January 18, 2000 Launch acquired the Atlanta based Tourdates.com, the
premier online guide to local and national concert information. The
predominantly stock transaction was valued at approximately $11.6 million.
Tourdates.com gathers this information from a network of 10,000 bands, leading
concert agencies and promoters and more than 80 field representatives based in
56 U.S. cities, Canada and other international locations such as London and
Warsaw. In addition, Tourdates.com's approximately 85,000 registered users will
become part of launch.com's member community. Launch plans to include
geographically targeted tour information in its weekly emails to all launch.com
members.
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RESULTS OF OPERATIONS
The following table sets forth the results of operations for Launch
expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Advertising............................................ 59.3% 60.6% 53.9%
Content licensing...................................... --% --% 32.7%
Subscription and other................................. 40.7% 39.4% 13.4%
------ ------ ------
Total net revenues............................. 100.0% 100.0% 100.0%
Operating expenses:
Cost of revenues....................................... 55.3% 63.5% 21.0%
Sales and marketing.................................... 134.7% 179.7% 145.8%
Content and product development........................ 78.2% 87.9% 66.3%
General and administrative............................. 40.0% 37.8% 26.6%
Depreciation, amortization and cost of warrants........ 4.6% 6.4% 77.8%
------ ------ ------
Loss from operations..................................... (212.8)% (275.3)% (237.5)%
Interest income (expense), net........................... (0.4)% 7.8% 12.0%
------ ------ ------
Loss before provision for income taxes................... (213.2)% (267.5)% (225.5)%
Provision for income taxes............................... (0.1)% (0.1)% (0.1)%
------ ------ ------
Net loss................................................. (213.3)% (267.6)% (225.6)%
====== ====== ======
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
Total Net Revenues
Total net revenues increased 232% from $5.0 million in 1998 to $16.6
million in 1999. The increase in net revenues was primarily attributable to an
increase in advertising revenues and content licensing.
Advertising Revenues. Advertising revenues increased 200% from $3.0
million, or 60.6% of total net revenues in 1998, to $9.0 million, or 53.9% of
total net revenues in 1999. The increase in advertising revenue can be
attributed to an increased number of advertisers and sponsors on Launch's media
properties and revenue from Sony and Intel's advertising sponsorships. Launch
added 44 new advertisers in the quarter ended December 31, 1999, bringing the
total to 137 unique advertisers for 1999. Throughout 1999, Launch continued to
expand its advertising sales force, in particular focusing its sales efforts on
sponsorships or advertisements that covered all of Launch's media properties.
The inventory of impressions available on our web site increased, as a result of
the fourth quarter growth of Online Music Group. Launch expects advertising
revenue to continue to represent a significant portion of its total net revenues
for the foreseeable future. Included in advertising revenues are revenues
recognized from barter transactions of $1.2 million for the year ended December
31, 1999, compared to $1.3 million for the year ended December 31, 1998.
Content Licensing. Content licensing revenues for the year ended December
31, 1999 were $5.4 million, or 32.7% of total net revenues. Content licensing
revenue is primarily generated from Launch Radio Networks (LRN) by providing
news and information to radio stations in exchange for advertising radio spots.
These radio spots are sold through a third-party advertising agency and
recognized as revenue when the radio station broadcasts the advertisement.
Content licensing revenues in prior years were immaterial and were captured in
subscriptions and other revenues. Content licensing revenues from LRN depend on
both the number of music and music related spots we are able to create and on
the radio market's demand for news and information. While LRN revenue comprises
the majority of our content licensing, we expect LRN revenues to decrease as a
percentage of total content licensing as we continue to expand our content
syndication.
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Subscriptions and Other Revenues. Subscriptions and other revenues
increased 10% from $2.0 million, or 39.4% of total net revenues in 1998 to $2.2
million, or 13.4% of total net revenues in 1999. Of the total $2.2 million in
1999, $1.1 million, or 6.8% of total net revenues, were generated from
subscriptions and $650,000 related to a development agreement with Intel.
Subscription revenue was $1.5 million in 1998. The decline in subscription
revenue can be attributed to Launch's intent to phase out Launch on CD-ROM, as
more efficient broadband distribution systems achieve widespread consumer
acceptance. As a result, Launch anticipates that subscription revenues from
Launch on CD-ROM will continue to decline substantially over time. At December
31, 1999, Launch had deferred revenues of $1,197,000 consisting primarily of
prepaid advertising on Launch's media properties.
Operating Expenses
Cost of Revenues. Cost of revenues consist primarily of CD-ROM
manufacturing and packaging costs and CD-ROM subscription distribution costs. In
addition, costs associated with acquiring advertising inventory related to
Launch's Online Music Group (OMG) are recorded as cost of revenues. Cost of
revenue increased 9% from $3.2 million, or 63.5% of total net revenues in 1998,
to $3.5 million or 21% of total net revenues in 1999. The increase in cost of
revenues can be attributed to the production and distribution of 11 issues of
Launch on CD-ROM versus 8 issues during 1998. We expect cost of revenues as a
percentage of total net revenues to decrease as Launch on CD-ROM is phased out.
However, costs associated with OMG will increase as OMG revenues increase,
resulting in potential increases in absolute dollars.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of customer acquisition and marketing costs, promotional costs and the
cost of the direct marketing and advertising sales force. Sales and marketing
expenses increased 169% from $9.0 million, or 179.7% of total net revenues in
1998 to $24.2 million, or 145.8% of total net revenues in 1999. The increase in
sales and marketing expenses occurred primarily due to the cost of acquiring new
registered users on launch.com, including distribution agreements and
promotions, advertising for Launch on other web sites, the hiring of additional
sales and marketing personnel and increased sponsorships of music events. In
addition, we undertook a significant outdoor advertising campaign beginning in
August 1999 in order to promote the Launch brand and increase the audience on
Launch's media properties. We expect sales and marketing expenses to increase as
we pursue additional marketing campaigns and enter into new distribution
agreements to increase the audience on launch.com, expand marketing of the
Launch brand and hire additional sales and marketing personnel.
Content and Product Development Expenses. Content and product development
expenses consist of editorial, which includes video production and editorial
writers, art production and software, technology and Web development costs.
Content and product development also includes expenses associated with site
hosting and rich media serving. Content and product development expenses
increased 150% from $4.4 million, or 87.9% of total net revenues in 1999 to
$11.0 million, or 66.3% of total net revenues in 1999. Content and product
development expenses increased due to costs of further development and
enhancement of the launch.com Web site, including product development costs,
significant additions to personnel, and software license costs. We believe that
significant investments in content and product development are required to
remain competitive and to retain our registered users. Therefore, we expect that
content and product development expenses will continue to increase in absolute
dollars, although decreasing as a percentage of total net revenues, for the
foreseeable future.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for general corporate functions,
including finance and accounting, human resources, legal, facilities and fees
for professional services. General and administrative expenses increased 132%
from $1.9 million, or 37.8% of total net revenues in 1998, to $4.4 million, or
26.6% of total net revenues in 1999. The increase in general and administrative
expenses for the year ended December 31, 1999 was primarily attributable to
salary and related expenses for additional personnel and increased facilities
costs. Launch anticipates hiring additional personnel, expanding facilities and
incurring additional costs related to being a public company, including costs
related to investor relations programs and professional services fees.
Accordingly Launch anticipates that general and administrative expenses will
continue to increase in absolute dollars, but decrease as a percentage of total
net revenue.
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<PAGE> 25
Depreciation, Amortization and Cost of Warrants
Depreciation and amortization was $8.0 million for the year ended December
31, 1999 as compared to $0.3 million for the year ended December 31, 1998.
Launch's depreciation and amortization expenses primarily consisted of
amortization of excess purchase prices over net tangible assets acquired arising
from its acquisitions in 1999 of Musicvideos.com and SW Networks. Also included
in depreciation and amortization are costs associated with purchases of
equipment and facility enhancement. We expect depreciation and amortization to
increase as we acquire additional companies and invest in technology and
facility assets.
In the fourth quarter of 1999, the Company issued fully vested,
nonforfeitable warrants to purchase 402,000 shares of common stock at an
exercise price of $11.97 to $18.35 per share to two major record labels for
nonexclusive Internet music video distribution rights to stream catalog and new
release music videos. Because the warrants are fully vested, are not subject to
forfeiture and do not require any minimum performance requirements, the Company
recognized approximately $5.0 million of expense based upon the fair value of
the warrants on the date issued, which is included in depreciation, amortization
and cost of warrants in the accompanying statement of operations and
comprehensive loss.
Interest Income (Expense), Net
Interest income (expense), net consists of interest earned on cash and cash
equivalents and short-term investments, offset by interest expense on
borrowings. Net interest income increased from $389,000 in 1998 to $2.0 million
in 1999. The increase in net interest income in 1999 is a result of investing
net proceeds from the Company's IPO.
Income Taxes
Launch's income taxes consist of minimum state franchise taxes. At December
31, 1999 Launch had approximately $58.1 million and $29.1 million of federal and
state net operating loss carryforwards, respectively, available to offset future
taxable income. Launch's federal and state net operating loss carryforwards
expire beginning in 2009 and 1999, respectively. Due to the change in Launch's
ownership interests in connection with the IPO and prior private placements,
future utilization of the net operating loss carryforwards may be subject to
certain annual limitations.
Preferred Stock and Accretion
As a result of the Initial Public Offering, all 5,918,230 shares of
preferred stock were converted to common stock, on a share for share basis. All
series of preferred stock were redeemable, at the option of the holders,
beginning on February 27, 2003. The shares were redeemable at the original
issuance price plus 6% per annum from February 27, 1998 through the redemption
date for Series A, B, and D stock and from March 29, 1996 through the redemption
date for Series C stock. The carrying amount of the preferred stock was being
increased by periodic accretions so that the amount reflected in the balance
sheet would equal the mandatory redemption amount at the redemption date.
Accretions were $608,000, $1.9 million and $766,000 in 1997, 1998 and 1999
respectively. The carrying amount of the preferred stock was $0 at December 31,
1999.
Unearned Compensation
In connection with the grant of stock options to employees in 1998, Launch
recorded unearned compensation of $1.4 million representing the difference
between the deemed value of Launch's common stock for accounting purposes and
the exercise price of such options at the date of grant. Such amount, net of
amortization, is presented as a reduction of stockholders' equity and amortized
over the four-year vesting period of the options. Amortization of unearned
compensation was $193,000 and $443,000 in 1998 and 1999 respectively.
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COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Total Net Revenues
Total net revenues increased 61% from $3.1 million in 1997 to $5.0 million
in 1998. The increase in total net revenues was primarily attributable to an
increase in advertising and subscription revenues. In addition, in 1998, we
distributed two additional issues of Launch on CD-ROM in connection with the
transition from bi-monthly to monthly distribution.
Advertising Revenues. Advertising revenues increased 58% from $1.9 million,
or 59.3% of total net revenues, in 1997 to $3.0 million, or 60.6% of total net
revenues, in 1998. Advertising revenues increased in 1998 due to an increase in
the number of advertisers and number of advertisements sold. An additional issue
of Launch on CD-ROM also contributed to the increased revenue. Included in
advertising revenues were revenues recognized from barter transactions of
$903,000 in 1997 and $1.3 million in 1998.
Subscription and Other Revenue. Subscription and other revenues increased
from $1.3 million, or 40.7% of total net revenues, in 1997 to $2.0 million, or
39.4% of total net revenues, in 1998. Subscription revenues increased in 1998
due to an increase in the paid subscription base for Launch on CD-ROM. Other
revenue increased 7% from $480,000, or 15.3. % of total net revenues, in 1997 to
$513,000, or 10.2% of total net revenues, in 1998. Merchandise and other
revenues increased in 1998 due primarily to $269,000 earned under a nonrecurring
development agreement with Intel. The total amount to be paid to Launch under
the Intel agreement is $1.0 million. The development efforts under this
agreement are expected to be completed in 1999. Excluding this development
agreement, other revenues were $244,000 in 1998, reflecting a 49% decrease from
1997 primarily related to a decrease in single copy retail sales of Launch on
CD-ROM. This decrease was due to Launch's efforts to build circulation of Launch
on CD-ROM through subscriptions rather than single copy retail sales and to a
reduction in the retail sales price. At December 31, 1998, Launch had deferred
revenues of $482,000 consisting primarily of prepaid subscriptions for Launch on
CD-ROM.
Operating Expenses
Cost of Revenues. Cost of revenues increased 88% from $1.7 million, or
55.3% of net revenues, in 1997 to $3.2 million, or 63.5% of total net revenues,
in 1998. As a percentage of total net revenues, cost of revenues increased in
1998 due primarily to a one-time distribution of Launch on CD-ROM. One million
copies of a customized issue of Launch on CD-ROM were distributed to college
students in August 1998.
Sales and Marketing Expenses. Sales and marketing expenses increased 114%
from $4.2 million, or 134.7% of total net revenues, in 1997 to $9.0 million, or
179.7% of total net revenues, in 1998. As a percentage of total net revenues,
sales and marketing expenses increased in 1998 due to the cost of acquiring new
subscribers, the hiring of additional sales and marketing personnel, increased
marketing to promote the Launch brand and amortization of approximately $1.2
million of a $3.0 million non-cash deferred charge resulting from the issuance
of series D stock as consideration for a strategic alliance with NBC.
Content and Product Development Expenses. Content and product development
expenses increased 76% from $2.5 million, or 78.2% of total net revenues, in
1997 to $4.4 million, or 87.9% of total net revenues in 1998. Content and
product development expenses increased in 1998 due to the costs of developing
and enhancing the launch.com Web site.
General and Administrative Expenses. General and administrative expenses
increased 58% from $1.2 million, or 40.0% of total net revenues, in 1997 to $1.9
million, or 37.8% of total net revenues in 1998. The increase in general and
administrative expenses in 1999 was due to an increase in the number of
administrative personnel necessary to support the growth of Launch's operations
and related facility costs.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased 124% from $144,000, or 4.6% of net revenues, in 1997 to
$322,000, or 6.4% of net revenues in 1998.
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Interest Income (Expense), Net
Net interest expense was $14,000 in 1997, and net interest income was
$389,000 in 1998. The increase in net interest income in 1998 was the result of
interest earned on the net proceeds from Launch's sales of Series D stock in
February and May of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Launch has financed its operations primarily through a
public issuance of common stock, private placements of preferred stock and, to a
lesser extent, from the revenues generated by operations. As of December 31,
1999, Launch had approximately $59.0 million in cash and cash equivalents and
short-term investments.
Net cash used in operating activities increased to $24.6 million for the
year ended December 31, 1999, from $10.8 million for 1998. The increase in net
cash used in operating activities is substantially attributable to the costs
associated with the growth of Launch's media business.
Net cash used in investing activities was $58.3 million for the year ended
December 31, 1999, as compared to $6.9 million for 1998. The increase in net
cash used in investing activities resulted primarily from the significant
purchase of securities which took place during 1999 as a result of investing
cash raised in our IPO. This cash is predominantly invested in instruments that
are highly liquid, are high quality investment grade, and have maturities of
less than one year with the intent to make such funds readily available for
operating purposes.
Net cash provided by financing activities increased to $82.0 million for
the year ended December 31, 1999, from $18.8 million for 1998, due principally
to the proceeds from the sale of common stock through our IPO in 1999.
Launch has a revolving capital lease line of credit for $2.0 million. At
December 31, 1999, $1.6 million was outstanding under this line of credit and
other capital lease obligations. This facility bears interest at the bank's
prime rate, 8.25% at December 31, 1999. The leased assets collateralize any
borrowings under this line of credit.
Launch has experienced a substantial increase in its capital expenditures
and operating lease arrangements since its inception, which is consistent with
the growth in Launch's operations and staffing, and anticipates that this will
continue for the foreseeable future. Additionally, Launch will continue to
evaluate possible investments in businesses, products and technologies, and
plans to expand its sales and marketing programs and conduct more aggressive
brand promotions. Launch currently expects that the net proceeds from its IPO,
together with its existing capital lease line of credit and available funds,
will be sufficient to meet its anticipated needs for working capital and capital
expenditures for at least the next 12 months. There can be no assurance,
however, that the underlying assumed levels of revenues and expenses will prove
to be accurate. Launch may seek additional funding through public or private
financings or other arrangements prior to such time. Adequate funds may not be
available when needed or may not be available on terms favorable to Launch. If
additional funds are raised through the issuance of equity securities, dilution
to existing stockholders may result. If funding is insufficient at any time in
the future, Launch may be unable to develop or enhance its products or services,
take advantage of business opportunities or respond to competitive pressures,
any of which could have a material adverse effect on Launch's business,
financial condition, results of operations and cash flows.
YEAR 2000 PRONOUNCEMENTS
To date, the Company has not experienced any problems related to year 2000
("Y2K") within its own operations or with any significant customers or vendors.
As such, management does not anticipate any significant Y2K issues will occur in
the future.
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RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999 the SEC issued Staff Accounting Bulletin (SAB) No. 101
"Revenue Recognition in Financial Statements" which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Management believes the impact of SAB 101 will not have a
material impact on the financial position or results of operations of the
Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. The Company does not expect the adoption of this statement to have a
significant impact on the Company's financial statements.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-up Activities" ("SOP No. 98-5"). SOP 98-5, which is effective for fiscal
years beginning after December 15, 1998, provides guidance on the financial
reporting of start-up costs and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred. The
adoption of SOP No. 98-5 did not have a significant impact on the Company's
financial statements.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Software for Internal
Use", which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The adoption of
SOP No. 98-1 did not have a material impact on the Company's financial
statements.
SEASONALITY
Launch believes that advertising sales in traditional media generally are
lower in the first and third quarters of each year and that advertising
expenditures fluctuate significantly with economic cycles. Depending on the
extent to which the Internet is accepted as an advertising medium, seasonality
and cyclicality in the level of Internet advertising expenditures could become
more pronounced. The foregoing factors could have a material adverse affect on
the Company's business, financial conditions, results of operations and cash
flows.
RISK FACTORS
You should consider carefully the following risk factors and all other
information contained in this report before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Additional risks
and uncertainties that are not yet identified or that we currently think are
immaterial may also materially adversely affect our business and financial
condition in the future. Any of the following risks could materially adversely
affect our business, operating results and financial condition and could result
in a complete loss of your investment.
WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT
We incorporated in February 1994 and published the first issue of Launch on
CD-ROM in May 1995. We first made launch.com available over the Internet in
October 1997. Because we have a limited operating history, you must consider the
risks and difficulties frequently encountered by early-stage companies such as
Launch in new and rapidly evolving markets, including the market for advertising
on the Internet and other digital media. Prior to 1999, Launch on CD-ROM had
accounted for the majority of Launch's audience. Accordingly, Launch had derived
its revenues principally from advertising sales against the Launch on CD-ROM
audience and, to a lesser extent, from subscriptions for Launch on CD-ROM.
Future growth in
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our business will depend substantially upon our ability to increase the size of
the launch.com audience, to increase advertising sales against that audience and
to meet the challenges described in the risk factors below.
WE HAVE A HISTORY OF LOSSES AND BECAUSE WE ANTICIPATE THAT OUR OPERATING
EXPENSES WILL GROW MORE QUICKLY THAN OUR REVENUES, AT LEAST IN THE SHORT TERM,
WE EXPECT INCREASED LOSSES
We incurred net losses of $6.7 million in 1997, $13.4 million in 1998 and
$37.5 million in 1999. As of December 31, 1999, our accumulated deficit was
$65.1 million. We have not achieved profitability and expect to incur operating
losses for the foreseeable future. We expect these operating losses to increase
for at least the next year. We will need to generate significant revenues to
achieve and maintain profitability, and we cannot assure you that we will be
able to do so. Even if we do achieve profitability, we cannot assure you that we
can sustain or increase profitability on a quarterly or an annual basis in the
future. If our revenues grow more slowly than we anticipate or if our operating
expenses exceed our expectations, our financial performance will likely be
adversely affected. See "Selected Financial Data" for more detailed information
regarding our historical operating results.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR STOCK PRICE TO
FLUCTUATE
Our future revenues and operating results are likely to vary significantly
from quarter to quarter due to a number of factors, many of which are outside of
our control. Accordingly, you should not rely on quarter-to-quarter comparisons
of our results of operations as an indication of future performance. It is
possible that in some future periods our operating results will be below the
expectations of public market analysts and investors. In this event, the price
of our common stock will likely decline. Factors which may cause our revenues
and operating results to fluctuate include the following:
- our ability to attract and retain advertisers;
- our ability to increase the registered membership of launch.com and the
new web sites, services or products introduced by us or by our
competitors;
- the timing and uncertainty of sales cycles;
- mix of online advertisements sold;
- seasonal declines in advertising sales, which typically occur in the
first and third calendar quarters;
- the level of Web and online services usage;
- our ability to successfully integrate operations and technologies from
acquisitions or other business combinations;
- technical difficulties or system downtime affecting the Internet
generally or the operation of launch.com; and
- general economic conditions, as well as economic conditions specific to
digital media and the music industry.
To attract and retain a larger audience, we plan to significantly in crease
our expenditures for sales and marketing, content development, and technology
and infrastructure development. Many of these expenditures are planned or
committed in advance in anticipation of future revenues. Because advertising
orders are typically short term and subject to cancellation without penalty
until shortly before the advertisement runs, our quarterly operating results are
difficult to forecast. If our revenues in a particular quarter are lower than we
anticipate, we may be unable to reduce spending in that quarter. As a result,
any shortfall in revenues would likely adversely affect our quarterly operating
results.
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BECAUSE WE DEPEND PRINCIPALLY UPON ADVERTISING REVENUES, IF WE DO NOT INCREASE
ADVERTISING SALES, OUR BUSINESS MAY NOT GROW OR SURVIVE
Our revenues for the foreseeable future will depend substantially on sales
of advertising. In 1998 advertising sales accounted for 60.6% of our net
revenues, and in 1999 they accounted for 53.9% of our net revenues. If we do not
increase advertising revenues, our business may not grow or survive. Increasing
our advertising revenues depends upon many factors, including our ability to do
the following:
- conduct successful selling and marketing efforts aimed at advertisers;
- increase the size of the launch.com audience;
- increase the amount of revenues per advertisement;
- aggregate our target demographic group of 12 to 34 year old active music
consumers, and, in particular, the Generation Y segment of this group;
- increase awareness of the Launch brand among advertisers;
- target advertisements to appropriate segments of our audience;
- make Launch available through evolving broadband distribution channels;
and
- accurately measure the size and demographic characteristics of our
audience.
Our failure to achieve one or more of these objectives could adversely
affect our business.
Advertising revenues are difficult to forecast, especially because the
market for advertising on digital media has emerged relatively recently. In
1999, we derived 7.3% of our net revenues from advertising barter transactions.
We have historically entered into barter transactions with advertisers that we
do not believe would pay cash for such advertisements. We expect to
substantially reduce both the dollar volume and frequency of such transactions
in future periods. In each quarterly period, we derive a significant portion of
our revenues from sales of advertising to a limited number of customers.
Accordingly, the loss of a key advertising relationship or the cancellation or
deferral of even a limited number of orders could adversely affect our quarterly
performance.
IF WE FAIL TO INCREASE THE SIZE OF OUR AUDIENCE, WE MAY NOT BE ABLE TO ATTRACT
ADVERTISERS OR STRATEGIC PARTNERS
Increasing the size of our audience is critical to selling advertising and
to increasing our revenues. If we cannot increase the size of our audience, then
we may be unable to attract new or retain existing advertisers. In addition, we
may be at a relative disadvantage to other digital media companies with larger
audiences that may be able to leverage their audiences to access more
advertisers and significant strategic alliances. To attract and retain our
audience, we must do the following:
- continue to offer compelling music content;
- encourage our users to become part of our community;
- conduct effective marketing campaigns to acquire new members;
- develop new and maintain existing distribution relationships with other
Web sites;
- update and enhance the features of launch.com;
- increase awareness of the Launch brand;
- make Launch available through broadband distribution channels as they
achieve widespread consumer acceptance; and
- offer targeted, relevant products and services.
Our failure to achieve one or more of these objectives could adversely affect
our business, and we cannot assure you that we will be successful in these
efforts.
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A significant element of our strategy is to build a loyal community of
registered members on launch.com because we believe community features help
retain actively engaged users. The concept of developing such a community on the
Web is unproven, and if it is not successful, then it may be more difficult to
increase the size of our audience.
We also depend on establishing and maintaining distribution relationships
with high-traffic Web sites to increase our audience. There is intense
competition for placements on these sites, and we may not be able to enter into
such relationships on commercially reasonable terms or at all. Even if we enter
into distribution relationships with these Web sites, they themselves may not
attract significant numbers of users. Therefore, launch.com may not obtain
additional users from these relationships. Moreover, we have paid in the past,
and may pay in the future, significant fees to establish these relationships.
We also intend to increase our financial expenditures on marketing the
Launch brand because we believe brand awareness will be critical to increasing
our audience, especially because there are few barriers to entry for Internet
businesses. If we do not increase our revenues as a result of our branding and
other marketing efforts or if we otherwise fail to promote our brand
successfully, our business could be adversely affected.
SALES CYCLES VARY FOR ADVERTISING AND MAY CAUSE OUR OPERATING RESULTS TO
FLUCTUATE
Our dependence on advertising subjects us to additional risks because the
sales cycles for these sales vary significantly. The time between the date of
initial contact with a potential advertiser or sponsor and receipt of a purchase
order from the advertiser may range from as little as six weeks to up to nine
months. During these sales cycles, we may expend substantial funds and
management resources but not obtain advertising revenues. Therefore, if these
sales are delayed or do not otherwise occur, our operating results for a
particular period may be adversely affected.
Advertising sales are subject to delays over which we have little or no
control, including the following:
- advertisers' budgetary constraints;
- internal acceptance reviews by advertisers and their agencies;
- the timing of completion of advertisements by advertisers; and
- the possibility of cancellation or delay of projects by advertisers or
sponsors.
FAILURE TO CONTINUE TO DEVELOP COMPELLING CONTENT THAT ATTRACTS OUR TARGET
AUDIENCE COULD CAUSE OUR AUDIENCE SIZE TO DECREASE OR CHANGE THE DEMOGRAPHICS OF
OUR AUDIENCE
Our future success depends on our ability to continue to develop content
that is interesting and engaging to our target audience. If our audience
determines that our content does not reflect its tastes, then our audience size
could decrease or the demographic characteristics of our audience could change.
Either of these results would adversely affect our ability to attract
advertisers. Our ability to develop compelling content depends on several
factors, including the following:
- quality of our editorial staff;
- technical expertise of our production staff;
- access to recording artists; and
- access to content controlled by record labels, publishers and artists.
Further, consumer tastes change, particularly those of Generation Y, and we
maybe unable to react to those changes effectively or in a timely manner.
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LIMITATIONS ON THE AVAILABILITY OR INCREASES IN THE PRICE OF MUSIC CONTENT
DEVELOPED BY THIRD PARTIES COULD ADVERSELY AFFECT OUR BUSINESS
Because much of our content, including recording artist interviews, audio
and video performances and music, are provided to us by record labels and
artists at minimal or no charge, we depend on our good relations with record
labels and artists to offer compelling content. We cannot assure you that they
will continue to make their content available to us on reasonable terms or at
all. If record labels, music publishers or artists charge significant fees for
their content or discontinue their relationships with us, then our content
offering could be adversely affected.
A significant portion of the music content available on Launch is licensed
from publishers, record labels and artists. We frequently either do not have
written contracts or have short-term contracts with copyright owners, and,
accordingly, our access to copyrighted content depends upon the willingness of
such parties to continue to make their content available. Further, the parties
who license material to us may face increasing costs to develop or acquire that
material as a result of evolving laws regarding intellectual property, and these
licensors may pass any such additional costs on to us. If the fees for music
content increase substantially or if significant music content becomes
unavailable, our ability to offer music content could be materially limited. We
currently use certain content without first obtaining a license because we
believe that a license is not required under existing law. However, this area of
law remains uncertain and may not be resolved for a number of years. When this
area of law is resolved, we may be required to obtain licenses for such content.
Licenses may not be available on reasonable terms, if at all. Any limit on our
content offering could adversely affect our business.
WE NEED NEW DISTRIBUTION TECHNOLOGIES TO INCREASE ACCESSIBILITY OF OR OUR
CONTENT, AND FAILURE OF SUCH TECHNOLOGIES TO ACHIEVE CONSUMER ACCEPTANCE COULD
LIMIT OUR GROWTH
To experience the full extent of our high-quality audio and full-motion
video content, consumers must access such content either from a CD-ROM, DVD-ROM
or over a high-bandwidth connection, such as cable or direct subscriber line
modem or satellite data broadcast. If such broadband distribution networks do
not achieve widespread consumer acceptance, we may be unable to effectively
distribute our audio and video content in its most compelling format. We cannot
assure you that broadband distribution networks will ever achieve consumer
acceptance, and if they do not, our growth may be limited.
WE DEPEND ON A LIMITED NUMBER OF ADVERTISERS, AND THE LOSS OF A NUMBER OF THESE
ADVERTISERS COULD ADVERSELY AFFECT OUR OPERATING RESULTS
Historically, a limited number of advertisers have accounted for a
significant percentage of our revenues. Although no advertiser accounted for
more than 15% of total net revenues in 1999, our four largest advertisers
accounted for 18.2% of total net revenues. We anticipate that our results of
operations in any given period will continue to depend to a significant extent
upon revenues from a small number of advertisers. In addition, particularly
because few advertisers are contractually obligated to purchase any advertising
in the future, we anticipate that the mix of advertisers in each fiscal period
will continue to vary. In order to increase our revenues, we will need to
attract additional significant advertisers on an ongoing basis. Our failure to
sell a sufficient number of advertisements or to engage a sufficient number of
advertisers during a particular period could adversely affect our results of
operations.
WE MUST MAINTAIN AND ESTABLISH STRATEGIC ALLIANCES TO INCREASE OUR AUDIENCE AND
ENHANCE OUR BUSINESS
In an attempt to increase audience, build brand recognition and enhance
content, distribution and commerce opportunities, we have entered into strategic
alliances with various media and Internet-related companies such as NBC
Multimedia, Inc., America Online, Inc., Microsoft Corporation and Snap! LLC. Our
failure to maintain or renew our existing strategic alliances or to establish
and capitalize on new strategic alliances could have an adverse affect on our
business. Our future success depends to a significant extent upon the success of
such alliances. Occasionally, we enter into agreements with strategic partners
that may prohibit us from entering into similar arrangements with competitors of
our strategic partners. Such exclusivity
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provisions may limit our ability to enter into favorable arrangements with
complementary businesses and thereby limit our growth. We cannot assure you that
we will achieve the strategic objectives of these alliances, that any party to a
strategic alliance agreement with Launch will perform its obligations as agreed
upon or that such agreements will be specifically enforceable by Launch. In
addition, some of our strategic alliances are short term in nature and may be
terminated by either party on short notice.
COMPETITION FROM TRADITIONAL AND ONLINE MEDIA AND OTHER COMPANIES FOCUSED ON
MUSIC COULD REDUCE OUR ADVERTISING SALES OR MARKET SHARE
Competition among media companies seeking to attract the active music
consumer is intense. Increased competition could result in advertising price
reduction, reduced margins or loss of market share, any of which could adversely
affect our business. Traditional media companies, such as television
broadcasters, magazine publishers and radio stations, are constantly refining
their content and strategies to increase their audiences and advertising
revenues. Further, the number of Web sites competing for the attention and
spending of members, users and advertisers has increased, and we expect it to
continue to increase, particularly because there are so few barriers to entry on
the Web. We compete for members, users and advertisers with the following types
of companies:
- publishers and distributors of traditional media, such as television,
radio and print, including MTV, Clear Channel, CMT, Rolling Stone and
Spin, and their Internet affiliates;
- online services or and Web sites targeted at music consumers, such as
mp3.com, Artistdirect, MTVi, emusic.com and musicmaker.com;
- Web retrieval and other Web "portal" companies, such as Excite@Home,
Inc., Infoseek Corporation, Lycos, Inc. and Yahoo, Inc.; and
- online music retailers, such as CDNow, Inc. and Amazon.com, Inc.
Because we compete for advertisers with traditional advertising media, our
business could be adversely affected if advertisers do not view digital media as
effective for advertising. Competition is likely to increase significantly as
new companies enter the market and current competitors expand their services.
Many of these potential competitors are likely to enjoy substantial competitive
advantages, including the following:
- larger audiences;
- larger technical, production and editorial staffs;
- greater name recognition;
- better access to content;
- more established Internet presence;
- larger advertiser bases; and
- substantially greater financial, marketing, technical and other
resources.
If we do not compete effectively or if we experience any pricing pressures,
reduced margins or loss of market share resulting from increased competition,
our business could be adversely affected.
THE LOSS OF OUR CHIEF EXECUTIVE OFFICER, OUR PRESIDENT OR OTHER KEY PERSONNEL
COULD ADVERSELY AFFECT OUR BUSINESS BECAUSE THESE OFFICERS ARE IMPORTANT TO OUR
CONTINUED GROWTH
Our future success depends to a significant extent on the continued
services of our senior management and other key personnel, and particularly
David B. Goldberg, Launch's chief executive officer, and Robert D. Roback,
Launch's president. The loss of either of these individuals or certain other key
employees would likely have an adverse effect on our business. We have an
employment agreement with only one of our executive officers, and we do not
anticipate that other executive officers or key personnel will enter into
employment agreements. We expect that we will need to hire additional personnel
in all areas during 2000. Competition for
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personnel throughout our industry is intense. We may be unable to retain our
current key employees or attract, integrate or retain other highly qualified
employees in the future. We have in the past experienced, and we expect to
continue to experience, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. If we do not succeed in attracting
new personnel or retaining and motivating our current personnel, our business
could be adversely affected.
GROWTH IN OUR OPERATIONS, PARTICULARLY OUR SALES, MARKETING, FINANCIAL AND
ADMINISTRATIVE ORGANIZATIONS, IS PLACING A STRAIN ON OUR RESOURCES, AND FAILURE
TO MANAGE GROWTH EFFECTIVELY COULD HARM OUR BUSINESS
We have experienced and are currently experiencing a period of significant
growth in our operations. This growth has placed, and our anticipated future
growth in our operations will continue to place, a significant strain on our
resources. As part of this growth, we will have to implement new operational
systems and procedures and controls to expand, train and manage our employee
base and to maintain close coordination among our technical, accounting,
finance, marketing, sales and production staffs. We will also need to continue
to attract, retain and integrate personnel in all aspects of our operations. To
the extent we acquire new businesses, we will also need to integrate new
operations, technologies and personnel. Failure to manage our growth effectively
could adversely affect our business.
ACCEPTANCE AND EFFECTIVENESS OF DIGITAL MEDIA FOR ADVERTISING ARE UNPROVEN,
WHICH MAY DISCOURAGE SOME ADVERTISERS FROM ADVERTISING ON LAUNCH
Our future is highly dependent on an increase in the use of the Internet
and other forms of digital media for advertising. If the Internet advertising
market fails to develop or develops more slowly than we expect, then our
business could be adversely affected. Moreover, the market for advertising on
other forms of digital media, such as broadband distribution, is even less
developed than Internet advertising, and if that market does not develop, then
our growth may be limited.
The Internet advertising market is new and rapidly evolving, and we cannot
yet gauge the effectiveness of advertising on the Internet as compared to
traditional media. As a result, demand for Internet advertising is uncertain.
Many advertisers have little or no experience using the Internet for advertising
purposes. The adoption of Internet advertising, particularly by companies that
have historically relied upon traditional media for advertising, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Such customers may find advertising on the
Internet to be undesirable or less effective for promoting their products and
services relative to traditional advertising media.
Different pricing models are used to sell Internet advertising. It is
difficult to predict which, if any, will emerge as the industry standard. This
uncertainty makes it difficult to project our future advertising rates and
revenues. Any failure to adapt to pricing models that develop or respond to
competitive pressures could adversely affect our advertising revenues. Moreover,
"filter" software programs that limit or prevent advertising from being
delivered to an Internet user's computer are available. Widespread adoption of
this software could adversely affect the commercial viability of Internet
advertising.
TRACKING AND MEASUREMENT STANDARDS FOR ADVERTISING ARE EVOLVING AND CREATE
UNCERTAINTY ABOUT THE VIABILITY OF OUR BUSINESS MODEL
There are currently no standards for the measurement of the effectiveness
of advertising on the Internet and other digital media, and the industry may
need to develop standard measurements. The absence or insufficiency of these
standards could adversely impact our ability to attract and retain advertisers.
We cannot assure you that such standard measurements will develop. In addition,
currently available software programs that track Internet usage and other
tracking methodologies are rapidly evolving. We cannot assure you that the
development of such software or other methodologies will keep pace with our
information needs, particularly to support the growing needs of our internal
business requirements and advertising clients. For instance, DoubleClick, Inc.,
our third party ad server, reported that there were 4.7 unique visitors in
December 1999. Our advertisers may rely on this data or other similar data to
determine whether to advertise on Launch, and
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adverse data from this or other sources in any particular period may cause
advertisers not to advertise on Launch.
It is important to our advertisers that we accurately measure the
demographics of our user base and the delivery of advertisements on our Web
site. We depend on third parties to provide certain of these measurement
services. If they are unable to provide these services in the future, we would
need to perform them ourselves or obtain them from another provider, if
available. This could cause us to incur additional costs or cause interruptions
in our business during the time we are replacing these services. Companies may
choose to not advertise on Launch or may pay less for advertising if they do not
perceive our measurements or measurements made by third parties to be reliable.
WE MAY HAVE LIABILITY FOR NEGLIGENCE, DEFAMATION OR OTHER MATTERS FOR CONTENT
POSTED ON LAUNCH.COM OR TO CONSUMERS FOR PRODUCTS SOLD THROUGH LAUNCH.COM
Because users of our Web site may distribute our content to others, third
parties might sue us for defamation, negligence, copyright or trademark
infringement or other matters. These types of claims have been brought,
sometimes successfully, against online services in the past. Others could also
sue us for the content that is accessible from our Web sites through links to
other Web sites or through content and materials that may be posted by
launch.com members. Such claims might include, among others, that by directly or
indirectly hosting the personal Web sites of third parties, we are liable for
copyright or trademark infringement or other wrongful actions by such third
parties through such Web sites. It is also possible that if any third-party
content information provided on launch.com contains errors, third parties could
make claims against us for losses incurred in reliance on such information.
We may also enter into agreements that entitle us to receive a share of
revenue from the purchase of goods and services through direct links from our
Web sites to their Web sites. Such arrangements may subject us to additional
claims, including potential liabilities to consumers of such products and
services, based on the access we provide to such products or services, even if
we do not provide such products or services ourselves. While our agreements with
these parties may provide that we will be indemnified against such liabilities,
such indemnification, if available, may not be adequate. Our insurance may not
adequately protect us against these types of claims and, even if such claims do
not result in liability, we could incur significant costs in investigating and
defending against such claims.
WE EXPECT TO MAKE ACQUISITIONS THAT MAY DILUTE OUR STOCKHOLDERS' INTERESTS IN
LAUNCH OR RESULT IN AMORTIZATION OF SIGNIFICANT AMOUNTS OF INTANGIBLE ASSETS
As part of our business strategy, we expect to review acquisition prospects
that would complement our current content offerings, increase our market share
or otherwise offer growth opportunities. Such acquisitions could cause our
operating results or the price of our common stock to decline. To date, we have
had limited experience in these types of transactions. We may acquire
businesses, products or technologies in the future. Because business
acquisitions typically involve significant amounts of intangible assets, future
operating results may be adversely affected by amortization of intangible assets
acquired. In the event of such future acquisitions or business combinations, we
could do the following:
- issue equity securities that would dilute current stockholders'
percentage ownership in us;
- incur substantial debt; or
- assume contingent liabilities.
WE MAY BE UNABLE TO EFFECTIVELY INTEGRATE BUSINESSES WE ACQUIRE IN THE FUTURE,
AND ANY SUCH FAILURE COULD DIMINISH THE VALUE OF AN ACQUIRED BUSINESS OR CAUSE
DISRUPTIONS IN OUR ONGOING OPERATIONS
Acquisitions and business combinations entail numerous operational risks,
including the following:
- difficulties in the assimilation of acquired operations, technologies or
products;
- diversion of management's attention from other business concerns;
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- risks of entering markets in which we have no or limited experience; and
- potential loss of key employees of acquired organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, and our failure to do so could damage our business.
We may not be able to effectively integrate the operations of acquired
businesses with our ongoing operations. Such failure could harm our business by
diverting management and other resources. Further, the personnel of acquired
businesses may elect not to continue with Launch after completion of any
acquisition, which could diminish the value of any acquisition. In that regard,
we cannot assure you that the personnel of acquired businesses will continue as
employees of Launch.
WE MAY NEED ADDITIONAL FINANCING TO ACHIEVE OUR BUSINESS OBJECTIVES, AND SUCH
FINANCING MAY NOT BE AVAILABLE BECAUSE OF THE CONDITION OF OUR BUSINESS OR THE
UNCERTAIN NATURE OF THE FINANCIAL MARKETS
We currently anticipate that our available cash resources, combined with
the net proceeds from our IPO, will be sufficient to meet our anticipated
working capital and capital expenditure requirements for at least the 12 months
following the date of this Report on Form 10-K.
If we raise additional funds by issuing equity or convertible debt
securities, the percentage ownership of our then-current stockholders will be
reduced, and such securities may have rights, preferences or privileges senior
to those of such stockholders. We cannot assure you that additional financing
will be available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of unanticipated opportunities, develop or enhance
services or products or otherwise respond to competitive pressures would be
significantly limited. This limitation could adversely affect our business.
We may need to raise additional funds in order to do the following:
- fund more rapid expansion;
- develop new or enhance existing services or products;
- fund distribution relationships;
- respond to competitive pressures; or
- acquire complementary products, businesses or technologies.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for a discussion of
our working capital and capital expenditures.
IF THE USE OF DIGITAL MEDIA, INCLUDING THE INTERNET, DOES NOT CONTINUE TO GROW,
OUR MARKET MAY NOT DEVELOP ADEQUATELY
Our market is new and rapidly evolving. If usage of digital media, and in
particular the Internet, does not continue to grow, our business will be
adversely affected. A number of factors may inhibit such usage, including, but
not limited to the following:
- inadequate network infrastructure;
- security concerns;
- inconsistent quality of service; and
- limited availability of cost-effective, high-speed access.
Even if digital media usage grows, the infrastructure necessary for such
growth may not be able to support the demands placed on it by this growth, and
its performance and reliability may decline. In addition, Web sites have
experienced interruptions in their service as a result of outages and other
delays occurring throughout the Internet network infrastructure. If these
outages or delays frequently occur in the future,
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digital media and, in particular, Internet usage, as well as the usage of
launch.com, could grow more slowly than we expect or even decline.
WE NEED TO ADAPT TO RAPID TECHNOLOGICAL CHANGE IN SOFTWARE AND DISTRIBUTION
SYSTEMS TO REMAIN COMPETITIVE
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. The recent
growth of digital media, and in particular, the Internet, and intense
competition in our industry exacerbate these market characteristics. To achieve
our goals, we need to effectively integrate the various software programs and
tools required to enhance and improve our product offerings and manage our
business. Our future success will depend on our ability to adapt to rapidly
changing technologies by continually improving the performance features and
reliability of our products and services. We may experience difficulties that
could delay or prevent the successful development, introduction or marketing of
new products and services. In addition, new enhancements must meet the
requirements of our current and prospective users and must achieve significant
market acceptance. We could also incur substantial costs if we need to modify
our service or infrastructures or adapt our technology to respond to these
changes.
GOVERNMENTAL REGULATION OF THE WEB RELATED TO COMMUNICATION, COMMERCE, SALES TAX
AND OTHER ISSUES MAY LIMIT THE GROWTH OF OUR BUSINESS AND DECREASE OUR MARKET
OPPORTUNITY
There are currently few laws or regulations that specifically regulate
communications or commerce on the Web. Laws and regulations may be adopted in
the future, however, that address issues such as user privacy, pricing, and the
characteristics and quality of products and services. For example, the
Telecommunications Act sought to prohibit transmitting certain types of
information and content over the Web. Several telecommunications companies have
petitioned the Federal Communications Commission to regulate Internet service
providers and online services providers in a manner similar to long distance
telephone carriers and to impose access fees on these companies. Any imposition
of access fees could increase the cost of transmitting data over the Internet.
Moreover, it may take years to determine the extent to which existing laws
relating to issues such as property ownership, libel and personal privacy are
applicable to the Web. Any new laws or regulations relating to the Web could
adversely affect our business.
Launch generally does not collect sales or other taxes in respect of goods
sold to users on launch.com. However, one or more states may seek to impose
sales tax collection obligations on out-of-state companies, such as Launch,
which engage in or facilitate online commerce. A number of proposals have been
made at the state and local level that would impose additional taxes on the sale
of goods and services through the Internet. Such proposals, if adopted, could
substantially impair the growth of electronic commerce and could adversely
affect our opportunity to derive financial benefit from electronic commerce.
Moreover, if any state or foreign country were to successfully assert that
Launch should collect sales or other taxes on the exchange of merchandise on its
system, our results of operations could be adversely affected. Legislation
limiting the ability of states to impose taxes on Internet-based transactions
has been proposed in the U.S. Congress. We cannot assure you that this
legislation will ultimately become law or that the tax moratorium in the final
version of this legislation will be ongoing. Failure to enact or renew this
legislation, once enacted, could allow various states to impose taxes on
Internet-based commerce, which could adversely affect our business.
WE RELY ON THIRD PARTIES FOR OUR WEB SITE HOSTING FACILITIES AND INTERNET
CONNECTIVITY. IF THESE SYSTEMS FAIL, THEY COULD DISRUPT OR DELAY USER TRAFFIC,
WHICH COULD IMPAIR OUR BUSINESS
Substantially all of our launch.com communications and computer hardware
was located at Exodus Communications, Inc.'s facilities in Irvine, California
through the end of January 2000. Effective February 2000, the Company moved
substantially all of our launch.com communications and computer hardware to
PSINet's facilities in Marina del Rey, California. PSINet provides Web site
hosting services. In addition, we utilize the audio and video streaming services
of iBEAM Broadcasting. iBEAM Broadcasting has a proprietary network which
delivers streaming audio and video over the Internet. Fire, floods, earthquakes,
power loss, telecommunications failures, break-ins and similar events could
damage these systems and cause interruptions in our services. Computer viruses,
electronic break-ins or other similar disruptive problems could
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result in reductions or termination of our services by our customers or
otherwise adversely affect our Web site. Our business could be adversely
affected if our systems were affected by any of these occurrences. Our insurance
policies may not adequately compensate us for any losses that may occur due to
any failures or interruptions in our systems. We do not presently have any
backup systems or a formal disaster recovery plan.
Our Web site must be able to accommodate a high volume of traffic and
deliver frequently updated information. Our Web site has experienced in the past
and may in the future experience slower response times or decreased traffic for
a variety of reasons. In addition, our users depend on Internet service
providers, online service providers and other Web site operators for access to
our Web site. Many of them have experienced significant outages in the past, and
could experience outages, delays and other difficulties due to system failures
unrelated to our systems. Moreover, the Internet network infrastructure may not
be able to support continued growth. Any of these problems could adversely
affect our business.
BECAUSE OUR USERS PROVIDE US WITH PRIVATE INFORMATION, WE MAY BE SUBJECT TO
LIABILITY IF THIS INFORMATION WERE MISUSED
Our privacy policy provides that we will not willfully disclose any
individually identifiable information about any user to a third party without
the user's consent unless required by law. This policy is displayed to users of
our personalized services when they initially register and is easily accessible
on launch.com. Despite this policy, however, if third persons were able to
penetrate our network security or otherwise misappropriate our users' personal
information or credit card information, we could be subject to liability. We
also rely on a third-party provider for our e-commerce services. If we
experience service problems with our e-commerce transactions, we could also be
subject to liability. This liability could include claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims. It could also include claims for other misuses of personal information,
such as for unauthorized marketing purposes. These claims could result in
litigation. In addition, the Federal Trade Commission, the European Union and
certain state and local authorities have been investigating certain Internet
companies regarding their use of personal information. We could incur additional
expenses if new regulations regarding the use of personal information are
introduced or if these authorities choose to investigate our privacy practices.
Like most Web sites, we typically place certain information commonly
referred to as cookies on a user's hard drive without the user's knowledge or
consent. We use cookies for a variety of reasons, including enabling us to limit
the frequency with which a user is shown a particular advertisement. Certain
currently available Internet browsers allow users to modify their browser
settings to remove cookies at anytime or to prevent cookies from being stored on
their hard drives. In addition, some Internet commentators, privacy advocates
and governmental bodies have suggested limiting or eliminating the use of
cookies. Any reduction or limitation in the use of cookies could limit the
effectiveness of this technology.
SECURITY CONCERNS REGARDING CREDIT CARD OR OTHER CONFIDENTIAL INFORMATION
TRANSMITTED OVER THE WEB COULD LIMIT OUR GROWTH
A significant barrier to e-commerce and communications over the Internet
has been the need for secure transmission of confidential information. Internet
usage may not increase at the rate we expect unless some of these concerns are
adequately addressed and found acceptable by the market. Internet usage could
also decline if any well-publicized compromise of security occurred. We may
incur significant costs to protect against the threat of security breaches or to
alleviate problems caused by such breaches. Any such protections may not be
available at a reasonable price or at all. If a third party were able to
misappropriate our users' personal information, users could sue us or bring
claims against us.
WE MAY EXPEND SIGNIFICANT RESOURCES TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS
OR TO DEFEND CLAIMS OF INFRINGEMENT BY THIRD PARTIES, AND IF WE ARE NOT
SUCCESSFUL WE MAY LOSE RIGHTS TO USE SIGNIFICANT MATERIAL OR BE REQUIRED TO PAY
SIGNIFICANT FEES
Copyrighted material that Launch develops internally, as well as trademarks
relating to the Launch brand and other proprietary rights, are important to our
success and our competitive position. We seek to protect our
38
<PAGE> 39
copyrights, trademarks and other proprietary rights, but these actions may be
inadequate. Launch has trademark applications pending in several jurisdictions,
but we cannot guarantee that we will be able to register our trademarks in all
jurisdictions in which we intend to do business. We generally enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and generally control access to and distribution of our
proprietary information. We cannot assure you that the steps we have taken will
prevent misappropriation of our proprietary rights, particularly in foreign
countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States. If third parties were to
use or otherwise misappropriate our copyrighted materials, trademarks or other
proprietary rights without our consent or approval, our competitive position
could be harmed, or we could become involved in litigation to enforce our
rights.
In addition, we rely on a third party to provide services enabling our
e-commerce transactions. We could become subject to infringement actions by
third parties based upon our use of intellectual property provided by our
third-party provider. There is no provision for indemnification of Launch by the
third-party provider. It is also possible that we could become subject to
infringement actions based upon the content licensed from third parties. Any
such claims or disputes could subject us to costly litigation and the diversion
of our financial resources and technical and management personnel. Further, if
our efforts to enforce our intellectual property rights are unsuccessful or if
claims by third parties against Launch are successful, we may be required to
change our trademarks, alter the content and pay financial damages. We cannot
assure you that such changes of trademarks, alteration of content or payment of
financial damages will not adversely affect our business.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We maintain investment portfolio holdings of various issuers, types and
maturities whose values are dependent upon short-term interest rates. We
generally classify these securities as available for sale, and consequently
record them on the balance sheet at fair value with unrealized gains and losses
being recorded as a separate part of stockholders' equity. We do not currently
hedge these interest rate exposures.
Given Launch's current profile of interest rate exposures and the
maturities of its investment holdings, we believe that an unfavorable change in
interest rates would not have a significant negative impact on our investment
portfolio or statement of operations through December 31, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is submitted in response to Part IV
hereof. See the Index to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning the executive officers of the Company is contained
in Item 1. Business of this Annual Report on Form 10-K. The information required
in response to this item is incorporated by reference to the Registrant's Proxy
Statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in response to this item is incorporated by
reference to the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
39
<PAGE> 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required in response to this item is incorporated by
reference to the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in response to this item is incorporated by
reference to the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial statements:
Reference is made to the Index to Financial Statements set forth in "Item
8. Financial Statements and Supplementary Data" of the Annual Report on From
10-K.
2. Financial Statement Schedules:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants on Financial Statement 60
Schedule..................................................
Schedule II --Valuation Qualifying Accounts................. 61
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.
3. Exhibits:
The following exhibits are filed as part of this Annual Report on Form
10-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
3.1(2) Second Amended and Restated Certificate of Incorporation of
Launch (formerly 2Way Media, Inc.).
3.2(2) Amended and Restated Bylaws of Launch.
10.1(1) 1994 Stock Option Plan.
10.2(2) 1998 Stock Option Plan.
10.3(2) 1999 Employee Stock Option Plan.
10.4(1) Form of Indemnity Agreement.
10.5(4) Strategic Alliance Agreement between Launch and NBC
Multimedia, Inc. dated February 26, 1998.
10.6(4) NBC-IN Content Provider Agreement between Launch and NBC
Multimedia, Inc. dated February 26, 1998.
10.7(4) Architectural Development and Assistance Agreement between
Launch and Intel Corporation dated November 13, 1998.
10.8(4) Software License and Development Agreement between Intel
Corporation and Launch dated as of February 27, 1998.
10.9(1) Anchor Tenant Agreement by and between America Online, Inc.
and Launch dated as of February 1, 1998.
10.10(1) Standard Industrial/Commercial Multi-Tenant Lease-Modified
Net between Pennsylvania Group, Ltd. And The Welk Group,
Inc. dated August 1, 1997.
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10.11(1) American Industrial Real Estate Association Standard
Sublease between The Welk Group, Inc. and Launch dated April
14, 1998.
10.12(1) Standard Form of Office Lease between Cityspire Centre
L.L.C. and Intershoe, Inc. dated January 22, 1997.
10.13(1) Sublease Agreement between Intershoe, Inc. and Launch dated
October 1998.
10.14 American Industrial Real Estate Association Standard Lease
between 2800 Olympic Boulevard Partners, L.P. and Launch
dated October 8, 1999.
10.15 Standard Industrial/Commercial Multi-Tenant Lease between
Ellen and David Adams and Launch dated January 11, 2000.
10.16 Standard Form of Loft Lease between 19th Street Associates
and Launch dated February 17, 2000.
10.17(2) Employment Agreement between Launch and Jeffrey Mickeal
dated April 10, 1995.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
SB-2 File No. 333-72433) on February 16, 1999.
(2) Incorporated by reference to Amendment No.1 to the Registrant's Registration
Statement on Form SB-2 (File No. 333-72433) on March 31, 1999.
(3) Incorporated by reference to Amendment No.2 to the Registrant's Registration
Statement on Form SB-2 (File No. 333-72433) on April 2, 1999.
(4) Incorporated by reference to Amendment No.3 to the Registrant's Registration
Statement on Form SB-2 (File No. 333-72433) on April 21, 1999.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on January 28, 2000 relating to the
acquisition of Musicom, Inc., a Georgia corporation.
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
LAUNCH MEDIA, INC.
March 29, 2000
By: /s/ DAVID B. GOLDBERG
------------------------------------
David B. Goldberg
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report on
10-K has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ DAVID B. GOLDBERG Chief Executive Officer and March 29, 2000
- ----------------------------------------------------- Director (Principal Executive
David B. Goldberg Officer)
/s/ ROBERT D. ROBACK President and Director March 29, 2000
- -----------------------------------------------------
Robert D. Roback
/s/ JEFFREY M. MICKEAL Chief Financial Officer and March 29, 2000
- ----------------------------------------------------- Secretary (Principal Financial
Jeffrey M. Mickeal and Accounting Officer)
/s/ THOMAS C. HOEGH Director March 29, 2000
- -----------------------------------------------------
Thomas C. Hoegh
/s/ SERGIO S. ZYMAN Director March 29, 2000
- -----------------------------------------------------
Sergio S. Zyman
/s/ RICHARD D. SNYDER Director March 29, 2000
- -----------------------------------------------------
Richard D. Snyder
/s/ WARREN LITTLEFIELD Director March 29, 2000
- -----------------------------------------------------
Warren Littlefield
</TABLE>
42
<PAGE> 43
LAUNCH MEDIA, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LAUNCH MEDIA, INC.:
Report of Independent Accountants......................... 44
Consolidated Balance Sheets at December 31, 1998 and
1999................................................... 45
Consolidated Statements of Operations and Comprehensive
Loss for the Years Ended December 31, 1997, 1998 and
1999................................................... 46
Consolidated Statements of Stockholders' Equity
(Deficiency) for the Years Ended December 31, 1997,
1998 and 1999.......................................... 47
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999....................... 48
Notes to Consolidated Financial Statements................ 49
Report of Independent Accountants on Financial Statement
Schedules.............................................. 60
Valuation and Qualifying Accounts......................... 61
</TABLE>
43
<PAGE> 44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Launch Media, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive loss,
stockholders' equity (deficiency) and cash flows present fairly, in all material
respects, the consolidated financial position of Launch Media, Inc. and
subsidiaries (the "Company") at December 31, 1998 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 of these financial statements in accordance with auditing standards
generally accepted in the United States which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
January 25, 2000
44
<PAGE> 45
LAUNCH MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
ASSETS:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,734,864 $ 878,352
Short-term investments.................................... 4,992,721 55,007,174
Securities available for sale............................. -- 1,683,594
Accounts receivable, net of allowances of $321,719 (1998)
and $12,603 (1999)..................................... 568,590 4,027,452
Inventory................................................. 124,476 272,785
Prepaid and other current assets.......................... 590,139 2,293,586
------------ ------------
Total current assets.............................. 8,010,790 64,162,943
Property and equipment, net................................. 2,587,212 7,403,722
Intangible and other assets................................. 2,566,000 22,651,224
------------ ------------
Total assets...................................... $ 13,164,002 $ 94,217,889
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
Current liabilities:
Accounts payable.......................................... $ 1,619,177 $ 2,767,377
Accrued expenses.......................................... 783,920 2,356,758
Deferred revenue.......................................... 481,794 1,197,419
Notes payable and accrued interest........................ 529,504 60,188
Capital lease obligations, current portion................ 230,150 796,217
------------ ------------
Total current liabilities......................... 3,644,545 7,177,959
Notes payable............................................... 200,846 160,431
Capital lease obligations, net of current portion........... 438,362 838,691
------------ ------------
Total liabilities................................. 4,283,753 8,177,081
------------ ------------
Commitments and contingencies (note 10)
Series A, B, C and D mandatory redeemable convertible
preferred stock, $.001 par value; shares authorized
6,580,405 (1998 and 1999); shares issued and outstanding
5,918,230 (1998); liquidation preference of approximately
$35,715,000 (1998)........................................ 36,706,546 --
Stockholders' equity (deficiency):
Common stock, $.001 par value, shares authorized
75,000,000; shares issued and outstanding, 934,333
(1998) and 12,849,686 (1999)........................... 935 12,849
Additional paid-in capital................................ 986,280 151,220,833
Other comprehensive income................................ -- 683,594
Unearned compensation..................................... (1,207,862) (765,134)
Accumulated deficit....................................... (27,605,650) (65,111,334)
------------ ------------
Total stockholders' equity (deficiency)........... (27,826,297) 86,040,808
------------ ------------
Total liabilities and stockholders' equity
(deficiency).................................... $ 13,164,002 $ 94,217,889
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
45
<PAGE> 46
LAUNCH MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Net revenues:
Advertising..................................... $ 1,859,172 $ 3,038,163 $ 8,958,273
Content licensing............................... -- -- 5,442,143
Subscription and other.......................... 1,277,837 1,975,998 2,225,212
----------- ------------ ------------
3,137,009 5,014,161 16,625,628
Operating expenses:
Cost of revenues................................ 1,734,515 3,185,319 3,493,136
Sales and marketing............................. 4,224,789 9,011,482 24,234,234
Content and product development................. 2,454,470 4,407,018 11,028,700
General and administrative...................... 1,254,765 1,893,364 4,416,281
Depreciation, amortization and cost of
warrants..................................... 143,778 321,425 12,934,581
----------- ------------ ------------
Loss from operations............................ (6,675,308) (13,804,447) (39,481,304)
Interest income (expense):
Interest income................................. 89,884 523,214 2,539,699
Interest expense................................ (103,944) (133,932) (551,834)
----------- ------------ ------------
Loss before provision for income taxes.......... (6,689,368) (13,415,165) (37,493,439)
Provision for income taxes........................ (2,774) (3,596) (12,245)
----------- ------------ ------------
Net loss........................................ (6,692,142) (13,418,761) (37,505,684)
Accretion of mandatory redeemable convertible
preferred stock................................. (607,404) (1,851,582) (765,746)
----------- ------------ ------------
Net loss attributable to common stockholders.... $(7,299,546) $(15,270,343) $(38,271,430)
=========== ============ ============
Basic and diluted net loss per common share....... $ (7.89) $ (16.36) $ (4.15)
=========== ============ ============
Weighted average shares outstanding used in per
share calculation............................... 924,788 933,502 9,217,937
=========== ============ ============
Comprehensive loss:
Net loss.......................................... $(6,692,142) $(13,418,761) $(37,505,684)
Other comprehensive income:
Unrealized gain on securities available for
sale......................................... -- -- 683,594
----------- ------------ ------------
Comprehensive loss................................ $(6,692,142) $(13,418,761) $(36,822,090)
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46
<PAGE> 47
LAUNCH MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL OTHER
-------------------- PAID-IN COMPREHENSIVE UNEARNED ACCUMULATED
SHARES AMOUNT CAPITAL INCOME COMPENSATION DEFICIT TOTAL
---------- ------- ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996...... 916,906 $ 917 -- -- -- $ (7,007,036) $ (7,006,119)
Issuance of warrants to
purchase common stock....... -- -- $ 100,000 -- -- -- 100,000
Stock options exercised....... 15,766 16 19,693 -- -- -- 19,709
Accretion of mandatory
redeemable convertible
preferred stock............. -- -- (119,693) -- -- (487,711) (607,404)
Net loss...................... -- -- -- -- -- (6,692,142) (6,692,142)
---------- ------- ------------ -------- ----------- ------------ ------------
Balance, December 31, 1997.... 932,672 933 -- -- -- (14,186,889) (14,185,956)
Stock options exercised....... 1,661 2 2,152 -- -- -- 2,154
Unearned compensation related
to stock options granted.... -- -- 1,400,710 -- $(1,400,710) -- --
Compensation related to stock
options vested.............. -- -- -- -- 192,848 -- 192,848
Issuance of warrants to
purchase common stock....... -- -- 1,435,000 -- -- -- 1,435,000
Accretion of mandatory
redeemable convertible
preferred stock............. -- -- (1,851,582) -- -- -- (1,851,582)
Net loss...................... -- -- -- -- -- (13,418,761) (13,418,761)
---------- ------- ------------ -------- ----------- ------------ ------------
Balance, December 31, 1998.... 934,333 935 986,280 -- (1,207,862) (27,605,650) (27,826,297)
Public stock offering, net of
$1,128,363 of issuance
costs....................... 4,010,000 4,010 80,912,227 -- -- -- 80,916,237
Conversion of notes payable
into common stock........... 85,848 86 1,888,238 -- -- -- 1,888,324
Accretion of mandatory
redeemable convertible
preferred stock............. -- -- (765,746) -- -- -- (765,746)
Conversion of mandatory
redeemable convertible
preferred stock............. 5,918,230 5,918 37,466,374 -- -- -- 37,472,292
Compensation related to stock
options vested.............. -- -- -- -- 442,728 -- 442,728
Cost of warrants issued....... -- -- 4,963,947 -- -- -- 4,963,947
Unrealized gain on securities
available for sale.......... -- -- -- $683,594 -- -- 683,594
Stock options exercised....... 188,470 188 302,255 -- -- -- 302,443
Issuance of stock under
employee stock purchase
plan........................ 32,240 32 298,262 -- -- -- 298,294
Issuance of common stock for
acquisitions................ 1,680,565 1,680 25,168,996 -- -- -- 25,170,676
Net loss...................... -- -- -- -- -- (37,505,684) (37,505,684)
---------- ------- ------------ -------- ----------- ------------ ------------
Balance, December 31, 1999.... 12,849,686 $12,849 $151,220,833 $683,594 $ (765,134) $(65,111,334) $ 86,040,808
========== ======= ============ ======== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
47
<PAGE> 48
LAUNCH MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
----------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(6,692,142) $(13,418,761) $ (37,505,684)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 143,778 321,425 7,970,634
Non-cash charges for issuance of equity securities...... 100,000 1,653,846 6,722,298
Allowance for sales returns............................. 307,576 (163,317) (309,116)
Amortization of deferred compensation................... -- 192,848 442,728
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable............ (25,230) (373,141) (2,950,532)
Decrease (increase) in inventory...................... 20,055 (74,998) (148,309)
Increase in prepaid and other current assets.......... (237,895) (205,654) (1,518,322)
Increase in accounts payable.......................... 505,783 459,316 572,295
Increase in accrued expenses.......................... 53,466 562,602 1,444,765
Increase in deferred revenue.......................... 43,153 218,942 715,625
----------- ------------ -------------
Net cash used in operating activities.............. (5,781,456) (10,826,892) (24,563,618)
----------- ------------ -------------
Cash flows from investing activities:
Decrease (increase) in short-term investments............. 2,974,160 -- --
Purchases of property and equipment....................... (335,936) (1,570,229) (3,416,602)
Purchases of securities................................... -- (44,652,900) (282,160,175)
Maturities of securities.................................. -- 39,660,179 228,066,275
Acquisition of businesses................................. -- -- (800,004)
Increase in other assets.................................. -- (288,290) (28,214)
----------- ------------ -------------
Net cash provided by (used in) investing
activities....................................... 2,638,224 (6,851,240) (58,338,720)
----------- ------------ -------------
Cash flows from financing activities:
Payments under capital lease obligations.................. (40,871) (83,404) (440,786)
Payments under notes payable.............................. -- (119,042) (530,362)
Proceeds from notes payable............................... 3,000,000 739,750 1,500,000
Net proceeds from initial public offering................. -- -- 80,916,237
Proceeds from issuance of mandatory redeemable convertible
preferred stock......................................... -- 18,229,628 --
Proceeds from employee stock purchase plan................ -- -- 298,294
Proceeds from exercise of stock options................... 19,709 2,154 302,443
----------- ------------ -------------
Net cash provided by financing activities.......... 2,978,838 18,769,086 82,045,826
----------- ------------ -------------
Increase (decrease) in cash and cash equivalents... (164,394) 1,090,954 (856,512)
Cash and cash equivalents, beginning of year............ 808,304 643,910 1,734,864
----------- ------------ -------------
Cash and cash equivalents, end of year.................. $ 643,910 $ 1,734,864 $ 878,352
=========== ============ =============
Supplementary disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 6,420 $ 55,203 $ 163,173
Taxes................................................... $ 2,774 $ 3,596 $ 12,245
Supplementary disclosure of noncash transactions:
Equipment acquired under capital leases................. $ 16,491 $ 682,560 $ 1,195,190
Notes payable issued for assets acquired................ $ 108,354 $ 407,346 $ --
Issuance of common stock through conversion of notes
payable............................................... $ -- $ -- $ 1,888,324
Issuance of warrants in connection with music video
license agreements.................................... $ -- $ -- $ 4,963,947
Issuance of common stock for acquisitions............... $ -- $ -- $ 25,170,676
Conversion of mandatory redeemable convertible preferred
stock to common stock................................. $ -- $ -- $ 37,472,292
Issuance of Series D stock through conversion of notes
payable............................................... $ -- $ 3,495,353 $ --
Issuance of Series D stock under strategic alliances.... $ -- $ 3,500,000 $ --
Issuance of warrants in connection with sale of Series D
stock................................................. $ -- $ 1,435,000 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48
<PAGE> 49
LAUNCH MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
Launch Media, Inc. and subsidiaries ("the Company") was incorporated in
Delaware in February 1994 and is a digital media company focused on creating the
premier Internet destination for discovering new music. The Company operates in
one reportable industry segment. Leveraging the inherent advantages of digital
media, the Company offers a compelling music discovery experience from new and
established artists for consumers and provides a valuable marketing platform for
record labels, artists, advertisers and merchants. The music content is
delivered on the Internet at www.launch.com and on Launch on CD-ROM. Both
launch.com and Launch on CD-ROM are advertiser supported and include original
content that takes advantage of the personal computer's interactive multimedia
technology.
On April 23, 1999 the Company effected an initial public offering of
3,500,000 shares of its common stock at a price of $22 per share. On May 19,
1999, the underwriters exercised their over-allotment option to purchase an
additional 510,000 shares of common stock. The net proceeds to the Company,
after deducting underwriting discounts and commissions and offering expenses,
were approximately $80.9 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Launch Media,
Inc. and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
REVENUE RECOGNITION
The Company's revenues have been derived primarily from the sale of
advertising and sponsorships, syndicating content to radio stations and other
Internet sites, and annual subscriptions relating to Launch on CD-ROM. Revenues
for sponsorships across the Launch media properties are recognized ratably over
the sponsorship term which ranges from one to twelve months. Revenues from
advertisements for Launch on CD-ROM are recognized upon the release date of the
issue in which the advertisement appears. With respect to launch.com, revenues
from advertisements are recognized ratably in the period in which the
advertisement is displayed, provided that no significant Launch obligations
remain.
Content licensing revenue includes revenue resulting from Launch obtaining
on-air radio advertising inventory in exchange for music news content. Launch
sells this inventory for cash and recognizes revenue when the radio stations
broadcast the advertisement. Revenue from syndication of Launch content is
recognized ratably over the contract term which is typically one year.
Advance payments for Launch on CD-ROM subscriptions are deferred and
recognized over the term of the related subscription, typically 12 months.
Advance payments for sponsorships are deferred and recognized over the term of
the sponsorship.
Advertising revenues also include barter revenues, which represent an
exchange by Launch of advertising space on Launch on CD-ROM for advertising
space on other Web sites. Revenues and expenses from barter transactions are
recorded at the lower of estimated fair value of the advertisements received or
delivered based
49
<PAGE> 50
LAUNCH MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
on advertising rates currently in effect. Barter revenues are recognized when
the advertisements are run on the Launch media properties. Barter expenses are
recognized when Launch's advertisements are run on the reciprocal Web sites or
other advertising medium, which is typically in the same period as when the
advertisements are run on the Launch media properties. Revenues and expenses
recognized from barter transactions were approximately $903,000, $1,345,000 and
$1,216,000 in 1997, 1998 and 1999, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents. The Company maintains
its cash accounts in various financial institutions and, at times, these
deposits may be in excess of the federally insured limit.
SHORT-TERM INVESTMENTS
The Company invests excess cash in commercial paper, corporate notes and
bonds, U.S. Government securities and money market funds. The investments are
stated at cost, as it is the intent of the Company to hold these securities
until maturity. The investments are recorded at their amortized cost on the
balance sheet which approximates fair value and consisted of the following:.
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
U.S. government securities.......................... $4,922,721 $15,926,232
Commercial paper.................................... -- 25,225,339
Corporate notes..................................... -- 13,855,603
---------- -----------
$4,992,721 $55,007,174
========== ===========
</TABLE>
SECURITIES AVAILABLE FOR SALE
The Company has classified its investment in an equity security as
available-for-sale. Available for sale securities are carried at fair value,
with unrealized gains and losses reported as a separate component of
stockholders' equity. Realized gains and losses and declines in value judged to
be other than temporary on available for sale securities are included in other
income. The cost basis for realized gains and losses on available for sale
securities is determined on a specific identification basis. As of December 31,
1999, the Company had available for sale an equity investment in a public
company with a fair market value of $1.7 million and a cost basis of $1.0
million. The unrealized gain of $684,000 has been recorded as a separate
component of stockholders' equity and comprehensive loss.
PREPAID PRODUCTION COSTS
The Company defers all production costs associated with a particular
project or issue of Launch on CD-ROM and reflects these costs as an expense upon
the release of the related issue. Prepaid production costs included in prepaid
and other current assets were approximately $118,000 and $557,000 at December
31, 1998 and 1999, respectively.
INVENTORY
Inventory consists primarily of the Company's CD-ROMs and is recorded at
the lower of cost (first in, first out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is being applied on
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements and equipment under capital leases are
50
<PAGE> 51
LAUNCH MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amortized over the shorter of the estimated useful life or the life of the
lease. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Equipment................................................... 5 years
Furniture and fixtures...................................... 5 years
Leasehold improvements...................................... 5 years
Equipment under capital leases.............................. 3 years
</TABLE>
Maintenance and repairs are charged to expense as incurred while renewals
and improvements are capitalized. Upon the sale or retirement of fixed assets,
the accounts are consolidated and the related accumulated deprecation, with any
resulting gain or loss included in the statements of operations and
comprehensive loss.
LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets whenever
events or changes in circumstances result in the carrying amount of the assets
exceeding the sum of the expected future undiscounted cash flows associated with
such assets. The measurement of the impairment losses to be recognized is to be
based on the difference between the fair values and the carrying amounts of the
assets. To date, no such impairment has been recorded.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, capital lease obligations and notes
payable are carried at cost, which approximates their fair market value because
of the short-term maturity of these instruments.
WEB SITE
Content and product development costs include expenses incurred by the
Company to develop, enhance, manage, monitor and operate the Company's Web site
and are expensed as incurred.
ADVERTISING
Advertising costs are expensed as incurred and were approximately
$1,234,000, $3,144,000 and $14,501,000 in 1997, 1998 and 1999, respectively.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company sells sponsorships and advertising to major advertising
agencies representing their clients and directly to large, well established,
companies.
The Company's customers are concentrated in the United States. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally does not require collateral. Estimated credit losses and returns have
been provided for in the financial statements and, to date, have generally been
within management's expectations.
For the year ended December 31, 1999 sales to one advertiser were 13% of
revenues. For the years ended December 31, 1997 and 1998 sales to any one
advertiser did not exceed 10% of revenues. As of December 31, 1998 and 1999
amounts due from one advertiser represented 18% and due from one advertising
agency represented 32% of accounts receivable, respectively.
51
<PAGE> 52
LAUNCH MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
STOCK BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
requirements of SFAS No. 123, "Accounting for Stock Based Compensation." Under
APB No. 25, compensation cost, if any, is recognized over the respective vesting
period based on the difference, if any, on the date of grant, between the fair
value of the Company's common stock and the grant price. The Company accounts
for stock issued to non-employees in accordance with the provisions of SFAS No.
123 and Emerging Issues Task Force 96-18.
COMPUTATION OF NET LOSS PER SHARE
In accordance with SFAS No. 128, "Computation of Earnings Per Share," basic
earnings per share is computed using the weighted average number of shares
outstanding during the period and diluted earnings per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon the conversion of the Mandatory
Redeemable Convertible Preferred Stock (using the if-converted method) and
shares issuable upon exercise of outstanding stock options and warrants, using
the treasury stock method. Common equivalent shares are excluded from the
calculation if their effect is anti-dilutive.
Diluted net loss per share for 1997, 1998 and 1999, does not include the
effect of options and warrants to purchase 536,404, 1,112,555 and 1,804,942
shares of common stock, respectively; 2,573,004 and 5,918,230 shares of
Mandatory Redeemable Convertible Preferred Stock on an "as-if-converted" basis
for 1997 and 1998, or for 1998, warrants to purchase 448,437 of Series D Stock
respectively, as the effect of their inclusion is anti-dilutive during each
period.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1998 amounts to
conform to the 1999 presentation. These reclassifications did not change the
previously reported net loss or the total assets of the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Software for Internal
Use," which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The adoption of
SOP No. 98-1 did not have a material impact on the Company's financial
statements.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-up Activities" ("SOP No. 98-5"). SOP 98-5, which is effective for fiscal
years beginning after December 15, 1998, provides guidance on the financial
reporting of start-up costs and organization costs. It requires costs of
start-up
52
<PAGE> 53
LAUNCH MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
activities and organization costs to be expensed as incurred. The adoption of
SOP No. 98-5 did not have a significant impact on the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. The Company does not expect the adoption of this statement to have a
significant impact on the Company's financial statements.
3. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
---------- -----------
<S> <C> <C>
Deferred charge, net....................................... $1,846,154 $ 461,539
Intangible assets, net..................................... 557,346 18,917,924
Deposits and long-term investment.......................... 162,500 3,271,761
---------- -----------
$2,566,000 $22,651,224
========== ===========
</TABLE>
On February 28, 1999, the Company acquired all the partnership interests of
Areohvee Online Partnership, dba Musicvideos.com. Musicvideos.com is a provider
of music videos over the Internet. The total purchase price of approximately
$9.4 million was comprised of 875,556 shares of the Company's common stock with
an estimated fair value of approximately $8.9 million, a cash payment of
approximately $300,000 and assumed liabilities and transaction costs of
approximately $200,000.
On April 22, 1999, the Company acquired all the outstanding shares of SW
Networks Inc. SW Networks (renamed Launch Radio Networks) is a provider of music
and entertainment information/news content to radio stations and Internet-based
entertainment companies. The purchase agreement relating to this acquisition
required that the Company pay Sony Music a stated consideration of $12.0 million
in shares of the Company's common stock. For purposes of the agreement, the
shares issued to Sony Music were valued at 80% of the initial public offering
price. Accordingly, the Company issued 681,818 shares of common stock to Sony
Music. For accounting purposes, the Company valued such shares to be equal to
the initial public offering price less 5% due to the restrictions on resale.
Accordingly, the Company, for accounting purposes, has estimated the purchase
price of SW Networks to be $14.3 million.
In addition, during 1999 the Company acquired a company and the net assets
of another company. The total combined purchase price of approximately $3.1
million was comprised of 123,191 shares of the Company's common stock and cash
payments of approximately $800,000.
These acquisitions were accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired and liabilities assumed on the basis of
their respective fair values on the acquisition date. The purchase price
allocation for the Company's acquisitions in 1999 was as follows:
<TABLE>
<S> <C>
Fixed assets and other tangible assets...................... $ 2,310,000
Membership database......................................... 5,000,000
Goodwill and other intangibles.............................. 19,593,000
-----------
$26,903,000
===========
</TABLE>
53
<PAGE> 54
LAUNCH MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The intangible assets represent the excess purchase price over net tangible
assets acquired and are being amortized over one to five years. Accumulated
amortization at December 31, 1999 was approximately $6,276,000. No amounts were
amortized as of December 31, 1998.
Pro forma results of operations for the year ended December 31, 1998 and
1999 assuming the completion of the Company's acquisitions of SW Networks Inc.
and Musicvideos.com as of January 1, 1998:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net revenue....................................... $ 9,356,000 $18,253,000
Net loss.......................................... $22,866,000 $40,038,000
Basic and diluted loss per share.................. $ 2.96 $ 3.52
Weighted average common shares used in per share
calculation..................................... 7,737,000 11,367,000
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- -----------
<S> <C> <C>
Leasehold improvements...................................... $ 929,965 1,322,105
Equipment, software, furniture and fixtures................. 1,420,989 6,366,862
Equipment under capitalized leases.......................... 803,908 1,999,098
---------- -----------
3,154,862 9,688,065
Accumulated depreciation and amortization (including $88,241
(1998) and $492,473 (1999) for equipment under capital
leases)................................................... (567,650) (2,284,343)
---------- -----------
$2,587,212 $ 7,403,722
========== ===========
</TABLE>
Depreciation expense was approximately $144,000, $321,000 and $1,695,000 in
1997, 1998 and 1999, respectively.
5. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
-------- ----------
<S> <C> <C>
Advertising.......................................... $ -- $ 877,759
Professional services................................ -- 304,713
Employee stock purchase plan......................... -- 135,550
Vacation............................................. 133,003 296,266
Royalties............................................ 130,723 299,892
Distribution......................................... 248,913 --
Other................................................ 271,281 442,578
-------- ----------
$783,920 $2,356,758
======== ==========
</TABLE>
6. RELATED PARTY TRANSACTIONS:
Advertising revenues for 1997, 1998 and 1999 include approximately $12,000,
$219,000 and $2,235,000, respectively, in revenues received from a corporate
shareholder of the Company. At December 31, 1998 and 1999, approximately
$103,000 and $24,000, respectively, of those amounts are included in accounts
receivable. In addition, deferred revenue related to this corporate
shareholder's advertising as of December 31, 1999 was $617,000.
54
<PAGE> 55
LAUNCH MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In November 1998, Launch entered into an architectural development and
assistance agreement with Intel Corporation. Pursuant to the terms of these
agreements, Launch agreed to develop a product which is able to use the
capabilities of a processor developed by Intel. In consideration, Intel agreed
to pay Launch certain amounts and to provide technical assistance, and Launch
agreed to pay Intel a portion of revenues derived from the developed product.
Approximately $269,000 and $650,000 in development revenue for the years ended
December 31, 1998 and 1999, respectively, has been recognized using the
percentage of completion method on a cost to cost basis. The development revenue
is included in subscription and other revenues in the statements of operations.
In October 1998, the Board of Directors approved a loan of $100,000 to an
officer/director of the Company, which is due upon demand, bears interest at 8%
per annum and is collateralized by shares of the Company's common stock held by
the officer/director. In addition, the Company has advanced amounts to other
officers of $148,000 as of December 31, 1999. The advances and note receivable
and accrued interest thereon are included in prepaid and other current assets.
In February 1998, in conjunction with its Series D Stock sale, the Company
entered into a strategic alliance and content provider agreement with a
corporate shareholder and a technical assistance agreement with another
corporate shareholder. Under the strategic alliance and content provider
agreement, the Company will share equally with its strategic partner all net
revenues, as defined in the agreements, generated through the alliance. Amounts
paid under these agreements have not been material.
7. OBLIGATIONS UNDER CAPITAL LEASES:
The Company has a revolving capital lease line of credit for $2.0 million,
which can be utilized until December 2000. The Company has net borrowings under
this line of credit of approximately $1,374,000 as of December 31, 1999. This
facility bears interest at the bank's prime rate (8.5% at December 31, 1999).
The leased assets collateralize any borrowings under this line of credit.
8. NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
--------- --------
<S> <C> <C>
Note payable, principal and interest of $5,094 due monthly,
interest at 10% per annum due December 2003............... $ 239,750 $200,846
Note payable, principal and interest of $5,000 due monthly,
interest at 10% per annum due October 1999................ 83,254 --
Note payable due and payable in full December 1999 (present
value at imputed interest of 10%)......................... 407,346 --
Other....................................................... -- 19,773
--------- --------
730,350 220,619
Less: current portion....................................... (529,504) (60,188)
--------- --------
Non-current portion of notes payable........................ $ 200,846 $160,431
========= ========
</TABLE>
55
<PAGE> 56
LAUNCH MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES:
The provision for income taxes for 1997, 1998 and 1999 represents minimum
state franchise taxes.
The tax effected amounts of temporary differences as of December 31, 1998
and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward....................... $ 10,716,000 $ 23,239,000
Allowances............................................ 129,000 5,000
Accrued vacation...................................... 53,000 119,000
------------ ------------
Total deferred tax assets..................... 10,898,000 23,363,000
Valuation allowance..................................... (10,578,000) (23,034,000)
------------ ------------
Net deferred tax assets....................... 320,000 329,000
Deferred tax liability:
Fixed assets.......................................... (320,000) (329,000)
------------ ------------
Net deferred taxes............................ $ -- $ --
============ ============
</TABLE>
The Company has net operating loss carryforwards as of December 31, 1999
available to offset future taxable income, if any, for federal and California
state income tax purposes of approximately $58,097,000 and $29,108,000, which
begin to expire in 2009 and 1999, respectively. Utilization of the net operating
loss carryforwards may be subject to an annual limitation due to a change in
ownership as defined under Section 382 of the Internal Revenue Code. Due to the
net operating losses incurred to date, the Company has provided a full valuation
allowance against its net deferred tax assets.
10. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company is committed to minimum rental payments under capital leases
and noncancelable facility operating leases as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ---------- ----------
<S> <C> <C>
2000........................................................ $ 970,771 $1,052,484
2001........................................................ 665,978 1,330,227
2002........................................................ 238,837 1,361,631
2003........................................................ -- 1,200,170
2004........................................................ -- 846,814
2005 and thereafter......................................... -- 1,548,515
---------- ----------
Total minimum lease payments...................... 1,875,586 $7,339,841
==========
Less amount representing interest........................... (240,678)
----------
Present value of capital lease payments..................... 1,634,908
Less current portion........................................ (796,217)
----------
Non-current portion......................................... $ 838,691
==========
</TABLE>
The Company has an option to renew its primary facility operating lease for
an additional four-year term. Rent expense was approximately $343,000, $512,000
and $976,000 for 1997, 1998 and 1999, respectively.
56
<PAGE> 57
LAUNCH MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CAPITALIZATION:
The authorized capital stock of the Company as of December 31, 1999
consists of 75,000,000 shares of common stock, $.001 par value, and 6,580,405
shares of preferred stock, $.001 par value, of which 380,160 shares have been
designated Series A Stock, 612,820 shares have been designated Series B Stock,
1,580,023 shares have been designated Series C Stock and 4,007,402 shares have
been designated Series D Stock.
As of December 31, 1998, the Company had four series of Mandatory
Redeemable Convertible Preferred Stock (collectively "Preferred Stock")
authorized and outstanding. The holders of the various series of Preferred Stock
generally had the same rights and privileges; significant difference were as
follows:
<TABLE>
<CAPTION>
DIVIDEND LIQUIDATION REDEMPTION
PREFERENCE PREFERENCE PREFERENCE
---------- ----------- ----------
<S> <C> <C> <C>
Series A Stock.......................... $0.170 $1.74 $1.74
Series B Stock ......................... $0.190 $3.20 $3.20
Series C Stock.......................... $0.285 $4.75 $4.75
Series D Stock.......................... $0.460 $7.65 $7.65
</TABLE>
The carrying amount of the Preferred Stock was being increased by periodic
accretions so that the amount reflected in the balance sheet was equal to the
mandatory redemption amount at the balance sheet date. Such increases are
reflected in the calculation of net loss per common share in the same manner as
dividends on nonredeemable preferred stock.
Each share of Preferred Stock automatically converted into a share of
common stock on April 22, 1999, the effective date of the Company's IPO.
12. STOCK OPTIONS AND WARRANTS:
Options:
Under the Company's 1994 and 1998 Stock Option Plans (the "Plans"), the
Company has been authorized to grant options to purchase a maximum of 2,325,905
shares of common stock.
The Company's Plans provide for the issuance of both non-statutory and
incentive stock options to employees, officers, directors and consultants of the
Company. Incentive stock options may be granted at no less than 100% of the fair
market value of the Company's common stock on the date of grant as determined by
the Board of Directors (110% if granted to an employee who owns 10% or more of
the common stock). Options granted under the Plans vest ratably over a four-year
period, except that new employees shall vest 25% of their shares after 12 months
of employment. Options are exercisable for a period no longer that 10 years from
date of grant. In the event option holders cease to be employed by the Company,
all unvested options are forfeited.
57
<PAGE> 58
LAUNCH MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the stock option activity for the years
ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------------------ ------------------ --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of 244,616 $1.25 243,700 $1.25 532,349 $ 1.25
year............................
Granted -- price equals fair 23,000 $1.25 -- $1.25 621,800 $13.05
value...........................
Granted -- price less than fair -- -- 326,800 $2.35 -- --
value...........................
Exercised......................... (15,766) $1.25 (1,661) $1.30 (188,470) $ 1.59
Cancelled......................... (8,150) $1.25 (36,490) $1.35 (107,233) $10.39
------- ------- ---------
Outstanding at year-end........... 243,700 $1.25 532,349 $1.90 858,446 $ 8.99
======= ======= =========
Options exercisable at year-end... 229,244 $ 6.50
=========
Options available for future 1,156,028
grant...........................
=========
</TABLE>
The weighted average fair value of options granted during 1997, 1998 and
1999 was $0.32, $4.88 and $7.27, respectively.
At December 31, 1999 the Company had reserved a total of 2,014,474 shares
of common stock for issuance to its stock option holders.
In connection with its option grants in 1998, the Company recorded unearned
deferred compensation of approximately $1,400,000 for the year ended December
31, 1998. The amount is being amortized over the vesting period of four years
from date of grant and approximately $193,000 and $443,000 was expensed during
the years ended December 31, 1998 and 1999, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.25 - $ 3.00 313,633 8.06 $ 2.13 147,795 $ 1.96
$ 9.00 - $14.75 411,913 9.36 $10.88 44,949 $ 9.03
$17.00 - $22.00 132,900 9.44 $19.34 36,500 $21.80
------- -------
858,446 8.90 $ 8.99 229,244 $ 6.50
======= =======
</TABLE>
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation." If compensation expense for the stock options had been determined
using "fair value" at the grant date for awards in 1997, 1998 and 1999,
consistent
58
<PAGE> 59
LAUNCH MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
with the provisions of Statement of Financial Accounting Standards No. 123, the
Company's net loss would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Net loss
As reported................................ $6,692,142 $13,418,761 $37,505,684
Pro forma.................................. $6,706,857 $13,474,805 $38,476,270
Basic net loss per common share
As reported................................ $ 7.89 $ 16.36 $ 4.15
Pro forma.................................. $ 7.91 $ 16.42 $ 4.26
</TABLE>
The fair value of each option granted was estimated on the date of grant
using the Black-Scholes method following the IPO and the minimum value method
prior to the IPO with the following assumptions (i) risk-free interest rate of
5.6% to 6.9%, (ii) expected option life of 5 years, (iii) forfeiture rate of
zero, (iv) expected volitility of 0%, 0% and 81%, for 1997, 1998 and 1999,
respectively, and (v) no expected dividends.
Warrants:
In the fourth quarter of 1999, the Company issued fully vested,
nonforfeitable warrants to purchase 402,000 shares of common stock at an
exercise price of $11.97 to $18.35 per share to major record labels for Internet
music video distribution rights to stream catalog and new release music videos.
Because the warrants are fully vested, are not subject to forfeiture and do not
require any minimum performance requirements, the Company recognized
approximately $5.0 million of expense based upon the fair value of the warrants
on the date issued, which is classified as cost of warrants issued in the
accompanying statements of operations and comprehensive loss.
The Company issued warrants in 1997 and 1998 to purchase an aggregate of
544,496 shares of Common Stock at an exercise price of $1.25 per share which
expire on September 8, 2002.
13. 401(k) SAVINGS PLAN:
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a percentage (not to
exceed 15%) of their pretax earnings up to the Internal Revenue Services annual
contribution limit. The Company is not required to contribute to the Savings
Plan and has made no contributions since inception of the Savings Plan.
14. SUBSEQUENT EVENTS:
In January 2000, the Company acquired Tourdates.com for $11.6 million
primarily through the issuance of common stock. Tourdates.com is a premier
online guide to local and national concert information. The acquisition will be
accounted for using the purchase method of accounting and, accordingly, the
purchase price will be allocated to the tangible and intangible assets acquired
and liabilities assumed on the basis of their respective fair values on the
acquisition date.
59
<PAGE> 60
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
Of Launch Media, Inc. and Subsidiaries
Our audits of the consolidated financial statements of Launch Media, Inc.
and subsidiaries referred to in our report dated January 25, 2000, also included
an audit of the financial statement schedules listed in Item 14(a)(2) of this
Form 10-K. In our opinion, these financial statement schedules present fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
January 25, 2000
60
<PAGE> 61
LAUNCH MEDIA, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF CHARGED TO CREDITED BALANCE AT
DESCRIPTION PERIOD REVENUES REVENUES DEDUCTIONS OTHER END OF PERIOD
----------- ------------ ---------- ----------- ---------- ----- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales return and allowances:
Fiscal year ended 1997........ $177,460 $1,143,450 $ (835,874) $ -- $ -- $485,036
Fiscal year ended 1998........ $485,036 $1,290,957 $(1,454,274) $ -- $ -- $321,719
Fiscal year ended 1999........ $321,719 $ 205,404 $ (514,520) $ -- $ -- $ 12,603
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF CHARGED TO CREDITED BALANCE AT
DESCRIPTION PERIOD REVENUES REVENUES DEDUCTIONS OTHER END OF PERIOD
----------- ------------ ---------- ----------- ----------- ----- -------------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax valuation
allowance:
Fiscal year ended 1997.... $ 2,752,000 $ -- $ -- $ 2,551,000 $ -- $ 5,303,000
Fiscal year ended 1998.... $ 5,303,000 $ -- $ -- $ 5,275,000 $ -- $10,578,000
Fiscal year ended 1999.... $10,578,000 $ -- $ -- $12,456,000 $ -- $23,034,000
</TABLE>
61
<PAGE> 1
EXHIBIT 10.14
STANDARD OFFICE LEASE - GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO]
1. BASIC LEASE PROVISIONS ("Basic Lease Provisions")
1.1 PARTIES: This Lease, dated, for reference purposes only, October 8,
1999, is made by and between 2800 Olympic Boulevard Partners, L.P., a California
Limited Partnership, (herein called "Lessor") and Launch Media, Inc., a Delaware
Corporation, doing business under the name of N/A, (herein called "Lessee").
1.2 PREMISES: Suite Numbers(s) 201-203 and 102-104, ___ floors,
consisting of approximately 12,914 feet, more or less, as defined in paragraph 2
and as shown on Exhibit "A" hereto (the "Premises").
1.3 BUILDING: Commonly described as being located at 2800 Olympic
Boulevard, in the City of Santa Monica, County of Los Angeles, State of
California, as more particularly described in Exhibit A hereto, and as defined
in paragraph 2.
1.4 USE: General office (studio production and multi-media use) purposes
and incidental uses thereto, subject to paragraph 6.
1.5 TERM: Five (5) years commencing See Addendum #1 ("Commencement
Date") and ending See Addendum #1, as defined in paragraph 3.
1.6 BASE RENT: $30,994.00 per month, payable on the 1st day of each
month, per paragraph 4.1 See Addendum #3.
1.7 BASE RENT INCREASE: On See Addendum #3 the monthly Base Rent payable
under paragraph 1.6 above shall be adjusted as provided in paragraph 4.3 below.
1.8 RENT PAID UPON EXECUTION: $30,994.00 for__________________________.
1.9 SECURITY DEPOSIT: $36,159.00.
1.10 LESSEE'S SHARE OF OPERATING EXPENSE INCREASE: 89% as defined in
paragraph 4.2.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 PREMISES: The Premises are a portion of a building, herein sometimes
referred to as the "Building" identified in paragraph 1.3 of the Basic Lease
Provisions. "Building" shall include adjacent parking structures used in
connection therewith. The Premises, the Building, the Common Areas, the land
upon which the same are located, along with all other buildings and improvements
thereon or thereunder, are herein collectively referred to as the "Office
Building Project." Lessor hereby leases to Lessee and Lessee leases from Lessor
for the term, at the rental, and upon all of the conditions set forth herein,
the real property referred to in the Basic Lease Provisions, paragraph 1.2, as
the "Premises", including rights to the Common Areas as hereinafter specified.
2.2 VEHICLE PARKING: So long as Lessee is not in default, and subject to
the rules and regulations attached hereto, and as established by Lessor from
time to time, Lessee shall be entitled to rent and use See Adden. #4 parking
spaces in the Office Building Project at the monthly rate applicable from time
to time for monthly parking as set by Lessor and/or its licensee.
2.2.1 If Lessee commits, permits or allows any of the prohibited
activities described in the Lease or the rules then in effect, then Lessor shall
have the right, without notice, in addition to such other rights and remedies
that it may have, to remove or tow away the vehicle involved and charge the cost
to Lessee, which cost shall be immediately payable upon demand by Lessor.
2.2.2 The monthly parking rate per parking space will be $ See
Adden. #4 per month at the commencement of the term of this Lease, and is
subject to change upon five (5) days prior written notice to Lessee. Monthly
parking fees shall be payable one month in advance prior to the first day of
each calendar month.
2.3 COMMON AREAS - DEFINITION. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Office Building Project that are provided and designated by the Lessor
from time to time for the general non-exclusive use of Lessor, Lessee and of
other lessees of the Office Building Project and their respective employees,
suppliers, shippers, customers and invitees, including but not limited to common
entrances, lobbies, corridors, stairways and stairwells, public restrooms,
elevators, escalators, parking areas to the extent not otherwise prohibited by
this Lease, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, ramps, driveways, landscaped areas and decorative walls.
2.4 COMMON AREAS - RULES AND REGULATIONS. Lessee agrees to abide by and
conform to the rules and regulations attached hereto as Exhibit B with respect
to the Office Building Project and Common Areas, and to cause its employees,
suppliers, shippers, customers, and invitees to so abide and conform. Lessor or
such other person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to time, to
modify, amend and enforce said rules and regulations. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees, their agents, employees and invitees of the Office Building
Project.
2.5 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Building interior and exterior and
Common Areas, including, without limitation, changes in the location, size
shape, number, and appearance thereof, including but not limited to the lobbies,
windows, stairways, air shafts, elevators, escalators, restrooms, driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, decorative walls, landscaped areas and walkways;
provided, however, Lessor shall at all times provide the parking facilities
required by applicable law;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land and improvements outside the
boundaries of the Office Building Project to be a part of the Common Areas,
provided that such other land and improvements have a reasonable and functional
relationship to the Office Building Project;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Office Building Project, or any
portion thereof;
(f) To do and perform such other acts and make such other changes
in, to or with respect to the Common Areas and Office Building Project as Lessor
may, in the exercise of sound business judgment deem to be appropriate.
3. TERM.
3.1 TERM. The term and Commencement Date of this Lease shall be as
specified in paragraph 1.5 of the Basic Lease Provisions.
3.2 DELAY IN POSSESSION. Notwithstanding said Commencement Date, if for
any reason Lessor cannot deliver possession of the Premises to Lessee on said
date and subject to paragraph 3.2.2, 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 be obligated to pay rent or perform any other obligation of
Lessee under the terms of this Lease, except as may be otherwise provided in
this Lease, until possession of the Premises is tendered to Lessee, as
hereinafter defined; provided, however, that if Lessor shall not have delivered
possession of the Premises within sixty (60) days following said Commencement
Date, as the same may be extended under the terms of a Work Letter executed by
Lessor and Lessee, Lessee may, at Lessee's 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, as to Lessee's obligations, Lessee first reimburses
MODIFIED GROSS
REVISED
Page 1 of 11
<PAGE> 2
Lessor for all costs Incurred for Non-Standard Improvements and, as to Lessor's
obligations, Lessor shall return any money previously deposited by Lessee (less
any offsets due Lessor for Non-Standard Improvements); and provided further,
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 hereunder shall terminate
and be of no further force or effect.
3.2.1 POSSESSION TENDERED - DEFINED. Possession of the Premises
shall be deemed tendered to Lessee ("Tender of Possession") when (1) the
improvements to be provided by Lessor under this Lease are substantially
completed, (2) the Building utilities are ready for use in the Premises, (3)
Leases has reasonable access to the Premises, and (4) ten (10) days shall have
expired following advance written notice to Lessee of the occurrence of the
matters described in (1), (2) and (3), above of this paragraph 3.2.1.
3.2.2 DELAYS CAUSED BY LESSEE. There shall be no abatement of
rent, and the sixty (60) day period following the Commencement Date before which
Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed
extended to the extent of any delays caused by acts or emissions of Lessee,
Lessee's agents, employees and contractors.
3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said
Commencement Date, such occupancy shall be subject to all provisions of this
Lease, such occupancy shall not change the termination date, and Lessee shall
pay rent for such occupancy.
3.4 UNCERTAIN COMMENCEMENT. In the event commencement of the Lease term
Is defined as the completion of the Improvements, Lessee and Lessor shall
execute an amendment to this Lease establishing the date of Tender of Possession
(as defined in paragraph 3.2.1) or the actual taking of possession by Lessee,
whichever first occurs, as the Commencement Date.
4. RENT.
4.1 BASE RENT. Subject to adjustment as hereinafter provided in
paragraph 4.3, and except as may be otherwise expressly provided in this Lease,
Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph
1.6 of the Basic Lease Provisions, without offset or deduction Lessee shall pay
Lessor upon execution hereof the advance Base Rent described in paragraph 1.8 of
the Basic Lease Provisions, Rent for any period during the term hereof which is
for less than one month shall be prorated based upon the actual number of days
of the calendar month involved. Rent shall be payable in lawful money of the
United States to Lessor at the address stated herein or to such other persons or
at such other places as Lessor may designate in writing.
4.2 OPERATING EXPENSE INCREASE. Losses shall pay to Lessor during the
term hereof, In addition to the Base Rent, Lessee's Share, as hereinafter
defined, of the amount by which all Operating Expenses, as hereinafter defined,
for each Comparison Year exceeds the amount of all Operating Expenses for the
Base Year, such excess being hereinafter referred to as the "Operating Expense
Increase", in accordance with the following provisions:
(a) "Lessee's Share" is defined, for purposes of this Lease, as
the percentage set forth In paragraph 1.10 of the Basic Lease Provisions, which
percentage has been determined by dividing the approximate square footage of the
Premises by the total approximate square footage of the rentable space contained
in the Office Building Project. It is understood and agreed that the square
footage figures set forth in the Basic Lease Provisions are approximations which
Lessor and Lessee agree are reasonable and shall not be subject to revision
except in connection with an actual change in the size of the Premises or a
change in the space available for lease in the Office Building Project.
(b) "Base Year" is defined as the calendar year In which the
Lease term commences.
(c) "Comparison Year" is defined as each calendar year during the
term of this Lease subsequent to the Base Year, provided, however, Lessee shall
have no obligation to pay a share of the Operating Expense Increase applicable
to the first twelve (12) months of the Lease Term (other than such as are
mandated by a governmental authority, as to which government mandated expenses
Lessee shall pay Lessee's Share, notwithstanding they occur during the first
twelve (12) months). Lessee's Share of the Operating Expense Increase for the
first and last Comparison Years of the Lease Term shall be prorated according to
that portion of such Comparison Year as to which Lessee is responsible for a
share of such increase.
(d) "Operating Expenses" is defined, for purposes of this Lease,
to include all costs, if any, incurred by Lessor in the exercise of its
reasonable discretion, for:
(i) The operation, repair, maintenance, and
replacement, in neat, clean, safe, good order and condition, of the Office
Building Project, including but not limited to, the following:
(aa) The Common Areas, including their surfaces,
coverings, decorative items, carpets, drapes and window coverings, and including
parking areas, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, stairways, parkways, driveways, landscaped areas, striping, bumpers,
irrigation systems, Common Area lighting facilities, building exteriors and
roofs, fences and gates;
(bb) All heating, air conditioning, plumbing,
electrical systems, life safety equipment, telecommunication and other equipment
used in common by, or for the benefit of, lessees or occupants of the Office
Building Project, including elevators and escalators, tenant directories, fire
detection systems including sprinkler system maintenance and repair.
(ii) Trash disposal, janitorial and security
services;
(iii) Any other service to be provided by Lessor that
is elsewhere in this Lease stated to be an "Operating Expense";
(iv) The cost of the premiums for the liability and
property Insurance policies to be maintained by Lessor under paragraph 8 hereof;
(v) The amount of the real property taxes to be paid
by Lessor under paragraph 10.1 hereof;
(vi) The cost of water, sewer, gas, electricity, and
other publicly mandated services to the Office Building Project;
(vii) Labor, salaries, and applicable fringe benefits
and costs, materials, supplies and tools, used in maintaining and/or cleaning
the Office Building Project and accounting and a management fee attributable to
the operation of the Office Building Project;
(viii) Replacing and/or adding improvements mandated
by any governmental agency and any repairs or removals necessitated thereby
amortized over its useful life according to Federal income tax regulations or
guidelines for depreciation thereof (including interest on the unamortized
balance as is then reasonable in the judgment of Lessor's accountants);
(ix) Replacement of equipment or improvements that
have a useful life for depreciation purposes according to Federal income tax
guidelines of five (5) years or less, as amortized over such life.
(e) Operating Expenses shall not include the costs of
replacements of equipment or improvements that have a useful life for Federal
income tax purposes in excess of five (5) years unless it is of the type
described in paragraph 4.2(d) (viii), in which case their cost shall be included
as above provided.
(f) Operating Expenses shall not include any expenses paid by any
lessee directly to third parties, or as to which Lessor is otherwise reimbursed
by any third party, other tenant, or by insurance proceeds.
(g) Lessee's Share of Operating Expense Increase shall be payable
by Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time in advance of Lessee's Share
of the Operating Expense Increase for any Comparison Year, and the same shall be
payable monthly or quarterly, as Lessor shall designate, during each Comparison
Year of the Lease term, on the same day as the Base Rent is due hereunder. In
the event that Lessee pays Lessor's estimate of Lessee's Share of Operating
Expense Increase as aforesaid, Lessor shall deliver to Lessee within sixty (60)
days after the expiration of each Comparison Year a reasonably detailed
statement showing Lessee's Share of the actual Operating Expense Increase
Incurred during such year. If Lessee's payments under this paragraph 4.2(g)
during said Comparison Year exceed Lessee's Share as indicated on said
statement, Lessee shall be entitled to credit the amount of such overpayment
against Lessees Share of Operating Expense Increase next falling due. If
Lessee's payments under this paragraph during said Comparison Year were less
than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor
the amount of the deficiency within ten (10) days after delivery by Lessor to
Lessee of said statement. Lessor and Lessee shall forthwith adjust between them
by cash payment any balance determined to exist with respect to that portion of
the last Comparison Year for which Lessee is responsible as to Operating Expense
Increases, notwithstanding that the Lease term may have terminated before the
end of such Comparison Year.
4.3 RENT INCREASE. See Addendum #3
MODIFIED GROSS
REVISED
Page 2 of 11
<PAGE> 3
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the
security deposit set forth In paragraph 1.9 of the Basic Lease Provisions as
security for Lessee's faithful performance of Lessee's obligations hereunder. If
Lessee fails to pay rent or other charges due hereunder, or otherwise defaults
with respect to any provision of this Lease, Lessor may use, apply or retain all
or any portion of said deposit for the payment of any rent or other charge in
default for the payment of any other sum to which Lessor may become obligated by
reason of Lessee's default, or to compensate Lessor for any loss or damage which
Lessor may suffer thereby. If Lessor so uses or applies all or any portion of
said deposit, Lessee shall within ten (10) days after written demand therefor
deposit cash with Lessor in an amount sufficient to restore said deposit to the
full amount then required of Lessee. If the monthly Base Rent shall, from time
to time, increase during the term of this Lease, Lessee shall, at the time of
such increase, deposit with Lessor additional money as a security deposit so
that the total amount of the security deposit held by Lessor shall at all times
bear the same proportion to the then current Base Rent as the initial security
deposit bears to the initial Base Rent set forth in paragraph 1.6 of the Basic
Lease Provisions. Lessor shall not be required to keep said security deposit
separate from its general accounts. If Lessee performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not heretofore
been applied by Lessor, shall be returned, without payment of interest or other
Increment for its use, to Lessee (or, at Lessor's option, to the last assignee,
if any, of Lessee's interest hereunder) at the expiration of the term hereof,
and after Lessee has vacated the Premises. No trust relationship is created
herein between Lessor and Lessee with respect to said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for the purpose
set forth In paragraph 1.4 of the Basic Lease Provisions or any other use which
is reasonably comparable to that use and for no other purpose.
6.2 COMPLIANCE WITH, LAW.
(a) Lessor warrants to Lessee that the Premises, in the state
existing on the date that the Lease term commences, but without regard to
alterations or improvements made by Lessee or the use for which Lessee will
occupy the Premises, does not violate any covenants or restrictions of record,
or any applicable building code, regulation or ordinance in effect on such Lease
term Commencement Date. In the event it is determined that this warranty has
been violated, then it shall be the obligation of the Lessor, after written
notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any
such violation.
(b) Except as provided In paragraph 6.2(a) Lessee shall, at
Lessee's expense, promptly comply with all applicable statutes, ordinances,
rules, regulations, orders, covenants and restrictions of record, and
requirements of any fire insurance underwriters or rating bureaus, now in effect
or which may hereafter come into effect, whether or not they reflect a change in
policy from that now existing, during the term or any part of the term hereof,
relating in any manner to the Premises and the occupation and use by Lessee of
the Premises. Lessee shall conduct its business in a lawful manner and shall not
use or permit the use of the Premises or the Common Areas in any manner that
will tend to create waste or a nuisance or shall tend to disturb other occupants
of the Office Building Project.
6.3 CONDITION OF PREMISES.
(a) Lessor shall deliver the Premises to Lessee in a clean
condition on the Lease Commencement Date (unless Lessee is already in
possession) and Lessor warrants to Lessee that the plumbing, lighting, air
conditioning, and heating system in the Premises shall be in good operating
condition. In the event that it is determined that this warranty has been
violated, then it shall be the obligation of Lessor, after receipt of written
notice from Lessee setting forth with specificity the nature of the violation,
to promptly, at Lessor's sole cost, rectify such violation.
(b) Except as otherwise provided in this Lease, Lessee hereby
accepts the Premises and the Office Building Project in their condition existing
as of the Lease Commencement Date or the date that Lessee takes possession of
the Premises, whichever is earlier, subject to all applicable zoning, municipal,
county and state laws, ordinances and regulations governing and regulating the
use of the Premises, and any easements, covenants or restrictions of record, and
accepts this Lease subject thereto and to all matters disclosed thereby and by
any exhibits attached hereto. Lessee acknowledges that it has satisfied itself
by its own independent investigation that the Premises are suitable for its
intended use, and that neither Lessor nor Lessor's agent or agents has made any
representation or warranty as to the present or future suitability of the
Premises, Common Areas, or Office Building Project for the conduct of Lessee's
business.
7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES.
7.1 LESSOR'S OBLIGATIONS. Lessor shall keep the Office Building Project,
including the Premises, interior and exterior walls, roof, and common areas, and
the equipment whether used exclusively for the Premises or in common with other
promises, in good condition and repair; provided, however, Lessor shall not be
obligated to paint, repair or replace wall coverings, or to repair or replace
any improvements that are not ordinarily a part of the Building or are above
then Building standards. Except as provided in paragraph 9.5, there shall be no
abatement of rent or liability of Lessee on account of any injury or
interference with Lessee's business with respect to any improvements,
alterations or repairs made by Lessor to the Office Building Project or any part
thereof, Lessee expressly waives the benefits of any statute now or hereafter in
effect which would otherwise afford Lessee the right to make repairs at Lessor's
expense or to terminate this Lease because of Lessor's failure to keep the
Premises in good order, condition and repair.
7.2 LESSEE'S OBLIGATIONS.
(a) Notwithstanding Lessor's obligation to keep the Premises in
good condition and repair, Lessee shall be responsible for payment of the cost
thereof to Lessor as additional rent for that portion of the cost of any
maintenance and repair of the Premises, or any equipment (wherever located) that
serves only Lessee or the Premises, to the extent such cost is attributable to
causes beyond normal wear and tear. Lessee shall be responsible for the cost of
painting, repairing or replacing wall coverings, and to repair or replace any
Premises improvements that are not ordinarily a part of the Building or that are
above then Building standards. Lessor may, at its option, upon reasonable
notice, elect to have Lessee perform any particular such maintenance or repairs
the cost of which is otherwise Lessee's responsibility hereunder.
(b) On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same condition
as received, ordinary wear and tear excepted, clean and free of debris. Any
damage or deterioration of the Premises shall not be deemed ordinary wear and
tear if the same could have been prevented by good maintenance practices by
Lessee. Lessee shall repair any damage to the Premises occasioned by the
installation or removal of Lessee's trade fixtures, alterations, furnishings and
equipment. Except as otherwise stated in this Lease, Lessee shall leave the air
lines, power panels, electrical distribution systems, lighting fixtures, air
conditioning, window coverings, wall coverings, carpets, wall panelling,
ceilings and plumbing on the Premises and in good operating condition.
7.3 ALTERATIONS AND ADDITIONS.
(a) Lessee shall not, without Lessor's prior written consent make
any alterations, improvements, additions, Utility Installations or repairs In,
on or about the Premises, or the Office Building Project. As used in this
paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and
wall coverings, power panels, electrical distribution systems, lighting
fixtures, air conditioning, plumbing, and telephone and telecommunication wiring
and equipment. At the expiration of the term, Lessor may require the removal of
any or all of said alterations, improvements, additions or Utility
Installations, and the restoration of the Premises and the of the Building
Project to their prior condition, at Lessee's expense. Should Lessor permit
Lessee to make its own alterations, improvements, additions or Utility
Installations, Lessee shall use only such contractor as has been expressly
approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's
sole cost and expense, a lien and completion bond In an amount equal to one and
one-half times the estimated cost of such improvements, to insure Lessor against
any liability for mechanic's and materialmen's liens and to insure completion of
the work. Should Lessee make any alterations, improvements, additions or Utility
Installations without the prior approval of Lessor, or use a contractor not
expressly approved by Lessor, Lessor may, at any time during the term of this
Lease, require that Lessee remove any part or all of the same.
(b) Any alterations, improvements, additions or Utility
Installations in or about the Premises or the Office Building Project that
Lessee shall desire to make shall be presented to Lessor in written form, with
proposed detailed plans. If Lessor shall give its consent to Lessee's making
such alteration, improvement, addition or Utility Installation, the consent
shall be deemed conditioned upon Lessee acquiring a permit to do so from the
applicable governmental agencies, furnishing a copy thereof to Lessor prior to
the commencement of the work, and compliance by Lessee with all conditions of
said permit In a prompt and expeditious manner.
(c) 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 in
the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises, the Building or the Office Building
Project, or any
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interest therein.
(d) Lessee shall give Lessor not less than ten (10) days' notice
prior to the commencement of any work in the Premises by Lessee, and Lessor
shall have the right to post notices of non-responsibility in or on the Premises
or the Building 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 itself and Lessor 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, the Building or the Office Building
Project, upon the condition that if Lessor shall require, Lessee shall furnish
to Lessor a surety bond satisfactory to Lessor In an amount equal to such
contested lien claim or demand indemnifying Lessor against liability for the
same and holding the Premises, the Building and the Office Building Project free
from the effect of such lien or claim. In addition, Lessor may require Lessee to
pay Lessors reasonable attorneys fees and costs in participating in such action
if Lessor shall decide it is to Lessor's best interest so to do.
(e) All alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may be made to the Promises by Lessee, including but
not limited to, floor coverings, panelings, doors, drapes, built-ins, moldings,
sound attenuation, and lighting and telephone or communication systems, conduit,
wiring and outlets, shall be made and done in a good and workmanlike manner and
of good and sufficient quality and materials and shall be the property of Lessor
and remain upon and be surrendered with the Premises at the expiration of the
Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a).
Provided Lessee is not in default, notwithstanding the provisions of this
paragraph 7.3(e), Lessee's personal property and equipment, other than that
which is affixed to the Promises so that it cannot be removed without material
damage to the Premises or the Building, and other than Utility Installations,
shall remain the property of Lessee and may be removed by Lessee subject to the
provisions of paragraph 7.2.
(f) Lessee shall provide Lessor with as-built plans and
specifications for any alterations, improvements, additions or Utility
Installations.
7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or
additional utility facilities throughout the Office Building Project for the
benefit of Lessor or Lessee, or any other lessee of the Office Building Project,
including, but not by way of limitations such utilities as plumbing, electrical
systems, communication systems, and fire protection and detection systems, so
long as such installations do not unreasonably interfere with Lessee's use of
the Premises.
8. INSURANCE; INDEMNITY.
8.1 LIABILITY INSURANCE - LESSEE. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease a policy of Comprehensive
General Liability insurance utilizing an Insurance Services Office standard form
with Broad Form General Liability Endorsement (GL0404), or equivalent, in an
amount of not less than $1,000,000 per occurrence of bodily injury and property
damage combined or in a greater amount as reasonably determined by Lessor and
shall insure Lessee with Lessor as an additional insured against liability
arising out of the use, occupancy or maintenance of the Premises. Compliance
with the above requirement shall not, however, limit the liability of Lessee
hereunder.
8.2 LIABILITY INSURANCE - LESSOR. Lessor shall obtain and keep in force
during the term of this Lease a policy of Combined Single Limit Bodily Injury
and Broad Form Property Damage Insurance, plus coverage against such other risks
Lessor deems advisable from time to time, Insuring Lessor, but not Lessee,
against liability arising out of the ownership, use, occupancy or maintenance of
the Office Building Project In an amount not less than $5,000,000.00 per
occurrence.
8.3 PROPERTY INSURANCE - LESSEE. Lessee shall, at Lessee's expense,
obtain and keep In force during the term of this Lease for the benefit of
Lessee, replacement cost fire and extended coverage insurance, with vandalism
and malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsements, in an amount sufficient to cover not less than 100% of the full
replacement cost, as the same may exist from time to time, of all of Lessee's
personal property, fixtures, equipment and tenant improvements.
8.4 PROPERTY INSURANCE - LESSOR. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies of insurance covering loss or
damage to the Office Building Project Improvements, but not Lessee's personal
property, fixtures, equipment or tenant Improvements, In the amount of the full
replacement cost thereof, as the same may exist from time to time, utilizing
Insurance Services Office standard form, or equivalent, providing protection
against all perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, plate glass, and such other perils as
Lessor deems advisable or may be required by a lender having a lien on the
Office Building Project. In addition, Lessor shall obtain and keep in force,
during the term of this Lease, a policy of rental value insurance covering a
period of one year, with loss payable to Lessor, which insurance shall also
cover all Operating Expenses for said period. Lessee will not be named in any
such policies carried by Lessor and shall have no right to any proceeds
therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain
such deductibles as Lessor or the aforesaid lender may determine. In the event
that the Premises shall suffer an insured loss as defined in paragraph 9.1 (f)
hereof, the deductible amounts under the applicable insurance policies shall be
deemed an Operating Expense. Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies carried by Lessor. Lessee shall
pay the entirety of any increase in the property insurance premium for the
Office Building Project over what it was immediately prior to the commencement
of the term of this Lease if the Increase is specified by Lessors Insurance
carrier as being caused by the nature of Lessee's occupancy or any act or
omission of Lessee.
8.5 INSURANCE POLICIES. Lessee shall deliver to Lessor copies of
liability insurance policies required under paragraph 8.1 or certificates
evidencing the existence and amounts of such insurance within seven (7) days
after the Commencement Date of this Lease. No such policy shall be cancelable or
subject to reduction of coverage or other 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 renewals thereof.
8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other,
for direct or consequential loss or damage arising out of or incident to the
perils covered by property insurance carried by such party, whether due to the
negligence of Lessor or Lessee or their agents, employees, contractors and/or
invitees. If necessary all property insurance policies required under this Lease
shall be endorsed to so provide.
8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor and its
agents, Lessors master or ground lessor, partners and lenders, from and against
any and all claims for damage to the person or property of anyone or any entity
arising from Lessee's use of the Office Building Project, or from the conduct of
Lessee's business or from any activity, work or things done, permitted or
suffered by Lessee in or about the Premises or elsewhere and shall further
indemnify and hold harmless Lessor from and against any and all claims, costs
and expenses arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any act or omission of Lessee, or any of Lessees agents,
contractors, employees or invitees, and from and against all costs, attorney's
fees, expenses and liabilities incurred by Lessor as the result of any such use,
conduct, activity, work, things done, permitted or suffered, breach, default or
negligence, and in dealing reasonably therewith, including but not limited to
the defense or pursuit of any claim or any action or proceeding involved
therein; and in case any action or proceeding be brought against Lessor by
reason of any such matter, Lessee upon notice from Lessor shall defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim In order to be so indemnified. Lessee, as a material part of the
consideration to Lessor, hereby assumes all risk of damage to property of Lessee
or injury to persons, in, upon or about the Office Building Project arising from
any cause and Lessee hereby waives all claims In respect thereof against Lessor.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for loss of or damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other person
in or about the Premises or the Office Building Project, nor shall Lessor be
liable for injury to the person of Lessee, Lessee's employees, agents or
contractors, whether such damage or injury is caused by or results from theft,
fire, steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures, or from any other cause, whether said
damage or injury results from conditions arising upon the Premises or upon other
portions of the Office Building Project, or from other sources or places, or
from new construction or the repair, alteration or improvement of any part of
the Office Building Project, or of the equipment, fixtures or appurtenances
applicable thereto, and regardless of whether the cause of such damage or injury
or the means of repairing the same is inaccessible, Lessor shall not be liable
for any damages arising from any act or neglect of any other lessee, occupant or
user of the Office Building Project, nor from the failure of Lessor to enforce
the provisions of any other lease of any other lessee of the Office Building
Project.
8.9 NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified in
this paragraph 8 are adequate to cover Lessee's property or obligations under
this Lease.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "Premises Damage" shall mean if the Premises are damaged or
destroyed to any extent.
(b) "Premises Building Partial Damage" shall mean if the Building
of which the Premises are a part Is damaged or destroyed to the extent that the
cost to repair is less than fifty percent (50%) of the then Replacement Cost of
the Building.
(c) "Premises Building Total Destruction" shall mean if the
Building of which the Premises are a part is damaged or destroyed to the extent
that the cost
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<PAGE> 5
to repair is fifty percent (60%) or more of the then Replacement Cost of the
Building.
(d) "Office Building Project Buildings" shall mean all of the
buildings on the Office Building Project site.
(e) "Office Building Project Buildings Total Destruction" shall
mean if the Office Building Project Buildings are damaged or destroyed to the
extent that the cost to repair is fifty percent (50%) or more of the then
Replacement Cost of the Office Building Project Buildings.
(f) "Insured Loss" shall mean damage or destruction which was
caused by an event required to be covered by the insurance described in
paragraph B. The fact that an Insured Loss has a deductible amount shall not
make the loss an uninsured loss.
(g) "Replacement Cost" shall mean the amount of money necessary
to be spent in order to repair or rebuild the damaged area to the condition that
existed immediately prior to the damage occurring, excluding all improvements
made by lessees, other than those installed by Lessor at Lessee's expense.
9.2 PREMISES DAMAGE; PROMISES BUILDING PARTIAL DAMAGE.
(a) Insured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which Is an
Insured Loss and which falls into the classification of either Premises Damage
or Premises Building Partial Damage, then Lessor shall, as soon as reasonably
possible and to the extent the required materials and labor are readily
available through usual commercial channels, at Lessor's expense, repair such
damage (but not Lessee's fixtures, equipment or tenant improvements originally
paid for by Lessee) to its condition existing at the time of the damage, and
this Lease shall continue In full force and effect.
(b) Uninsured Loss: Subject to the provisions of paragraphs 9.4
and 9.5, if at any time during the term of this Lease there is damage which is
not an Insured Loss and which falls within the classification of Premises Damage
or Premises Building Partial Damage, unless caused by a negligent or willful act
of Lessee (in which event Lessee shall make the repairs at Lessee's expense),
which damage prevents Lessee from making any substantial use of the Premises,
Lessor may at Lessors option either (1) 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 the date of the occurrence of such damage of Lessor's intention to cancel
and terminate this Lease as of the date of the occurrence of such damage, in
which event this Lease shall terminate as of the date of the occurrence of such
damage.
9.3 PREMISES BUILDING TOTAL DESTRUCTION; OFFICE BUILDING PROJECT TOTAL
DESTRUCTION. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time
during the term of this Lease there is damage, whether or not it is an Insured
Loss, which falls into the classifications of either (i) Premises Building Total
Destruction, or (ii) Office Building Project Total Destruction, then Lessor may
at Lessor's option either (i) repair such damage or destruction as soon as
reasonably possible at Lessor's expense (to the extent the required materials
are readily available through usual commercial channels) to its condition
existing at the time of the damage, but not Lessee's fixtures, equipment or
tenant Improvements, and this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after the date of
occurrence of such damage of Lessor's intention to cancel and terminate this
Lease, in which case this Lease shall terminate as of the date of the occurrence
of such damage.
9.4 DAMAGE NEAR END OF TERM.
(a) Subject to paragraph 9.4(b), if at any time during the last
twelve (12) months of the term of this Lease there is substantial damage to the
Premises, Lessor may at Lessor's option cancel and terminate this Lease as of
the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within 30 days after the date of occurrence of such
damage,
(b) Notwithstanding paragraph 9.4(a), In the event that Lessee
has an option to extend or renew this Lease, and the time within which said
option may be exercised has not yet expired, Lessee shall exercise such option,
if it is to be exercised at all, no later than twenty (20) days after the
occurrence of an Insured Loss falling within the classification of Premises
Damage during the last twelve (12) months of the term of this Lease. If Lessee
duly exercises such option during said twenty (20) day period, Lessor shall, at
Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or
tenant improvements, as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee falls to exercise such option
during said twenty (20) day period, then Lessor may at Lessor's option terminate
and cancel this Lease as of the expiration of said twenty (20) day period by
giving written notice to Lessee of Lessor's election to do so within ten (10)
days after the expiration of said twenty (20) day period, notwithstanding any
term or provision in the grant of option to the contrary.
9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event Lessor repairs or restores the Building or
Premises pursuant to the provisions of this paragraph 9, and any part of the
Premises are not usable (including loss of use due to loss of access or
essential services), the rent payable hereunder (including Lessee's Share of
Operating Expense Increase) for the period during which such damage, repair or
restoration continues shall be abated, provided (1) the damage was not the
result of the negligence of Lessee, and (2) such abatement shall only be to the
extent the operation and profitability of Lessee's business as operated from the
Premises is adversely affected. Except for said abatement of rent, if any,
Lessee shall have no claim against Lessor for any damage suffered by reason of
any such damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises or the Building under the provisions of this Paragraph 9 and shall not
commence such repair or restoration within ninety (90) days after such
occurrence, or if Lessor shall not complete the restoration and repair within
six (6) months after such occurrence, Lessee may at Lessee's option cancel and
terminate this Lease by giving Lessor written notice of Lessee's election to do
so at any time prior to the commencement or completion, respectively, of such
repair or restoration. In such event this Lease shall terminate as of the date
of such notice.
(c) Lessee agrees to cooperate with Lessor in connection with any
such restoration and repair, including but not limited to the approval and/or
execution of plans and specifications required,
9.6 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.7 WAIVER. Lessor and Lessee waive the provisions of any statute which
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as
defined in paragraph 10.3, applicable to the Office Building Project subject to
reimbursement by Lessee of Lessee's Share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2.
10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for paying
any increase in real property tax specified in the tax assessor's records and
work sheets as being caused by additional improvements placed upon the Office
Building Project by other lessees or by Lessor for the exclusive enjoyment of
any other lessee. Lessee shall, however, pay to Lessor at the time that
Operating Expenses are payable under paragraph 4.2(c) the entirety of any
increase in real property tax it assessed solely by reason of additional
improvements placed upon the Premises by Lessee or at Lessee's request.
10.3 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "real
property tax" 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 on the Office Building Project or any portion thereof
by any authority having the direct or indirect power to tax, including any city,
county, state or federal government, or any school, agricultural, sanitary,
fire, street, drainage or other improvement district thereof, as against any
legal or equitable interest of Lessor in the Office Building Project or in any
portion thereof, as against Lessor's right to rent or other income therefrom,
and as against Lessor's, business of leasing the Office Building Project. The
term "real property tax" shall also include any tax, fee, levy, assessment or
charge (i) in substitution of partially or totally, any tax, fee, levy,
assessment or charge hereinabove included within the definition of "real
property tax", or (ii) the nature of which was hereinbefore included within the
definition of "real property tax", or (iii) which is imposed for a service or
right not charged prior to June 1, 1978 or, if previously charged, has been
increased since June 1, 1978, or (iv) which is imposed as a result of a change
in ownership, as defined by applicable local statutes for property tax purposes,
of the Office Building Project or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such change of
ownership, or (v) which is imposed by reason of this transaction, any
modifications or changes hereto, or any transfers hereof.
10.4 JOINT ASSESSMENT. If the improvements or property, the taxes for
which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not
separately assessed, Lessee's portion of that tax shall be equitably determined
by Lessor from the respective valuations assigned in the assessor's work sheets
or such other information (which may include the cost of construction) as may be
reasonably available. Lessors reasonable determination thereof, in good faith,
shall be conclusive.
10.5 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Promises or elsewhere.
(b) If any of Lessee's said personal property shall be assessed
with Lessor's real property, Lessee shall pay to 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.
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11. UTILITIES.
11.1 SERVICES PROVIDED BY LESSOR. Lessor shall provide heating,
ventilation, air conditioning, and janitorial service as reasonably required,
reasonable amounts of electricity for normal lighting and office machines, water
for reasonable and normal drinking and lavatory use, and replacement light bulbs
and/or fluorescent tubes and ballasts for standard overhead fixtures.
11.2 SERVICES EXCLUSIVE TO LESSEE. Lessee shall pay for all water, gas,
heat, light, power, telephone and other utilities and services specially or
exclusively supplied and/or metered exclusively to the Premises or to Lessee,
together with any taxes thereon. If any such services are not separately metered
to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a
reasonable proportion to be determined by Lessor of all charges jointly metered
with other premises in the Building.
11.3 HOURS OF SERVICE. Said services and utilities shall be provided
during generally accepted business days and hours or such other days or hours as
may hereafter be set forth. Utilities and services required at other times shall
be subject to advance request and reimbursement by Lessee to Lessor of the cost
thereof.
11.5 INTERRUPTIONS. There shall be no abatement of rent and Lessor shall
not be liable in any respect whatsoever for the inadequacy, stoppage,
interruption or discontinuance of any utility or service due to riot, strike,
labor dispute, breakdown, accident, repair or other cause beyond Lessor's
reasonable control or in cooperation with governmental request or directions.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in the Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a material
default and breach of this Lease without the need for notice to Lessee under
paragraph 131. "Transfer" within the meaning of this paragraph 12 shall include
the transfer or transfers aggregating: (a) if Lessee is a corporation, more than
twenty-five percent (25%) of the voting stock of such corporation, or (b) if
Lessee is a partnership, more than twenty-five percent (25%) of the profit and
loss participation in such partnership.
12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, all of which are referred to as "Lessee Affiliate";
provided that before such assignment shall be effective, (a) said assignee shall
assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall
be given written notice of such assignment and assumption. Any such assignment
shall not, in any way, affect or limit the liability of Lessee under the terms
of this Lease even if after such assignment or subletting the terms of this
Lease are materially changed or altered without the consent of Lessee, the
consent of whom shall not be necessary.
12.3 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessors consent, no assignment or subletting
shall release Lessee of Lessee's obligation hereunder or alter the primary
liability of Lessee to pay the rent and other sums due Lessor hereunder
including Lessee's Share of Operating Expense Increase, and to perform all other
obligations to be performed by Lessee hereunder.
(b) Lessor may accept rent from any person other than Lessee
pending approval or disapproval of such assignment.
(c) Neither a delay in the approval or disapproval of such
assignment or subletting, nor the acceptance of rent, shall constitute a waiver
or estoppel of Lessor's right to exercise its remedies for the breach of any of
the terms or conditions of this paragraph 12 or this Lease.
(d) If Lessee's obligation under this Lease have been guaranteed
by third parties, then an assignment or sublease, and Lessor's consent thereto,
shall not be effective unless said guarantors give their written consent to such
sublease and the terms thereof.
(e) The consent by Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without notifying Lessee or
anyone else liable on the Lease or sublease and without obtaining their consent
and such action shall not relieve such persons from liability under this Lease
or said sublease; however, such persons shall not be responsible to the extent
any such amendment or modification enlarges or increases the obligations of the
Lessee or sublessee under this Lease or such sublease.
(f) In the event of any default under this Lease, Lessor may
proceed directly against Lessee, any guarantors or anyone else responsible for
the performance of 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.
(g) Lessor's written consent to any assignment or subletting of
the Premises by Lessee shall not constitute an acknowledgment that no default
then exists under this Lease of the obligations to be performed by Lessee nor
shall such consent be deemed a waiver of any then existing default, except as
may be otherwise stated by Lessor at the time.
(h) The discovery of the fact that any financial statement relied
upon by Lessor in giving its consent to an assignment or subletting was
materially false shall, at Lessor's election, render Lessor's said consent null
and void.
12.4 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING.
Regardless of Lessor's consent, 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 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 default shall occur in the performance of Lessee's obligations under this
Lease, Lessee may 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 default exists in
the performance of Lessee's obligations under this Lease, to pay to Lessor the
rents due and to become due under the sublease. Lessee agrees that such
sublessee shall have the right to rely upon any such statement and request from
Lessor, and that such sublessee shall pay such rents to Lessor without an
obligation or right to inquire as to whether such default exists and
notwithstanding any notice from or claim from Lessee to the contrary Lessee
shall have no right or claim against said sublessee or Lessor for any such rents
so paid by said sublessee to Lessor.
(b) No sublease entered into by Lessee shall be effective unless
and until it has been approved in writing by Lessor. In entering into any
sublease, Lessee shall use only such form of sublease as is satisfactory to
Lessor, and once approved by Lessor, such sublease shall not be changed or
modified without Lessor's prior written consent. Any sublease shall, by reason
of entering into a sublease under this Lease, be deemed for the benefit of
Lessor, to have assumed and agreed to conform and comply with each and every
obligation herein to be performed by Lessee other than such obligations as are
contrary to or inconsistent with provisions contained in a sublease to which
Lessor has expressly consented in writing.
(c) In the event Lessee shall default 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 Lessee under such sublease from the time of
the exercise of said option to the termination of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to Lessee or for any other prior defaults of Lessee under
such sublease.
(d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(e) With respect to any subletting to which Lessor has consented,
Lessor agrees to deliver a copy of any notice of default by Lessee to the
sublessee. Such sublessee shall have the right to cure a default of Lessee
within three (3) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursement and offset from
and against Lessee for any such defaults cured by the sublessee.
12.5 LESSOR'S EXPENSES. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable costs and expenses incurred in
connection therewith, including attorneys', architects', engineers' or other
consultants' fees.
12.6 CONDITIONS TO CONSENT. Lessor reserves the right to condition any
approval to assign or sublet upon Lessor's determination that (a) the proposed
assignee or sublessee shall conduct a business on the Premises of a quality
substantially equal to that of Lessee and consistent with the general character
of the
MODIFIED GROSS
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<PAGE> 7
other occupants of the Office Building Project and not in violation of any
exclusives or rights then held by other tenants, and (b) the proposed assignee
or sublessee be at least as financially responsible as Lessee was expected to be
at the time of the execution of this Lease or of such assignment or subletting,
whichever is greater.
13. DEFAULT; REMEDIES.
13.1 DEFAULT. The occurrence of any one or more of the following events
shall constitute a material default of this Lease by Lessee:
(a) The vacation or abandonment of the Premises by Lessee.
Vacation of the Premises shall include the failure to occupy the Premises for a
continuous period of sixty (60) days or more, whether or not the rent is paid.
(b) The breach by Lessee of any of the covenants, conditions or
provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or
subletting), 131(a) (vacation or abandonment), 13.1(e) (insolvency), 13.1(f)
(false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33
(auctions), or 41.1 (easements), all of which are hereby deemed to be material,
non-curable defaults without the necessity of any notice by Lessor to Lessee
thereof.
(c) The failure by Lessee to make any payment of rent or any
other payment required to be made by Lessee hereunder, as and when due, where
such failure shall continue for a period of three (3) days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph.
(d) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
Lessee other than those referenced in subparagraphs (b) and (c), above, where
such failure shall continue for a period of thirty (30) days after written
notice thereof from Lessor to Lessee; provided, however, that if the nature of
Lessee's noncompliance is such that more than thirty (30) days are reasonably
required for its cure, then Lessee shall not be deemed to be in default if
Lessee commenced such cure within said thirty (30) day period and thereafter
diligently pursues such cure to completion. To the extent permitted by law, such
thirty (30) day notice shall constitute the sole and exclusive notice required
to be given to Lessee under applicable Unlawful Detainer statutes.
(e) (i) The making by Lessee of any general arrangement or
general assignment for the benefit of creditors; (ii) Lessee 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. In the event that any provision of this paragraph 13.1 (e) is
contrary to any applicable law, such provision shall be of no force or effect.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's
obligation hereunder, was materially false.
13.2 REMEDIES. In the event of any material default or breach of this
Lease by Lessee, Lessor may at any time thereafter, with or without notice or
demand and without limiting Lessor in the exercise of any right or remedy which
Lessor may have by reason of such default:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee all damages incurred by
Lessor by reason of Lessee's default 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 any real estate commission actually paid; the worth at the time of award by
the court having jurisdiction thereof of the amount by which the unpaid rent for
the balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Lessee proves could be reasonably avoided;
that portion of the leasing commission paid by Lessor pursuant to paragraph 15
applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this
Lease shall continue in effect whether or not Lessee shall have vacated or
abandoned the Premises. In such event Lessor shall be entitled to enforce all of
Lessor's rights and remedies under this Lease, including the right to recover
the rent as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located. Unpaid installments of rent and other unpaid monetary obligations of
Lessee under the terms of this Lease shall bear interest from the date due at
the maximum rate then allowable by law.
13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but in
no event later than thirty (30) days after written notice by Lessee to Lessor
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have theretofore been furnished to Lessee in
writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such 30-day period and
thereafter diligently pursues the same to completion.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of Base Rent, Lessee's Share of Operating Expense Increase or
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 on Lessor by the terms of any mortgage or
trust deed covering the Office Building Project. Accordingly, if any installment
of Base Rent, Operating Expense Increase, or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) 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 6% of such overdue amount. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late payment by Lessee.
Acceptance of such late charge by Lessor shall in no event constitute a waiver
of Lessee's default with respect to such overdue amount, nor prevent Lessor from
exercising any of the other rights and remedies granted hereunder.
14. CONDEMNATION. If the Premises or any portion thereof or the Office Building
Project are taken under the power of eminent domain, or sold under the threat of
the exercise of said power (all of which are herein called "condemnation"), this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs; provided that if so
much of the Premises or the Office Building Project are taken by such
condemnation as would substantially and adversely affect the operation and
profitability of Lessee's business conducted from the Premises, Lessee shall
have the option, to be exercised only in writing within thirty (30) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within thirty (30) days after the condemning authority shall
have taken possession), to 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 rent and Lessee's
Share of Operating Expense Increase shall be reduced in the proportion that the
floor area of the Premises taken bears to the total floor area of the Premises.
Common Areas taken shall be excluded from the Common Areas usable by Lessee and
no reduction of rent shall occur with respect thereto or by reason thereof.
Lessor shall have the option in its sole discretion to terminate this Lease as
of the taking of possession by the condemning authority, by giving written
notice to Lessee of such election within thirty (30) days after receipt of
notice of a taking by condemnation of any part of the Premises or the Office
Building Project. Any award for the taking of all or any part of the Premises or
the Office Building Project 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 separate award for loss of or
damage to Lessee's trade fixtures, removable personal property and unamortized
tenant improvements that have been paid for by Lessee. For that purpose the cost
of such improvements shall be amortized over the original term of this Lease
excluding any options. In the event that this Lease is not terminated by reason
of such condemnation, Lessor shall to the extent of severance damages received
by Lessor in connection with such condemnation, 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 pay any amount in
excess of such severance damages required to complete such repair.
15. BROKER'S FEE.
(a) The brokers involved in this transaction are Sandstone
Property Management Company as "listing broker" and Lee & Associates, West Los
Angeles as "cooperating broker," licensed real estate broker(s). A "cooperating
broker" is defined as any broker other than the listing broker entitled to a
share of any commission arising under this Lease. Upon execution of this Lease
by both parties, Lessor shall pay to said brokers jointly, or in such separate
shares as they may mutually designate in writing, a fee as set forth in a
separate agreement between Lessor and said broker(s), or in the event there is
no separate agreement between Lessor and said broker(s), the sum of $_______ for
brokerage services rendered by said broker(s) to Lessor in this
FULL SERVICE-GROSS
REVISED
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<PAGE> 8
transaction.
(b) Lessor further agrees that (i) if Lessee exercises any
Option, as defined in paragraph 39.1 of this Lease, which is granted to Lessee
under this Lease, or any subsequently granted option which is substantially
similar to an Option granted to Lessee under this Lease, or (ii) 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 (iii) if Lessee remains in
possession of the Premises after the expiration of the term of this Lease after
having failed to exercise an Option, or (iv) if said broker(s) 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
(v) if the Base Rent is increased, whether by agreement or operation of an
escalation clause contained herein, then as to any of said transactions or rent
increases, Lessor shall pay said broker(s) a fee in accordance with the schedule
of said broker(s) in effect at the time of execution of this Lease. Said fee
shall be paid at the time of such increased rental is determined.
(c) Lessor agrees to pay said fee not only on behalf of Lessor
but also on behalf of any person, corporation, association, or other entity
having an ownership interest in said real property or any part thereof, when
such fee is due hereunder. Any 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 listing and
cooperating broker shall be a third party beneficiary of the provisions of this
paragraph 15 to the extent of their interest in any commission arising under
this Lease and may enforce that right directly against Lessor; provided,
however, that all brokers having a right to any part of such total commission
shall be a necessary party to any suit with respect thereto.
(d) Lessee and Lessor each represent and warrant to the other
that neither has had any dealings with any person, firm, broker or finder (other
than the person(s), if any, whose names are set forth in paragraph 15(a), above)
in connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby, and no other broker or other person, firm or
entity is entitled to any commission or finder's fee in connection with said
transaction and Lessee and Lessor do each hereby indemnify and hold the other
harmless from and against any costs, expenses, attorneys' fees or liability for
compensation or charges which may be claimed by any such unnamed broker, finder
or other similar party by reason of any dealings or actions of the Indemnifying
party.
16. ESTOPPEL CERTIFICATE.
(a) Each party (as "responding party") shall at any time upon not
less than ten (10) days' prior written notice from the other party ("requesting
party") execute, acknowledge and deliver to the requesting party a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and certifying
that this Lease, as so modified, is in full force and effect) and the date to
which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to the responding party's knowledge, any
uncured defaults on the part of the requesting party, or specifying such
defaults if any are claimed. Any such statement may be conclusively relied upon
by any prospective purchaser or encumbrancer of the Office Building Project or
of the business of Lessee.
(b) At the requesting party's option, the failure to deliver such
statement within such time shall be a material default of this Lease by the
party who is to respond, without any further notice to such party, or it shall
be conclusive upon such party that (i) this Lease is in full force and effect,
without modification except as may be represented by the requesting party, (ii)
there are no uncured defaults in the requesting party's performance, and (iii)
if Lessor is the requesting party, not more than one month's rent has been paid
in advance.
(c) If Lessor desires to finance, refinance, or sell the Office
Building Project, or any part thereof, Lessee hereby agrees to deliver to any
lender or purchaser designated by Lessor such financial statements of Lessee as
may be reasonably required by such lender or purchaser. Such statements shall
include the past three (3) years' financial statements of Lessee. 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 "Lessee" as used herein shall mean only
the owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Office Building Project, and except as
expressly provided in paragraph 15, in the event of any transfer of such title
or interest, Lessor herein named (and in case of any subsequent transfers then
the grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall, subject
as aforesaid, be binding on Lessor's successors and assigns, only during their
respective periods of ownership.
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. Except as expressly herein
provided, any amount due to Lessor not paid when due shall bear interest at the
maximum rate then allowable by law or judgments from the date due. Payment of
such interest shall not excuse or cure any default by Lessee under this Lease;
provided, however, that interest shall not be payable on late charges incurred
by Lessee nor on any amounts upon which late charges are paid by Lessee.
20. TIME OF ESSENCE. Time is of the essence with respect to the
obligations to be performed under this Lease.
21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under
the terms of this Lease, including but not limited to Lessee's Share of
Operating Expense Increase and any other expenses payable by Lessee hereunder
shall be deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains
all agreements of the parties with respect to any matter mentioned herein. No
prior or contemporaneous agreement or understanding pertaining to any such
matter shall be effective. This Lease may be modified in writing only, signed by
the parties in interest at the time of the modification. Except as otherwise
stated in this Lease, Lessee hereby acknowledges that neither the real estate
broker listed in paragraph 15 hereof nor any cooperating broker on this
transaction nor the Lessor or any employee or agents of any of said persons has
made any oral or written warranties or representations to Lessee relative to the
condition or use by Lessee of the Premises or the Office Building Project and
Lessee acknowledges that Lessee assumes all responsibility regarding the
Occupational Safety Health Act, the legal use and adaptability of the Premises
and the compliance thereof with all applicable laws and regulations In effect
during the term of this Lease.
23. NOTICES. Any notice required or permitted to be given hereunder
shall be in writing and may be given by personal delivery or by certified or
registered mail, and shall be deemed sufficiently given if delivered or
addressed to Lessee or to Lessor at the address noted below or adjacent to the
signature of the respective parties, as the case may be. Mailed notices shall be
deemed given upon actual receipt at the address required, or forty-eight hours
following deposit in the mail, postage prepaid, whichever first occurs. Either
party may by 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 notice purposes. 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 notice to Lessee.
24. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed
a waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. 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 act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent,
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.
26. HOLDING OVER. If Lessee, with Lessor's consent, remains in
possession of the Premises or any part thereof after the expiration of the term
hereof, such occupancy shall be a tenancy from month to month upon all the
provisions of this Lease pertaining to the obligations of Lessee, except that
the rent payable shall be one hundred fifty percent (150%) of the rent payable
immediately preceding the termination date of this Lease, and all Options, if
any, granted under the terms of this Lease shall be deemed terminated and be of
no further effect during said month to month tenancy.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law
MODIFIED GROSS
REVISED
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or in equity.
28. COVENANTS AND CONDITIONS. Each provision of this Lease performable
by Lessee shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provision of
paragraph 17, this Lease shall bind the parties, their personal representatives,
successors and assign. This Lease shall be governed by the laws of the State
where the Office Building Project is located and any litigation concerning this
Lease between the parties hereto shall be initiated in the county in which the
Office Building Project is located.
30. SUBORDINATION.
(a) This Lease, and any Option or right of first refusal granted
hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage,
deed of trust, or any other hypothecation or security now or hereafter placed
upon the Office Building Project and to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements and extensions thereof. Notwithstanding such subordination,
Lessee's right to quiet possession of the Premises shall not be disturbed if
Lessee is not in default and so long as Lessee shall pay the rent and observe
and perform all of the provisions of this Lease, unless this Lease is otherwise
terminated pursuant to its terms. If any mortgagee, trustee or ground lessor
shall elect to have this Lease and any Options granted hereby prior to the lien
of its mortgage, deed of trust or ground lease, and shall give written notice
thereof to Lessee, this Lease and such Option shall be deemed prior to such
mortgage, deed of trust or ground lease, whether this Lease or such Options are
dated prior or subsequent to the date of said mortgage, deed of trust or ground
lease or the date of recording thereof.
(b) Lessee agrees to execute any documents required to effectuate
an attornment, a subordination, or to make this Lease or any Option granted
herein prior to the lien of any mortgage, deed of trust or ground lease, as the
case may be. Lessee's failure to execute such documents within ten (10) days
after written demand shall constitute a material default by Lessee hereunder
without further notice to Lessee or, at Lessor's option, Lessor shall execute
such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does
hereby make, constitute and irrevocably appoint Lessor as Lessee's
attorney-in-fact and in Lessee's name, place and stead, to execute such
documents in accordance with this paragraph 30(b).
31. ATTORNEYS' FEES.
31.1 If either party or the broker(s) named herein bring an action to
enforce the terms hereof or declare rights hereunder, the prevailing party in
any such action, trial, or appeal thereon, shall be entitled to his reasonable
attorneys' fees to be paid by the losing party as fixed by the court in the same
or separate suit, and whether or not such action is pursued to decision or
judgment. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.
31.2 The attorneys' fee award shall not be computed in accordance with
any court fee schedule, but shall be such as to fully reimburse all attorneys'
fees reasonably incurred in good faith.
31.3 Lessor shall be entitled to reasonable attorneys' fees and all
other costs and expenses incurred in the preparation and service of notices of
default and consultations in connection therewith, whether or not a legal
transaction is subsequently commenced in connection with such default.
32. LESSOR'S ACCESS.
32.1 Lessor and Lessor's agents shall have the right to enter the
Premises at reasonable times for the purpose of inspecting the same, performing
any services required of Lessor, showing the same to prospective purchasers,
lenders, or lessees, taking such safety measures, erecting such scaffolding or
other necessary structures, making such alterations, repairs, improvements or
additions to the Premises or to the Office Building Project as Lessor may
reasonably deem necessary or desirable and the erecting, using and maintaining
of utilities, services, pipes and conduits through the Premises and/or other
premises as long as there is no material adverse effect to Lessee's use of the
Premises. Lessor may at any time place on or about the Premises or the Building
any ordinary "For Sale" signs and Lessor may at any time during the last 120
days of the term hereof place on or about the Premises any ordinary "For Lease"
signs.
32.2 All activities of Lessor pursuant to this paragraph shall be
without abatement of rent, nor shall Lessor have any liability to Lessee for the
same.
32.3 Lessor shall have the right to retain keys to the Premises and to
unlock all doors in or upon the Premises other than to files, vaults and safes,
and in the case of emergency to enter the Premises by any reasonably appropriate
means, and any such entry shall not be deemed a forceable or unlawful entry or
detainer of the Premises or an eviction. Lessee waives any charges for damages
or injuries or interference with Lessee's property or business in connection
therewith.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Promises or the Common Areas
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. The holding of any auction on the Premises or Common Areas in violation
of this paragraph shall constitute a material default of this Lease.
34. SIGNS. Lessee shall not place any sign upon the Premises or the Office
Building Project without Lessor's prior written consent. Under no circumstances
shall Lessee place a sign on any roof of the Office Building Project.
35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
36. CONSENTS. Except for paragraphs 33 (auctions) and 34 (signs) hereof,
wherever in this Lease the consent of one party is required to an act of the
other party such consent shall not be unreasonably withheld or delayed.
37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing
and performing all of the covenants, conditions and provisions on Lessee's part
to be observed and performed hereunder, Lessee shall have quiet possession of
the Premises for the entire term hereof subject to all of the provisions of this
Lease. The individuals executing this Lease on behalf of Lessor represent and
warrant to Lessee that they are fully authorized and legally capable of
executing this Lease on behalf of Lessor and that such execution is binding upon
all parties holding an ownership interest in the Office Building Project.
39. OPTIONS.
39.1 DEFINITION. As used in this paragraph the word "Option" has the
following meaning: (1) the right or option 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; (2) the option of 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 space within the Office Building Project or other
property of Lessor or the right of first offer to lease other space within the
Office Building Project or other property of Lessor; (3) the right or option to
purchase the Premises or the Office Building Project, or the right of first
refusal to purchase the Premises or the Office Building Project or the right of
first offer to purchase the Premises or the Office Building Project, or the
right or option to purchase other property of Lessor, or the right of first
refusal to purchase other property of Lessor or the right of first offer to
purchase other property of Lessor.
39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease is
personal to the original Lessee and may be exercised only by the original Lessee
while occupying the Premises who does so without the intent of thereafter
assigning this Lease or subletting the Premises or any portion thereof, and may
not be exercised or be assigned, voluntarily or involuntarily, by or to any
person or entity other than Lessee; provided, however, that an Option may be
exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of
this Lease. The Options, if any, herein granted to Lessee are not assignable
separate and apart from this Lease, nor may any Option be separated from this
Lease in any manner, either by reservation or otherwise.
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 option to extend or renew this Lease has been so 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 time commencing
MODIFIED GROSS
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<PAGE> 10
from the date Lessor gives to Lessee a notice of default pursuant to paragraph
13.1(c) or 13.1(d) and continuing until the noncompliance alleged in said notice
of default is cured, or (ii) during the period of time commencing on the day
after a monetary obligation to Lessor is due from Lessee and unpaid (without any
necessity for notice thereof to Lessee) and continuing until the obligation is
paid, or (111) in the event that Lessor has given to Lessee three or more
notices or default under paragraph 13.1(c), or paragraph 131(d), whether or not
the defaults are cured, during the 12 month period of time immediately prior to
the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has
committed any non-curable breach, including without limitation those described
in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants
or conditions of this Lease.
(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 falls 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) Lessee fails to
commence to cure a default specified in paragraph 13.1(d) within thirty (30)
days after the date that Lessor gives notice to Lessee of such default and/or
Lessee falls thereafter to diligently prosecute said cure to completion, or
(iii) Lessor gives to Lessee three or more notices of default under paragraph
13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if
Lessee has committed any non-curable breach, including without limitation those
described in paragraph 13.1(b), or is otherwise in default of any of the terms,
covenants and conditions of this Lease.
40. SECURITY MEASURES - LESSOR'S RESERVATIONS.
40.1 Lessee hereby acknowledges that Lessor shall have no obligation
whatsoever to provide guard service or other security measures for the benefit
of the Premises or the Office Building Project. Lessee assumes all
responsibility for the protection of Lessee, its agents, and invitees and the
property of Lessee and of Lessee's agents and invitees from acts of third
parties. Nothing herein contained shall prevent Lessor, at Lessors sole option,
from providing security protection for the Office Building Project or any part
thereof, in which event the cost thereof shall be included within the definition
of Operating Expenses, as set forth in paragraph 4.2(b).
40.2 Lessor shall have the following rights:
(a) To change the name, address or title of the Office Building
Project or building in which the Premises are located upon not less than 90 days
prior written notice;
(b) To, at Lessee's expense, provide and install Building
standard graphics on the door of the Premises and such portions of the Common
Areas as Lessor shall reasonably deem appropriate;
(c) To permit any lessee the exclusive right to conduct any
business as long as such exclusive does not conflict with any rights expressly
given herein;
(d) To place such signs, notices or displays as Lessor reasonably
deems necessary or advisable upon the roof, exterior of the buildings or the
Office Building Project or on pole signs in the Common Areas;
40.3 Lessee shall not:
(a) Use a representation (photographic or otherwise) of the
Building or the Office Building Project or their name(s) in connection with
Lessee's business;
(b) Suffer or permit anyone, except in emergency, to go upon the
roof of the Building.
41. EASEMENTS.
41.1 Lessor reserves to itself the right, from time to time, to grant
such easements, rights and dedications that Lessor deems necessary or desirable,
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 shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material default of this Lease by Lessee without the need for
further notice to Lessee.
41.2 The obstruction of Lessee's view, air, or light by any structure
erected in the vicinity of the Building, whether by Lessor or third parties,
shall in no way affect this Lease or impose any liability upon Lessor.
42. 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.
43. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, Lessee, and each individual executing this Lease on behalf of such
entity represent and warrant that such individual is duly authorized to execute
and deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after execution of
this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
44. CONFLICT. Any conflict between the printed provisions, Exhibits or Addenda
of this Lease and the typewritten or handwritten provisions, if any, shall be
controlled by the typewritten or handwritten provisions.
45. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully executed
by both parties.
46. LENDER MODIFICATION. Lessee agrees to make such reasonable modifications to
this Lease as may be reasonably required by an institutional lender in
connection with the obtaining of normal financing or refinancing of the Office
Building Project.
47. MULTIPLE PARTIES. If more than one person or entity is named as either
Lessor or Lessee herein, except as otherwise expressly provided herein, the
obligations of the Lessor or Lessee herein shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee,
respectively.
48. WORK LETTER. This Lease is supplemented by that certain Work Letter of even
date executed by Lessor and Lessee, attached hereto as Exhibit C, and
incorporated herein by this reference.
49. ATTACHMENTS. Attached hereto are the following documents which constitute a
part of this Lease:
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY 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. NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL
ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS
MODIFIED GROSS
REVISED
Page 10 of 11
<PAGE> 11
LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY
UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE.
LESSOR LESSEE
2800 Olympic Boulevard Partners, L.P., a Launch Media, Inc., a Delaware
California Limited Partnership Corporation
- ---------------------------------------- -----------------------------------
By KMK Capital Corp. By /s/ JEFF MICKEAL
------------------------------------- --------------------------------
Its General Partner Its JEFF MICKEAL C.F.O.
BY /s/ JEFF KIRSHNER By
------------------------------------- ---------------------------------
Its Jeff Kirshner, VP Its
------------------------------------ --------------------------------
Executed at Santa Monica, CA Executed at Santa Monica, CA
on October 19, 1999 on October 14, 1999
Address Address 2700 Pennsylvania
---------------------------------
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing
the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700
South Flower Street, SUITE 600, LOS ANGELES, CA 90017.
(213) 687-8777.
MODIFIED GROSS
REVISED
PAGE 11 OF 11
<PAGE> 12
STANDARD OFFICE LEASE FLOOR PLAN
[LOGO]
EXHIBIT A
MODIFIED GROSS
REVISED
Page 1 of 1
<PAGE> 13
EXHIBIT A
[DIAGRAM OF FLOOR PLAN]
SECOND FLOOR PLAN - EXISTING
<PAGE> 14
EXHIBIT A
[DIAGRAM OF FLOOR PLAN]
FIRST FLOOR PLAN - EXISTING
<PAGE> 15
RULES AND REGULATIONS FOR
STANDARD OFFICE LEASE
[LOGO]
Dated:______________________________
By and Between______________________________
GENERAL RULES
1. LESSEE shall not suffer or permit the obstruction of any Common
Areas, including driveways, walkways and stairways.
2. LESSOR reserves the right to refuse access to any persons LESSOR in
good faith judges to be a threat to the safety, reputation, or property of the
Office Building Project and its occupants.
3. LESSEE shall not make or permit any noise or odors that annoy or
interfere with other lessees or persons having business within the Office
Building Project.
4. LESSEE shall not keep animals or birds within the Office Building
Project, and shall not bring bicycles, motorcycles or other vehicles into areas
not designated as authorized for same.
5. LESSEE shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.
6. LESSEE shall not alter any lock or install new or additional locks or
bolts.
7. LESSEE shall be responsible for the inappropriate use of any toilet
rooms, plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.
8. LESSEE shall not deface the walls, partitions or other surfaces of
the Premises or Office Building Project.
9. LESSEE shall not suffer or permit anything in or around the Premises
or Building that causes excessive vibration or floor loading in any part of the
Project.
10. Furniture, significant freight and equipment shall be moved into or
out of the building only with the LESSOR'S knowledge and consent, and subject to
such reasonable limitations, techniques and timing, as may be designated by
LESSOR. LESSEE shall be responsible for any damage to the Office Building
Project arising from any such activity.
11. LESSEE shall not employ any service or contractor for services or
work to be performed in the Building, except as approved by LESSOR.
12. LESSOR reserves the right to close and lock the Building on
Saturdays, Sundays and legal holidays, and on other days between the hours of
___________P.M. and ___________ A.M. of the following day. If LESSEE uses the
Premises during such periods, LESSEE shall be responsible for securely locking
any doors it may have opened for entry.
13. LESSEE shall return all keys at the termination of its tenancy and
shall be responsible for the cost of replacing any keys that are lost.
14. No awnings shall be installed or used by LESSEE.
15. No LESSEE, employee or invitee shall go upon the roof of the
Building.
16. LESSEE shall not suffer or permit smoking or carrying of lighted
cigars or cigarettes in areas reasonably designated by LESSOR or by applicable
governmental agencies as non-smoking areas.
17. LESSEE shall not use any method of heating or air conditioning other
than as provided by LESSOR.
18. LESSEE shall not install, maintain or operate any vending machines
upon the Premises without LESSOR'S written consent.
19. THE PREMISES shall not be used for lodging or manufacturing, cooking
or food preparation.
20. LESSEE shall comply with all safety, fire protection and evacuation
regulations established by LESSOR or any applicable governmental agency.
21. LESSOR reserves the right to waive any one of these rules or
regulations, and/or as to any particular LESSEE, and any such waiver shall not
constitute a waiver of any other rule or regulation or any subsequent
application thereof to such LESSEE.
22. LESSEE assumes all risks from theft or vandalism and agrees to keep
its Premises locked as may be required.
23. LESSOR reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the appropriate
operation and safety of the Office Building Project and its occupants. LESSEE
agrees to abide by these and such rules and regulations.
PARKING RULES
1. Parking areas shall be used only for parking by vehicles no longer
than full size, passenger automobiles herein called "Permitted Size Vehicles."
Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized
Vehicles."
2. LESSEE shall not permit or allow any vehicles that belong to or are
controlled by LESSEE or Lessee's employees, suppliers, shippers, customers, or
invitees to be loaded, unloaded, or parked in areas other than those designated
by LESSOR for such activities.
6. Users of the parking area will obey all posted signs and park only in
the areas designated for vehicle parking.
7. Unless otherwise instructed, every person using the parking area is
required to park and lock his own vehicle. LESSOR will not be responsible for
any damage to vehicles, injury to persons or loss of property, all of which
risks are assumed by the party using the parking area.
9. The maintenance, washing, waxing or cleaning of vehicles in the
parking structure or Common Areas is prohibited.
10. LESSEE shall be responsible for seeing that all of its employees,
agents and invitees comply with the applicable parking rules, regulations, laws
and agreements.
11. LESSOR reserves the right to modify these rules and/or adopt such
other reasonable and non-discriminatory rules and regulations as it may deem
necessary for the proper operation of the parking area.
12. Such parking use as is herein provided is intended merely as a
license only and no bailment is intended or shall be created hereby.
EXHIBIT B
MODIFIED GROSS
REVISED
Page 1 of 1
<PAGE> 16
ADDENDUM TO STANDARD OFFICE LEASE - GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
Date: October 8, 1999
By and Between: 2800 Olympic Blvd. Partners, L.P. ("Lessor") and Launch
Media, Inc. ("Lessee")
Premises: Suite 201-203 and 102-104
Building: 2800 Olympic Boulevard, Santa Monica, California
This Addendum ("Addendum") to Standard Office Lease -- Gross (the
"Lease") shall modify and amend the Lease as set forth below. Except as
expressly amended herein, the Lease remains in full force and effect. In the
event of any conflict or inconsistency between the terms of the Lease and this
Addendum, this Addendum shall prevail. The defined terms set forth in this
Addendum shall have the same meanings as the defined terms set forth in the
Lease.
1. Term. The Commencement Date of the Lease shall be the date which is
ninety (90) days after the date of delivery of the first portion of the Premises
to Lessee. The term of the Lease shall expire five (5) years after the
Commencement Date.
Other than the payment of the full amount of Base Rent, Lessee shall
comply with all other terms of this Lease upon delivery of any portion of the
Premises to Lessee. Due to the fact that there are other tenants in possession
of the Premises at this time, Lessor anticipates that it shall deliver the
following portions of the Premises to Lessee on or before the dates shown below
(Lessor will give Lessee ten (10) day written notice if before date shown
below):
<TABLE>
<CAPTION>
Suite No.: 201 202 203 102-104
<S> <C> <C> <C> <C>
Rentable Square 4,574 1,464 1,855 5,021
Footage:
Anticipated 11/15/99 11/15/99 12/15/99 1/1/2000
Delivery Date:
</TABLE>
During the time prior to Lessor's delivery of the entire Premises to
Lessee, Lessee shall pay Base Rent based on the square footage of the portion of
the Premises actually delivered to Lessee at the rate per square foot as set
forth in paragraph 3. Any partial month's rent shall be prorated.
2. Contingency for Existing Lease Terminations. The obligations of the
parties under this Lease are contingent upon the termination of the existing
leases for the Premises. Landlord shall use reasonable efforts to terminate the
existing leases and to deliver possession of the Premises to Lessee by the dates
set forth in paragraph 1 above ("Anticipated Delivery Dates"). If Lessor has not
terminated the existing Leases and delivered possession of the entire Premises
to Lessee by March 5, 2000, then either Lessor or Lessee may terminate this
Lease with respect to the portion of the Premises not delivered to Lessee by
delivery of written notice to the other party at any time prior to delivery of
such undelivered portion of the Premises to Lessee, in which case the parties
agree to execute an amendment to this Lease to modify all applicable terms based
on the square of footage of the Premises actually delivered to
1
<PAGE> 17
Lessee. Notwithstanding anything to the contrary contained herein, no leasing
commissions, brokerage commissions or fees shall be due and payable until Lessee
takes possession of the entire Premises (or the parties execute the lease
amendment referenced above).
3. Base Rent. The Base Rent described in Paragraph 1.6 shall be subject
to adjustment as follows:
<TABLE>
<CAPTION>
Monthly Base Rent Per
Year Rentable Square Foot
---- --------------------
<S> <C>
1 $2.40
2 $2.50
3 $2.60
4 $2.70
5 $2.80
</TABLE>
4. Parking. Lessee shall have the right to all of the parking spaces at
the Building (except for those parking spaces used by Suite 101, the handicapped
parking spaces and guest parking) for the entire Lease term and any extensions
thereof. The initial rates for Lessee's parking shall be $50.00 per car, per
month for unreserved, uncovered parking and $75.00 per car, per month for
reserved, covered. Said parking rates shall be inclusive of any and all parking
taxes.
5. Operating Expense Increases; Base-Year. Lessee shall pay its
proportionate share of operating expenses and real estate tax increases over
2000 Base Year. All calculations shall be based on the Building deemed to be no
less than ninety-five percent (95%) leased.
6. Utilities; Janitorial. Notwithstanding anything to the contrary
contained in the Lease, Lessee shall contract and pay for all utilities for the
Premises and the cost of all janitorial services (using a service approved by
Lessor in its reasonable discretion) for the interior and exterior of the
Building.
7. First Months' Rent/Security Deposit. Lessee shall deliver to Lessor
upon Lease execution an amount equal to the first month's rent plus the amount
specified in Section 1.9 of the Lease which shall be the Security Deposit. Said
Security Deposit shall not be increased throughout the initial lease term due to
an increase in Lessee's rent.
8. Tenant Improvements. Lessee shall commence the installation of
improvements, alterations, fixtures and any other tenant improvements
(collectively, "Tenant Improvements") as soon as Lessee is given access to the
Premises and the permits have been issued. All of the Tenant-Improvements shall
be completed pursuant to plans and specifications which shall have first
received Lessor's written approval (not to be unreasonably withheld) and shall
be undertaken and completed by a licensed contractor (selected by Lessee and
approved by Lessor) in a good and workmanlike manner. Any structural work,
plumbing, electrical and HVAC work at the Premises shall require approval and
supervision by Lessor's architect, engineer and/or other consultants, provided
that such approvals and supervision shall be handled on a reasonable basis and
shall not result in unreasonable delays in the Tenant Improvements. Prior to
commencement of construction, Lessee shall deliver to Lessor all required
insurance certificates, Lessee shall obtain all necessary permits, licenses and
other approvals with respect thereto (a copy of which shall be delivered to the
Lessor prior to commencement of any work) and Lessee shall fully comply with all
governmental and quasi-governmental statutes, ordinances, rules and regulations
pertaining thereto. Lessee shall keep the property and all Tenant Improvements
lien free, shall timely pay all bills and invoices for the Tenant Improvements
and shall minimize any disturbances to the Building, neighbors and other tenants
at the Building. Lessee shall not store any materials, supplies or
2
<PAGE> 18
trash at any location outside of the Premises. Lessee shall promptly dispose of
all trash and debris and shall not use the Building's trash containers for any
construction materials or debris. Lessee shall arrange for all contractors,
subcontractors and workers to park at a location designated by Lessor.
Lessor will contribute the sum of $13.00 per rentable square foot ("TI
Allowance") towards the Tenant Improvements. All Tenant Improvements and other
work at the Premises in excess of the TI Allowance shall be paid by Lessee. The
TI Allowance shall be disbursed to Lessee within ten (10) days after all of the
following conditions occurs:
(a) Lessor and/or its representatives has inspected the Premises
(which inspection shall be conducted within ten (10) business
days after written notice from Lessee, and has determined that
such construction has been substantially completed in accordance
with the approved plans and specifications;
(b) Lessee provides Lessor with the final certificate of occupancy,
and other permits required by law;
(c) Lessee provides Lessor with evidence that Lessee has paid the
construction costs in full;
(d) Lessee assigns to Lessor all warranties, guarantees and building
manuals in respect to the construction of the improvements, if
applicable; and
(e) Lessee provides Lessor with copies of final unconditional lien
releases from its general contractor, as well as any significant
sub-contractors and suppliers as requested by Lessor in a form
acceptable to Lessor.
9. Option to Extend Lease Term. Lessee shall have the right, at its
option, to extend the Term for one (1) period of five (5) years (the "Option
Term") immediately following the Expiration Date. Lessee shall exercise its
right to extend the Term by delivery of written notice to Lessor at least six
(6) months and not more than nine (9) months prior to the then scheduled
Expiration Date. All of the terms, covenants and conditions (including without
limitation defined terms) contained in this Lease shall be applicable to the
Option Term in the event of exercise by Lessee; provided, however, that the Term
and the Base Rent shall be modified as provided herein and Lessee shall have no
further options to extend the Term thereafter.
Subject to adjustment as hereafter provided, the Base Rent for the
Option Term shall be adjusted to the greater of (i) the Base Rent for the last
month of the Term or (ii) Prevailing Market Rent, described below.
The "Prevailing Market Rent" shall be equal to the rental per square
foot of rentable area of the Premises per month as of the date which is six (6)
months prior to the expiration of the Original Term of the Lease prevailing for
comparable space in the same area where the Premises are located. In determining
the Prevailing Market Rent, the particular configuration, frontage along a
public thoroughfare, signage visible to the public, parking facilities, and
general level of quality of improvements and location of each comparison
building shall be taken into account.
If Lessee has timely exercised the Option, Lessor shall notify Lessee
in writing of the proposed new Base Rent determined by Lessor for the Option
Term at least ninety (90) days prior to the commencement date of the Option
Term. Unless Lessee objects to the amount determined by Lessor within fifteen
(15) days after receipt of such notice, the amount stated in such notice shall
be the new Base
3
<PAGE> 19
Rent. If Lessee objects to Lessor's proposal, then the new Base Rent shall be
determined by a MAI appraiser chosen by Lessor and approved by Lessee. If Lessee
does not disapprove Lessor's choice of an appraiser by delivery of written
notice of disapproval within five (5) days of written notice of such choice by
Lessor, then Lessor's appraiser shall be deemed to be approved by Lessee. If
Lessee does not approve Lessor's choice of an appraiser, then Lessee's notice of
disapproval shall name a MAI Appraiser, designated by Lessee, and each of
Lessor's appraiser and Lessee's appraiser shall appoint a third MAI Appraiser
and each appraiser shall determine the Prevailing Market Rent. The two amounts
which are closest shall be averaged, and such average shall be the Prevailing
Market Rent for purposes of this Option. The cost of any common appraiser shall
be split equally by Lessor and Lessee, and if three appraisers are utilized,
Lessor and Lessee shall each be responsible for the fees and costs of the
appraiser which it appoints. If the Base Rent shall not have been determined by
the commencement date of the Option Term, then until it is determined, Lessee
shall pay Base Rent when due during the Option Term determined using Lessor's
proposed Base Rent, and when the actual adjusted Base Rent is determined, either
Lessee shall pay to Lessor any additional rent due for the months which have
elapsed in the Option Term, or Lessor shall credit any excess payment for the
elapsed months to the next Base Rent becoming due.
The Base Rent during each Option Term shall be subject to annual
increases based on market conditions at the time the Option is exercised.
10. Assignment and Subletting. The following language is added at the
end of Paragraph 12.6 of the Lease:
"Lessor may consider all factors relating to the proposed new lessee
and the Premises, including, without limitation, the financial capacity and
economic condition of the proposed new lessee, the lessee mix in the Building,
any adverse impact on the business of existing tenants, wear and tear on
facilities, comparable type and quality of business, conformity to the use
provision in the Lease, hours of operation, business plan and qualified business
reputation, credit, rent payment history and experience of the proposed new
lessee. In addition, Lessor's consent shall be subject to and conditioned upon
compliance with reasonable standards and conditions required by Lessor,
including, without limitation:
(1) Lessor's receipt from Lessee, not less than thirty (30) days
prior to any proposed transfer, of a written request for Lessor's consent which
request shall set forth (i) the name of the proposed assignee or sublessee, (ii)
the financial details and other terms of any proposed transfer, (iii) the type
and history of the performance of the business of any proposed transferee and
(iv) such bank, credit, tax returns, financial and other reasonable information
concerning any proposed transferee as Lessor may require.
(2) Use of a form of document approved by Less(
(3) Payment to Lessor of fifty percent (50%) of which the rent paid
or to be paid to Lessee as a result of any transfer under Article 12, plus fifty
percent (50%) of all other consideration paid or to be paid as consideration for
or otherwise in connection with the proposed transfer, exceeds the rent then
payable by Lessee under the Lease. For purposes of this calculation, Lessee may
deduct, from the amount of rent and other consideration paid or to be paid to
Lessee, the reasonable costs for brokerage commissions paid to unrelated third
party brokers in connection with such transfer and any reasonable tenant
improvement costs paid by Lessee in connection with such transfer."
11. Compliance with Law. Paragraph 6.2(a) of the Lease is hereby deleted
in its entirety and the language which follows is substituted in its place: "As
of the date of this Lease, Lessor has no actual knowledge of any violation of
any covenants or restrictions of record, or any applicable building code,
4
<PAGE> 20
regulation or ordinance in effect on the Lease term Commencement Date. In the
event it is determined that a non-disclosed material violation exists and Lessee
has given Lessor written notice of the same, it shall be Lessor's obligation to
cure such violation in an amount not to exceed Ten Thousand Dollars
($10,000.00). In the event the costs to cure such violation exceeds Ten Thousand
Dollars ($10,000.00), Lessee has the option to cure the violation for the amount
which exceeds Ten Thousand Dollars or either party may terminate this Lease by
providing written notice to the other of such election to terminate the Lease.
No abatement or offset of rent by Lessee shall occur pursuant to this paragraph.
Other than the foregoing, Lessee accepts the Premises in an
"As-Is/Where Is" condition and agrees and acknowledges that neither Lessor nor
any other party acting on behalf of Lessor has made any representations or
warranties of any type regarding the Premises or the Building."
The following language is added at the end of Paragraph 6.2(b):
"Lessee shall conduct its business and shall cause each Lessee party
to act in such a manner as to (a) not release or permit the release of any
Hazardous Material in, under, on or about the Building, (b) not create any
nuisance or unreasonable interference with or disturbance of other lessees of
the Building or Lessor in its management of the Building, such as the creation
of excessive noise, odors parking usage, and (c) not to increase materially
insurance premiums for the Building due solely or primarily to Lessee's
activities. "Hazardous Materials" means any hazardous, explosive, radioactive or
toxic substance, material or waste which is or becomes regulated by any local
governmental authority, the state in which the Building is located, or the
United States, including, without limitation, any material or substance which is
(i) defined or listed as a "hazardous waste," "extremely hazardous waste,"
"restricted hazardous waste," "hazardous substance," "hazardous material,"
"pollutant" or "contaminant" under any Law, (ii) petroleum or a petroleum
derivative, (iii) a flammable explosive, (iv) a radioactive material, (v) a
polychlorinated biphenyl, (vi) asbestos or an asbestos derivative, or (vii) a
carcinogen.
Lessee shall indemnify and hold Lessor harmless from and against any
and all claims, judgments, damages, penalties, fines, costs (including actual
attorneys' fees, litigation expenses and court costs), liabilities and losses,
including without limitation, attorneys' fees, consultant fees and expert fees
which arise during or after the Lease term as a result of Hazardous Materials
contamination and any clean up, remediation, removal or restoration work
necessary in the reasonable judgment of Lessor or required by any federal, state
or local governmental agency or political subdivision because of the presence of
such Hazardous Materials in, on or about the Premises arising out of or relating
to (a) the use, presence, handling or disposition of Hazardous Materials by
Lessee, its employees, agents, contractors or invitees in, on or about the
Premises, (b) the breach by Lessee, its employees, agents, contractors or
invitees of any of the terms of this paragraph, and (c) any Hazardous Materials
contamination of the Premises or the Building caused by Lessee, its employees,
agents, contractors of invitees. Lessee's obligations hereunder shall survive
the termination of this Lease.
Upon termination of this Lease, Lessee shall cause any and all
Hazardous Materials stored on or about the Premises and any contamination caused
by Lessee to be completely removed prior to Lessee's vacating the Premises at
Lessee's expenses and in compliance with all applicable laws. Lessee shall be
liable for any and all costs and expenses incurred by Lessor on Lessee's behalf
should Lessee fail to fulfill its obligations described in this paragraph."
12. Condition of Premises. Paragraph 6.3(a) of the Lease is hereby
modified to insert the phrase," to Lessor's actual current knowledge with no
duty of investigation," after the word "and" before the word "Lessor" in the
first sentence of that paragraph.
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13. Premises Damage: Insured Loss. The following language is added at
the end of Paragraph 9.2(a) of the Lease:
"Notwithstanding the foregoing, Lessor may, at Lessor's option,
either (i) repair such damage as soon as reasonably possible as described above,
in which event this Lease shall continue in full force and effect, or (ii) give
written notice to Lessee within thirty (30) days after the occurrence of such
damage of Lessor's intention to cancel and terminate this Lease as of the date
of the occurrence of such damage, in which event this Lease shall terminate as
of the date of the occurrence of such damage. Lessor shall be entitled to retain
an insurance proceeds emanating from insurance policies purchased by Lessor or
issued in Lessor's name."
14. Permits and Business Licenses. Lessee shall, at its sole cost and
expense, obtain all necessary permits and licenses to operate its business at
the Premises and shall comply with all local, state and federal laws relating to
the operation of its business. In addition, Lessee shall keep all such licenses
and permits in effect and shall pay all fees relating thereto during the Term of
the Lease.
15. Square Footage. Any square footage figure expressed in the Lease,
any addenda thereto or any other documents prepared prior thereto are
approximate, and any inaccuracies of such figures shall not affect the rent
payable under the Lease or otherwise constitute a default under the Lease.
16. Arbitration. The parties hereby submit all controversies, claims and
matters of difference, other than unlawful detainer actions, to binding
arbitration in Los Angeles, California according to the rules and practices of
the American Arbitration Association from time to time in force. This submission
and agreement to arbitrate shall be specifically enforceable. Without limiting
the generality of the foregoing, the following shall be considered controversies
for this purpose:
(a) All questions relating to adequacy of performance, the breach of
any obligation, warranty, representation, covenant or agreement hereunder or
under any Exhibit hereto and all questions relating to the construction and
interpretation thereof;
(b) All questions relating to representations, negotiations and other
proceedings leading to the execution hereof and all modifications of this Lease
of every nature and description;
(C) Failure of any party to deny or reject a claim or demand of
another party;
(d) All questions as to whether the right to arbitrate any questions
exists or as to the existence or an agreement to arbitrate; and
(e) All issues raised by any subsequent alleged amendment hereto,
whether written or oral, unless such amendment expressly cancels this
arbitration provision in writing signed by all affected parties hereto.
Arbitration may proceed in the absence of either party if fifteen
(15) days prior written notice of the proceedings has been given to such party.
The parties may agree on an alternative dispute resolution lawyer or retired
judge as sole arbitrator. In the absence of such agreement, there shall be three
(3) arbitrators: one (1) attorney and/or retired judge, one (1) expert in
commercial real estate leasing and one (1) certified public accountant.
Where there are three arbitrators, a decision agreed on by two (2) of
the arbitrators shall be the decision of the arbitration panel; provided,
however, that in the case of monetary damages, if there is no agreement of two
arbitrators as to the amount of the award, the highest and lowest numbers
submitted shall be disregarded and the remaining number shall be the final award
of the arbitration panel
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for the purpose of this Lease. Further, with respect to nonmonetary awards, in
the absence of agreement by two or more arbitrators, then the decision of the
attorney and/or retired judge shall be final with respect to such non-monetary
decision. The parties agree to abide by all awards rendered in such proceedings.
Any award shall include costs and reasonable attorneys' fees to the successful
party. Such awards shall be final and binding on all parties. There shall be no
appeal therefrom other than for fraud or misconduct. All awards may be filed
with the clerk of one or more courts, state of federal, having jurisdiction over
the party against whom such award is rendered or its property as a basis of
judgment and of the issuance of execution for its collection.
Nothing in this Lease and/or the exhibits hereto shall be deemed to
prevent the arbitration panel from exercising authority to permit exercise by a
party of its legal and/or equitable remedies including the right of offset and
injunctive relief.
17. Building Signage. Lessee shall have the right to install signs on
the exterior of the Building provided that Lessee (i) pays all costs and
expenses (including, without limitation, materials, labor, installation and
monthly utilities for such signs); (ii) obtains all required permits and
governmental approvals; (iii) complies with all applicable laws, codes,
regulations, rules and ordinances; (iv) obtains Lessor's written approval as to
such signs prior to installation, such approval not to be unreasonably withheld;
and (v) upon expiration or termination of this Lease, Lessee shall remove all
signs and repair any damage, at Lessee's sole cost and expense.
18. Expansion Space. During the Term and Option Term (if exercised by
Lessee), if Suite 101 becomes available for lease, Lessee shall have the right
to lease such space at the same monthly Base Rent per square foot and on the
same terms as contained herein (except that Lessee shall receive no tenant
improvement allowance for Suite 101) and the term shall expire on the same date
as this Lease. If Suite 101 becomes available for lease, Lessor shall provide
written notice to Lessee and Lessee shall have fifteen (15) days to exercise
the right to lease Suite 101 by delivery of written notice to Lessor of
Lessee's exercise of such right ("Acceptance Notice") within the fifteen (15)
day period. Thereafter, the parties shall execute an amendment to this Lease to
add Suite 101 to the Premises and to revise the Lease terms as appropriate with
respect to Suite 101. If Lessee fails to deliver the Acceptance Notice within
the fifteen (15) day period, then Lessee's right to lease Suite 101 pursuant
to this paragraph 18 shall terminate and Lessor shall be free to lease Suite 101
to any other party.
19. Rooftop. Lessee has been informed that the rooftop which is
accessible from the fourth (4th) floor penthouse, has not been built for, and
does not have the necessary permits for use as, a patio or useable area of any
kind. Lessee shall not use the rooftop or any adjacent exterior portion of the
Building for any purpose unless Lessee first (i) obtains Lessor's prior written
approval; (ii) installs a deck to protect the roof, and installs walls or
barriers for safety and other necessary improvements, at Lessee's sole cost;
(iii) obtains all required permits and governmental approvals; and (iv) complies
with all other Lease terms relating to such construction. Lessor has made no
representations that the roof area may be used or is legally permitted to be
used for any purpose. Lessor shall have no liability or responsibility (and
Lessee hereby releases Lessor from all costs, damages, liabilities and expenses)
relating to any use of the roof area by Lessee.
20. Lessor and Lessee acknowledge and agree that Lee & Associates
Commercial Real Estate Services and Sandstone Property Management (collectively,
the "Brokers") are the only brokers involved in this transaction. Lessor agrees
that it shall be responsible to pay any brokerage commissions due to the Brokers
in connection with the consummation of the transaction set forth in this Lease
and Lessee shall have no responsibility therefor. Except for the Brokers, both
Lessor and Lessee represent and warrant to each other that no other brokerage
firm, person or entity has represented either of them in connection with this
transaction, and that no other
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person, firm or entity is entitled to any finder's fee, brokerage commission or
other compensation in connection herewith. Both Lessor and Lessee agree to
indemnify and hold each other harmless for any liabilities, damages, claims,
judgments, liens and reasonable costs and expenses that either of them may incur
due to the fact that the foregoing representation and warranty is not true or
accurate. The indemnity provisions contained herein shall survive the execution
of and the expiration or earlier termination of this Lease.
IN WITNESS WHEREOF, the parties have executed this Addendum on the date
set forth above.
"Lessor" "Lessee"
2800 Olympic Blvd. Partners, L.P, Launch Media, Inc.,
a California limited partnership a Delaware corporation
By: KMK Capital Corp., a California
Corporation, its General Partner By: /s/ JEFF MICKEAL
Name: JEFF MICKEAL
Title: C.F.O.
By: /s/ JEFF KIRSHNER
Name: Jeff Kirshner
Title: VP
Date: October 19, 1999 Date: October 19, 1999
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<PAGE> 1
EXHIBIT 10.15
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only
January 11, 2000, is made by and between Ellen and David Adams ("LESSOR") and
Launch Media, Inc. ("LESSEE"), (collectively the "PARTIES", or individually a
"PARTY").
1.2(a) PREMISES: That certain portion of the Project (as defined below),
including all improvements therein or to be provided by Lessor under the terms
of this Lease, commonly known by the street address of 2803 Colorado Avenue,
located in the City of Santa Monica, County of Los Angeles, State of CA, with
zip code 90404, as outlined on Exhibit ___ attached hereto ("PREMISES") and
generally described as (describe briefly the nature of the Premises): Free
Standing Commercial Office Bldg. In addition to Lessee's rights to use and
occupy the Premises as hereinafter specified, Lessee shall have non-exclusive
rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter
specified, but shall not have any rights to the roof, exterior walls or utility
raceways of the building containing the Premises ("BUILDING") or to any other
buildings in the Project. The Premises, the Building, the Common Areas, the
loan upon which they are located, along with all other buildings and
improvements thereon, are herein collectively referred to as the "PROJECT."
(See also Paragraph 2)
1.2(b) PARKING: 0 unreserved vehicle parking spaces ("UNRESERVED PARKING
SPACES"); and Eleven reserved vehicle parking spaces ("RESERVED PARKING
SPACES"). (See also Paragraph 2.6)
1.3 TERM: N/A years and N/A months ("ORIGINAL TERM") commencing upon
vacation of space ("COMMENCEMENT DATE") and ending December 31, 2003
("EXPIRATION DATE"). (See also Paragraph 3)
1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE").
(See also Paragraphs 3.2 and 3.3)
1.5 BASE RENT: $8,600.00 per month ("BASE RENT"), payable on the first
(1st) day of each month commencing N/A. (See also Paragraph 4)
[x] If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: N/A percent (61%)
("LESSEE'S SHARE").
1.7 BASE RENT AND OTHER MONIES PAID UPON EXECUTION:
(a) BASE RENT: $8,600.00 for the period of one month.
(b) COMMON AREA OPERATING EXPENSES: $N/A for the period______.
(c) SECURITY DEPOSIT: $17,200.00 ("SECURITY DEPOSIT"). (See also
Paragraph 5)
(d) OTHER: $5,000.00 for option to purchase property.
(e) TOTAL DUE UPON EXECUTION OF THIS LEASE: $30,800.00.
1.8 AGREED USE: general office and warehouse use for a film company.
(See also Paragraph 6)
1.9 INSURING PARTY. Lessor is the "Insuring Party". (See also Paragraph 8)
1.10 REAL ESTATE BROKERS: (See also Paragraph 15)
(a) REPRESENTATION: The following real estate brokers (the
"BROKERS") and brokerage relationships exist in this transaction (check
applicable boxes):
[ ] _______________________ represents Lessor exclusively ("LESSOR'S BROKER");
[ ] ____________________ represents Lessee exclusively ("LESSEE'S BROKER"); or
[ ] Lee & Associates - West Los Angeles represents both Lessor and Lessee
("DUAL AGENCY").
(b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by
both Parties, Lessor shall pay to the Brokers the brokerage fee agreed to in a
separate written agreement (or if there is no such agreement, the sum of ____
or 5% of the total Base Rent for the brokerage services rendered by the
Brokers).
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by Launch Media, Inc. ("GUARANTOR"). (See also Paragraph 37)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraph 50 through 55 and Exhibits _____ through _____, all of
which constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may
have been used in calculating Rent, is an approximation which the Parties agree
is reasonable and any payments based thereon are not subject to revision
whether or not the actual size is more or less.
2.2 CONDITION. Lessor shall deliver that portion of the Premises
contained within the Building ("UNIT") to Lessee broom clean and free of debris
on the Commencement Date or the Early Possession Date, whichever first occurs
("START DATE"), and, so long as the required service contracts described in
Paragraph 7.1(b) below are obtained by Lessee and in effect within thirty days
following the Start Date, warrants that the existing electrical, plumbing, fire
sprinkler, lighting, heating, ventilating and air conditioning systems
("HVAC"), loading doors, if any, and all other such elements in the Unit, other
than those constructed by Lessee, shall be in good operating condition on said
date and that the structural elements of the roof, bearing walls and foundation
of the Unit shall be free of material defects. If a non-compliance with such
warranty exists as of the Start Date, or if one of such systems or elements
should malfunction or fail within the appropriate warranty period, Lessor shall,
as Lessor's sole obligation with respect to such matter, except as otherwise
provided in this Lease, promptly after receipt of written notice from Lessee
setting forth with specificity the nature and extent of such non-compliance,
malfunction or failure, rectify same at Lessor's expense. The warranty periods
shall be as follows: (i) 6 months as to the HVAC systems, and (ii) 30 days as to
the remaining systems and other elements of the Unit. If Lessee does not give
Lessor the required notice within the appropriate warranty period, correction of
any such non-compliance, malfunction or failure shall be the obligation of
Lessee at Lessee's sole cost and expense (except for the repairs to the fire
sprinkler systems, roof, foundations, and/or bearing walls - see Paragraph 7).
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<PAGE> 2
2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises and
the Common Areas comply with the building codes that were in affect at the time
that each such improvement, or portion thereof, was constructed, and also with
all applicable laws, covenants or restrictions of record, regulations, and
ordinances in effect on the Start Date ("APPLICABLE REQUIREMENTS"). Said
warranty does not apply to the use to which Lessee will put the Premises or to
any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made
or to be made by Lessee. NOTE: LESSEE IS RESPONSIBLE FOR DETERMINING WHETHER OR
NOT THE APPLICABLE REQUIREMENTS, AND ESPECIALLY THE ZONING, ARE APPROPRIATE FOR
LESSEE'S INTENDED USE, AND ACKNOWLEDGES THAT PAST USES OF THE PREMISES MAY NO
LONGER BE ALLOWED. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided, promptly after receipt of written notice
from Lessee setting forth with specificity the nature and extent of such non-
compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor
written notice of a non-compliance with this warranty within 6 months following
the Start Date, correction of that non-compliance shall be the obligation of
Lessee at Lessee's sole cost and expense. If the Applicable Requirements are
hereafter changed so as to require during the term of this Lease the
construction of an addition, to or an alteration of the Unit, Premises and/or
Building, the remediation of any Hazardous Substance, or the reinforcement or
other physical modification of the Unit, Premises and/or Building ("CAPITAL
EXPENDITURE"), Lessor and Lessee shall allocate the cost of such work as
follows:
(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures
are required as a result of the specific and unique use of the Premises by
Lessee as compared with uses by tenants in general, Lessee shall be fully
responsible for the cost thereof, provided, however that if such Capital
Expenditure is required during the last 2 years of this Lease and the cost
thereof exceeds 6 months' Base Rent, Lessee may instead terminate this Lease
unless Lessor notifies Lessee, in writing, within 10 days after receipt of
Lessee's termination notice that Lessor has elected to pay the difference
between the actual cost thereof and the amount equal to 6 months' Base Rent. If
Lessee elects termination, Lessee shall immediately cease the use of the
Premises which requires such Capital Expenditure and deliver to Lessor written
notice specifying a termination date at least 90 days thereafter. Such
termination date shall, however, in no event be earlier than the last day that
Lessee could legally utilize the Premises without commencing such Capital
Expenditure.
(b) If such Capital Expenditure is not the result of the specific and
unique use of the Premises by Lessee (such as, governmentally mandated seismic
modifications), then Lessor and Lessee shall allocate the obligation to pay for
the portion of such costs reasonably attributable to the Premises pursuant to
the formula set out in Paragraph 7.1(d); provided, however, that if such Capital
Expenditure is required during the last 2 years of this Lease or if Lessor
reasonably determines that it is not economically feasible to pay its share
thereof, Lessor shall have the option to terminate this Lease upon 90 days prior
written notice to Lessee unless Lessee notifies Lessor, in writing, within 10
days after receipt of Lessor's termination notice that Lessee will pay for such
Capital Expenditure. If Lessor does not elect to terminate, and fails to tender
its share of any such Capital Expenditure, Lessee may advance such funds and
deduct same, with interest, from Rent until Lessor's share of such costs have
been fully paid. If Lessee is unable to finance Lessor's share, or if the
balance of the Rent due and payable for the remainder of this Lease is not
sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the
right to terminate this Lease upon 30 days written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in intensity
of use, or modification to the Premises then, and in that event, Lessee shall be
fully responsible for the cost thereof, and Lessee shall not have any right to
terminate this Lease.
2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been advised by
Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements and the Americans with Disabilities Act), and their suitability for
Lessee's intended use, (b) Lessee has made such investigation as if deems
necessary with reference to such matters and assumes all responsibility therefor
as the same relate to its occupancy of the Premises, and (c) neither Lessor,
Lessor's agents, nor Brokers have made any oral or written representations or
warranties with respect to said matters other than as set forth in this Lease.
In addition, Lessor acknowledges that: (i) Brokers have made no representations,
promises or warranties concerning Lessee's ability to honor the Lease or
suitability to occupy the Premises, and (ii) it is Lessor's sole responsibility
to Investigate the financial capability and/or suitability of all proposed
tenants.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spacers specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than
full-size passenger automobiles or pick-up trucks, herein called "PERMITTED SIZE
VEHICLES." Lessor may regulate the loading and unloading of vehicles by adopting
Rules and Regulations as provided in Paragraph 2.9. No vehicles other than
Permitted Size Vehicles may be parked in the Common Area without the prior
written permission of Lessor.
(a) Lessee shall not permit or allow any vehicles that belong to or
are controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
contractors or invitees to be loaded, unloaded, or parked in areas other than
those designated by Lessor for such activities.
(b) Lessee shall not service or store any vehicles in the Common
Areas.
(c) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
2.7 COMMON AREAS - DEFINITION. The term "COMMON AREAS" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Project and interior utility raceways and installations within the Unit
that are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other tenants of the Project and their
respective employees, suppliers, shippers, customers, contractors and invitees,
including parking areas, loading and unloading areas, trash areas, roadways,
walkways, driveways and landscaped areas.
2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor grants to Lessee, for the
benefit of Lessee and its employees, suppliers, shippers, contractors, customers
and invitees, during the term of this Lease, the non-exclusive right to use, in
common with others entitled to such use, the Common Areas as they exist from
time to time, subject to any rights, powers, and privileges reserved by Lessor
under the terms hereof or under the terms of any rules and regulations or
restrictions governing the use of the Project. Under no circumstances shall the
right herein granted to use the Common Areas be deemed to include the right to
store any property, temporarily or permanently, in the Common Areas. Any such
storage shall be permitted only by the prior written consent of Lessor or
Lessor's designated agent, which consent may be revoked at any time. In the
event that any unauthorized storage shall occur then Lessor shall have the
right, without notice, in addition to such other rights and remedies that it may
have, to remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other person(s)
as Lessor may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to establish, modify,
amend and enforce reasonable rules and regulations ("RULES AND REGULATIONS") 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 the Building and the Project and
their invitees. Lessee agrees to abide by and conform to all such Rules and
Regulations, and to cause its employees, suppliers, shippers, customers,
contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said Rules and Regulations by
other tenants of the Project.
2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes in the Common Areas, including, without limitation
changes in the location, size shape and number of driveways, entrances, parking
spaces, parking areas, loading and unloading areas, ingress, egress, direction
of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available:
(c) To designate other land outside the boundaries of the Project to
be a part of the Common Areas;
(d) To add additional buildings and improvement to the Common Areas;
(e) To use the Common Aras while engaged in making additional
improvements, repairs or alterations to the Project, or any portion thereof; and
(f) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Project as Lessor may, in the
exercise of sound business judgment, deem to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be abated
for the period of such early possession. All other terms of this Lease
(including but not limited to pay Lessee's Share of Common Area Operating
Expenses, Real Property Taxes and insurance premiums and to maintain the
Premises) shall, however, be in effect during such period. Any such early
possession shall not affect the Expiration Date.
3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agree, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is not delivered within 60 days after
the Commencement Date, Lessee may, at its option, by notice in writing within 10
days after the end of such 60 day period, cancel this Lease, in which event the
Parties shall be discharged from all obligations hereunder. If such written
notice is not received by Lessor within said 10 day period, Lessee's right to
cancel shall terminate. Except as otherwise provided, if possession is not
tendered to Lessee by the Start Date and Lessee does not terminate this Lease,
as aforesaid, any period of rent abatement that Lessee would otherwise have
enjoyed shall run from the date of delivery of possession and continue for a
period equal to what Lessee would otherwise have enjoyed under the terms hereof,
but minus any days of delay caused by the acts or omissions of Lessee. If
possession of the Premises is not delivered within 4 months after the
Commencement Date, this Lease shall terminate unless other agreements are
reached between Lessor and Lessee, in writing.
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession
of the Premises to Lessee until Lessee complies with its obligation to
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provide evidence of insurance (Paragraph 8.5). Pending delivery of such
evidence, Lessee shall be required to perform all of its obligations under this
Lease from and after the Start Date, including the payment of Rent,
notwithstanding Lessor's election to withhold possession pending receipt of such
evidence of insurance. Further, if Lessee is required to perform any other
conditions prior to or concurrent with the Start Date, the Start Date shall
occur but Lessor may elect to withhold possession until such conditions are
satisfied.
4. RENT.
4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease (except for the Security Deposit) are deemed to be rent
("RENT").
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "COMMON AREA OPERATING EXPENSES" are defined, for purposes of
this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Project, including, but not limited to, the following:
(i) The operation, repair and maintenance, in neat, clean,
good order and condition of the following:
(aa) The Common Areas and Common Area improvements,
including park areas, loading and unloading areas,
trash areas, roadways, parkways, walkways,
driveways, landscaped areas, bumpers, irrigation
systems, Common Area lighting facilities, fences
and gates, elevators, roofs and roof drainage
systems.
(bb) Exterior signs and any tenant directories.
(cc) Any fire detection and/or sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to
service the Common Areas and any utilities not
separately metered.
(iii) Trash disposal, pest control services, property
management, security services, and the costs of any
environmental inspections.
(iv) Reserves set aside for maintenance and repair of Common
Areas.
(v) Real Property Taxes (as defined in Paragraph 10).
(vi) The cost of the premiums for the insurance maintained
by Lessor pursuant to Paragraph 8.
(vii) Any deductible portion of an insured loss concerning
the Building or the Common Areas.
(viii) The cost of any Capital Expenditure to the Building or
the Project not covered under the provisions of
Paragraph 2.3 provided; however, that Lessor shall
allocate the cost of any such Capital Expenditure over
a 12 year period and Lessee shall not be required to
pay more than Lessee's Share of 1/144th of the cost of
such Capital Expenditure in any given month.
(ix) Any other services to be provided by Lessor that are
stated elsewhere in this Lease to be a Common Area
Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes that
are specifically attributable to the Unit, the Building or to any other building
in the Project or to the operation, repair and maintenance thereof, shall be
allocated entirely to such Unit, Building, or other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Project.
(c) The inclusion of the Improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Project already has the same, Lessor already provides the
services, or Lessor has agreed elsewhere in this Lease to provide the same or
some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be payable
by Lessee within 10 days after a reasonably detailed statement of actual
expenses is presented to Lessee. At Lessor's option, however, an amount may be
estimated by Lessor from time to time of Lessee's Share of annual Common Area
Operating Expenses and the same shall be payable monthly or quarterly, as Lessor
shall designate, during each 12 month period of the Lease term, on the same day
as the Base Rent is due hereunder. Lessor shall deliver to Lessee within 60 days
after the expiration of each calendar year a reasonably detailed statement
showing Lessee's Share of the actual Common Area Operating Expenses incurred
during the preceding year. If Lessee's payments under this Paragraph 4.2(d)
during the preceding year exceed Lessee's Share as indicated on such statement,
Lessor shall be credited the amount of such over-payment against Lessee's Share
of Common Area Operating Expenses next becoming due. If Lessee's payments under
this Paragraph 4.2(d) during the preceding year were less than Lessee's Share as
indicated on such statement, Lessee shall pay to Lessor the amount of the
deficiency within 10 days after delivery by Lessor to Lessee of the statement.
4.3 PAYMENT. Lessee shall cause payment of Rent to be received by Lessor
in lawful money of the Untied States, without offset or deduction (except as
specifically permitted in this Lease), on or before the day on which it is due.
Rent for any period during the term hereof which is for less than one full
calendar month shall be prorated based upon the actual number of days of said
month. Payment of Rent shall be made to Lessor at its address stated herein or
to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver of Lessor's rights to the balance of such Rent, regardless of
Lessor's endorsement of any check so stating. In the event that any check,
draft, or other instrument of payment given by Lessee to Lessor is dishonored
for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any
late charges which may be due.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of the Security Deposit, Lessee shall within 10 days after written request
therefor deposit monies with Lessor sufficient to restore said Security Deposit
to the full amount required by this Lease. If the Base Rent increases during the
term of this Lease, Lessee shall, upon written request for Lessor, deposit
additional monies with Lessor so that the total amount of the Security Deposit
shall at all times bear the same proportion to the increased Base Rent as the
Initial Security Deposit bore to the Initial Base Rent. Should the Agreed Use be
amended to accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to increase the
Security Deposit to the extent necessary, in Lessor's reasonable judgment, to
account for any increased wear and tear that the Premises may suffer as a result
thereof. If a change in control of Lessee occurs during this Lease and following
such change the financial condition of Lessee is, in Lessor's reasonable
judgment, significantly reduced, Lessee shall deposit such additional monies
with Lessor as shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on such change in financial condition.
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within 14 days after the expiration or termination of this
Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and
otherwise within 30 days after the Premises have been vacated pursuant to
Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit
not used or applied by Lessor. No part of the Security Deposit shall be
considered to be held in trust, to bear interest or to be prepayment for any
monies to be paid by Lessee under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the Agreed
Use, or any other legal use which is reasonably comparable thereto, and for no
other purpose. Lessee shall not use or permit the use of the Premises in a
manner that is unlawful, creates damage, waste or a nuisance, or that disturbs
occupants of or causes damage to neighboring premises or properties. Lessor
shall not unreasonably withhold or delay its consent to any written request for
a modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, and/or is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within 7 days after
such request give written notification of same, which notice shall include an
explanation of Lessor's objections to the change in the Agreed Use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, or waste whose
presence, use, manufacture, disposal, transportation, or release, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products
or fractions thereof. Lessee shall not engage in any activity in or on the
Premises which constitutes a Reportable Use of Hazardous Substances without the
express prior written consent of Lessor and timely compliance (at Lessee's
expense) with all Applicable Requirements. "REPORTABLE USE" shall mean (i) the
installation or use of any above or below ground storage tank, (ii) the
generation, possession, storage, use, transportation, or disposal of a Hazardous
Substance that requires a permit from, or with respect to which a report,
notice, registration or business plan is required to be filed with, any
governmental authority, and/or (iii) the presence at the Premises of a Hazardous
Substance with respect to which any Applicable Requirements requires that a
notice be given to persons entering or occupying the Premises or neighboring
properties. Notwithstanding the foregoing, Lessee may use any ordinary and
customary materials reasonably required to be used in the normal course of the
Agreed Use, so long as such use is in compliance with all Applicable
Requirements, is not a Reportable Use, and does not expose the Premises or
neighboring property to any meaningful risk of contamination or damage or expose
Lessor to any liability therefor. In addition, Lessor may condition its consent
to any Reportable Use upon receiving such additional assurances as Lessor
reasonably deems necessary to protect itself, the public, the Premises and/or
the environment against damage, contamination, injury and/or liability,
including, but not limited to, the installation (and removal on or before Lease
expiration or termination) of protective modifications (such as concrete
encasements) and/or increasing the Security Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises, other than as previously consented to by Lessor, Lessee
shall immediately give written notice of such fact to Lessor, and provide Lessor
with a copy of any report, notice, claim or other documentation which it has
concerning the presence of such Hazardous Substance.
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<PAGE> 4
(c) LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any
Hazardous Substance brought onto the Premises during the term of this Lease, by
or for Lessee, or any third party.
(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, harmless from
and against any and all loss of rents and/or damages, liabilities, judgments,
claims, expenses, penalties, and attorneys' and consultants' fees arising out
of or involving any Hazardous Substance brought onto the Premises by or for
Lessee, or any third party (provided, however, that Lessee shall have no
liability under this Lease with respect to underground migration of any
Hazardous Substance under the Premises from areas outside of the Project).
Lessee's obligations shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation, removal, remediation,
restoration and/or abatement, and shall survive the expiration or termination
of this Lease. No termination, cancellation or release agreement entered into
by Lessor and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances, unless specifically so agreed by Lessor
in writing at the time of such agreement.
(e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages, including the cost
of remediation, which existed as a result of Hazardous Substances on the
Premises prior to the Start Date or which are caused by the gross negligence or
willful misconduct of Lessor, its agents or employees. Lessor's obligations, as
and when required by the Applicable Requirements, shall include, but not be
limited to, the cost of investigation, removal, remediation, restoration and/or
abatement, and shall survive the expiration or termination of this Lease.
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by government entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date, unless such
remediation measure is required as a result of Lessee's use (including
"Alterations", as defined in paragraph 7.3(a) below) of the Premises, in which
event Lessee shall be responsible for such payment. Lessee shall cooperate
fully in any such activities at the request of Lessor, including allowing
Lessor and Lessor's agents to have reasonable access to the Premises at
reasonable times in order to carry out Lessor's investigative and remedial
responsibilities.
(g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition
(see Paragraph 9.1(e)) occurs during the term of this Lease, unless Lessee is
legally responsible therefor (in which case Lessee shall make the investigation
and remediation thereof required by the Applicable Requirements and this Lease
shall continue in full force and effect, but subject to Lessor's rights under
Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i)
investigate and remediate such Hazardous Substance Condition, if required, as
soon as reasonably possible at Lessor's expense, in which event this Lease
shall continue in full force and effect, or (ii) if the estimated cost to
remediate such condition exceeds 12 times the then monthly Base Rent or
$100,000, whichever is greater, give written notice to Lessee, within 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
60 days following the date of such notice. In the event Lessor elects to give a
termination notice, Lessee may, within 10 days thereafter, give written notice
to Lessor of Lessee's commitment to pay the amount by which the cost of the
remediation of such Hazardous Substance Condition exceeds an amount equal to 12
times the then monthly Base Rent or $100,000, whichever is greater. Lessee
shall provide Lessor with said funds or satisfactory assurance thereof within
30 days following such commitment. In such event, this Lease shall continue in
full force and effect, and Lessor shall proceed to make such remediation as
soon as reasonably possible after the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance thereof
within the time provided, this Lease shall terminate as of the date specified
in Lessor's notice of termination.
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise
provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within 10 days after receipt of Lessor's written request, provide Lessor
with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, citation,
warning, complaint or report pertaining to or involving the failure of Lessee
or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined in
Paragraph 30) and consultants shall have the right to enter into Premises at
any time, in the case of an emergency, and otherwise at reasonable times, for
the purpose of inspecting the condition of the Premises and for verifying
compliance by Lessee with this Lease. The cost of any such inspections shall be
paid by Lessor, unless a violation of Applicable Requirements, or a
contamination is found to exist or be imminent, or the inspection is requested
or ordered by a governmental authority. In such case, Lessee shall upon request
reimburse Lessor for the cost of such inspection, so long as such inspection is
reasonably related to the violation or contamination.
7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations (intended for Lessee's exclusive use, no matter where
located), and Alterations in good order, condition and repair (whether or not
the portion of the Premises requiring repairs, or the means of repairing the
same, are reasonably or readily accessible to Lessee, and whether or not the
need for such repairs occurs as a result of Lessee's use, any prior use, the
elements or the age of such portion of the Premises), including, but not
limited to, all equipment or facilities, such as plumbing, HVAC equipment,
electrical, lighting facilities, boilers, pressure vessels, fixtures, interior
walls, interior surfaces of exterior walls, ceilings, floors, windows, doors,
plate glass, and skylights but excluding any items which are the responsibility
of Lessor pursuant to Paragraph 7.2. Lessee, in keeping the Premises in good
order, condition and repair, shall exercise and perform good maintenance
practices, specifically including the procurement and maintenance of the
service contracts required by Paragraph 7.1(b) below. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order,
condition and state of repair.
(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler and pressure
vessels, (iii) clarifiers, and (iv) any other equipment, if reasonably required
by Lessor. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain any or all of such service contracts, and if Lessor so
elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof.
(c) FAILURE TO PERFORM. If Lessee fails to perform Lessee's
obligations under this Paragraph 7.1, Lessor may enter upon the Premises after
10 days' prior written notice to Lessee (except in the case of an emergency, in
which case no notice shall be required), perform such obligations on Lessee's
behalf, and put the Premises in good order, condition and repair, and Lessee
shall promptly reimburse Lessor for the cost thereof.
(d) REPLACEMENT. Subject to Lessee's indemnification of Lessor as
set forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if an item described in Paragraph 7.1(b) cannot be repaired other
than at a cost which is in excess of 50% of the cost of replacing such item,
then such item shall be replaced by Lessor, and the cost thereof shall be
prorated between the Parties and Lessee shall only be obligated to pay, each
month during the remainder of the term of this Lease, on the date on which Base
Rent is due, an amount equal to the product of multiplying the cost of such
replacement by a fraction, the numerator of which is one, and the denominator
of which is 144 (i.e. 1/144th of the cost per month). Lessee shall pay interest
on the unamortized balance at a rate that is commercially reasonable in the
judgment of Lessor's accountants. Lessee may, however, prepay its obligation at
any time.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 4.2 (Common Area Operating Expenses), 6 (Use),
7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation),
Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good
order, condition and repair the foundations, exterior walls, structural
condition of interior bearing walls, exterior roof, fire sprinkler system,
Common Area fire alarm and/or smoke detection systems, fire hydrants, parking
lots, walkways, parkways, driveways, landscaping, fences, signs and utility
systems serving the Common Areas and all parts thereof, as well as providing
the services for which there is a Common Area Operating Expense pursuant to
Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior
surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or
replace windows, doors or plate glass of the Premises. Lessee expressly waives
the benefit of any statute now or hereafter in effect to the extent it is
inconsistent with the terms of this Lease.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS. The term "UTILITY INSTALLATIONS" refers to all
floor and window coverings, air lines, power panels, electrical distribution,
security and fire protection systems, communication systems, lighting fixtures,
HVAC equipment, plumbing, and fencing in or on the Premises. The term "TRADE
FIXTURES" shall mean Lessee's machinery and equipment that can be removed
without doing material damage to the Premises. The term "ALTERATIONS" shall
mean any modification of the improvements, other than Utility Installations or
Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS
AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility
Installations made by Lessee that are not yet owned by Lessor pursuant to
Paragraph 7.4(a).
(b) CONSENT. Lessee shall not make any Alterations or Utility
Installations to the Premises without Lessor's prior written consent. Lessee
may, however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof) without such consent but upon notice to Lessor,
as long as they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, and the cumulative cost
thereof during this Lease as extended does not exceed a sum equal to 3 month's
Base Rent in the aggregate or a sum equal to one month's Base Rent in any one
year. Notwithstanding the foregoing, Lessee shall not make or permit any roof
penetrations and/or install anything on the roof without the prior written
approval of Lessor. Lessor may, as a precondition to granting such approval,
require Lessee to utilize a contractor chosen and/or approved by Lessor. Any
Alterations or Utility Installations that Lessee shall desire to make and which
require the consent of the Lessor shall be presented to Lessor in written form
with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i)
acquiring all applicable government permits, (ii) furnishing Lessor with copies
of both the permits and the plans and specifications prior to commencement of
the work, and (iii) compliance with all conditions of said permits and other
Applicable Requirements in a prompt and expeditious manner. Any Alterations or
Utility Installations shall be performed in a workmanlike manner with good and
sufficient materials. Lessee shall promptly
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<PAGE> 5
upon completion furnish Lessor with as-built plans and specifications. For work
which costs an amount in excess of one month's Base Rent, Lessor may condition
its consent upon Lessee providing a lien and completion bond in an amount equal
to 150% of the estimated cost of such Alteration or Utility Installation and/or
upon Lessee's posting an additional Security Deposit with Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialman's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than 10 days notice prior to the commencement
of any work in, on or about the Premises, and Lessor shall have the right to
post notices of non-responsibility. If Lessee shall contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof. If Lessor shall require, Lessee shall furnish a surety
bond in an amount equal to 150% of the amount of such contested lien, claim or
demand, indemnifying Lessor against liability for the same. If Lessor elects to
participate in any such action, Lessee shall pay Lessor's attorneys' fees and
costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require removal or elect
ownership as hereinafter provided, all Alterations and Utility Installations
made by Lessee shall be the property of Lessee, but considered a part of the
Premises. Lessor may, at any time, elect in writing to be the owner of all or
any specified part of the Lessee Owned Alterations and Utility Installations.
Unless otherwise instructed per paragraph 7.4(b) hereof, all Lessee Owned
Alterations and Utility Installations shall, at the expiration or termination
of this Lease, become the property of Lessor and be surrendered by Lessee with
the Premises.
(b) REMOVAL. By delivery to Lessee of written notice from Lessor not
earlier than 90 and not later than 30 days prior to the end of the term of this
Lease, Lessor may require that any or all Lessee Owned Alterations or Utility
Installations be removed by the expiration or termination of this Lease. Lessor
may require the removal at any time of all or any part of any Lessee Owned
Alterations or Utility Installations made without the required consent.
(c) SURRENDER; RESTORATION. Lessee shall surrender the Premises by
the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or
deterioration that would have been prevented by good maintenance practice.
Notwithstanding the foregoing, if this Lease is for 12 months or less, then
Lessee shall surrender the Premises in the same condition as delivered to
Lessee on the Start Date with NO allowance for ordinary wear and tear. Lessee
shall repair any damage occasioned by the installation, maintenance or removal
of Trade Fixtures, Lessee owned Alterations and/or Utility Installations,
furnishings, and equipment as well as the removal of any storage tank installed
by or for Lessee. Lessee shall also completely remove from the Premises any and
all Hazardous Substances brought onto the Premises by or for Lessee, or any
third party (except Hazardous Substances which were deposited via underground
migration from areas outside of the Project) even if such removal would require
Lessee to perform or pay for work that exceeds statutory requirements. Trade
Fixtures shall remain the property of Lessee and shall be removed by Lessee.
The failure by Lessee to timely vacate the Premises pursuant to this Paragraph
7.4(c) without the express written consent of Lessor shall constitute a
holdover under the provisions of Paragraph 26 below.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUMS. The cost of the premiums for the insurance
policies required to be carried by Lessor, pursuant to Paragraphs 8.2(b),
8.3(a) and 8.3(b), shall be a Common Area Operating Expense. Premiums for
policy periods commencing prior to, or extending beyond, the term of this Lease
shall be prorated to coincide with the corresponding Start Date or Expiration
Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force 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 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 annual aggregate of not less than
$2,000,000, an "Additional Insured-Managers or Lessors of Premises Endorsement"
and contain the "Amendment of the Pollution Exclusion Endorsement" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not contain
any intra-insured exclusions as between insured persons or organizations, but
shall include coverage for liability assumed under this Lease as an "INSURED
CONTRACT" for the performance of Lessee's indemnity obligations under this
Lease. The limits of said insurance shall not, however, limit the liability of
Lessee nor relieve LESSEE of any obligation hereunder. All insurance carried by
LESSEE shall be primary to and not contributory with any similar insurance
carried by LESSOR, whose insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall maintain liability insurance as
described in Paragraph 8.2(a), in addition to, and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in force
a policy or policies of insurance in the name of Lessor, with loss payable to
Lessor, any ground-lessor, and to any Lender insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by any Lender, but in no event more than the commercially reasonable
and available insurable value thereof. Lessee Owned Alterations and Utility
Installations, Trade Fixtures, and Lessee's personal property shall be insured
by Lessee under Paragraph 8.4. If the coverage is available and commercially
appropriate, such policy or policies shall insure against all risks of direct
physical loss or damage (except the perils of flood and/or earthquake unless
required by a Lender), including coverage for debris removal and the
enforcement of any Applicable Requirements requiring the upgrading, demolition,
reconstruction or replacement of any portion of the Premises as the result of a
covered loss. Said policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance clause, waiver of subrogation, and
inflation guard protection causing an increase in the annual property insurance
coverage amount by a factor of not less than the adjusted U.S. Department of
Labor Consumer Price Index for All Urban Consumers for the city nearest to
where the Premises are located. If such insurance coverage has a deductible
clause, the deductible amount shall not exceed $1,000 per occurrence.
(b) RENTAL VALUE. Lessor shall also obtain and keep in force a
policy or policies in the name of Lessor with loss payable to Lessor and any
Lender, insuring the loss of the full Rent for one year with an extended
period of indemnity for an additional 180 days ("Rental Value Insurance"). Said
insurance shall contain an agreed valuation provision in lieu of any
coinsurance clause, and the amount of coverage shall be adjusted annually to
reflect the projected Rent otherwise payable by Lessee, for the next 12 month
period.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas or
other buildings in the Project if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 LESSEE'S PROPERTY; BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds for any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.
(b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss of
income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 INSURANCE POLICIES. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after 30 days prior written notice
to Lessor. Lessee shall, at least 30 days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand. Such policies shall be for a term of at least one year, or the length of
the remaining term of this Lease, whichever is less. If either Party shall fail
to procure and maintain the insurance required to be carried by it, the other
Party may, but shall not be required to, procure and maintain the same.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and
waive their entire right to recover damages against the other, for loss of or
damage to its property arising out of or incident to the perils required to be
insured against herein. The effect of such releases and waivers is not limited
by the amount of insurance carried or required, or by any deductibles
applicable hereto. The Parties agree to have their respective property damage
insurance carriers waive any right to subrogation that such companies may have
against Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.
8.7 INDEMNITY. Except for Lessor's gross negligence or willful misconduct,
Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor
and its agents, Lessor's master or ground lessor, partners and Lenders, from
and against any and all claims, loss of rents and/or damages, liens, judgments,
penalties, attorneys' and consultants' fees, expenses and/or liabilities
arising out of, involving, or in connection with, the use and/or occupancy of
the Premises by Lessee. If any action or proceeding is brought against Lessor
by reason of any of the foregoing matters, Lessee shall upon notice defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and
Lessor shall cooperate with Lessee in such defense. Lessor need not have first
paid any such claim in order to be defended or indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. 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,
Page 5 of 12
<PAGE> 6
plumbing, HVAC or lighting fixtures, or from any other cause, whether the said
injury or damage results from conditions arising upon the Premises or upon other
portions of the Building, or from other sources or places. LESSOR shall not be
liable for any damages arising from any act or neglect or any other tenant of
LESSOR nor from the failure of LESSOR to enforce the provisions of any other
LEASE in the Project. 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 and Trade Fixtures, which cannot reasonably be repaired
in 3 months or less from the date of the damage or destruction, and/or the cost
thereof exceeds a sum equal to 6 month's Base Rent. LESSOR shall notify LESSEE
in writing within 30 days from the date of the damage or destruction as to
whether or not the damage is Partial or Total.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to
the improvements on the Premises, other than LESSEE Owned Alterations and
Utility Installations and Trade Fixtures, which cannot reasonably be repaired
in 3 months or less from the date of the damage or destruction and/or the cost
thereof exceeds a sum equal to 6 month's Base Rent. LESSOR shall notify LESSEE
in writing within 30 days from the date of the damage or destruction as to
whether or not the damage is Partial or Total.
(c) "INSURED LOSS" shall mean damage or destruction to improvements
on the Premises, other than LESSEE Owned Alterations and Utility Installations
and Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by LESSOR at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of Applicable requirements, and without
deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE -- INSURED LOSS. If a Premises Partial Damage that is
an Insured Loss occurs, then LESSOR shall, at LESSOR'S expense, repair such
damage (but not LESSEE'S Trade Fixtures or LESSEE Owned Alterations and Utility
Installations) as soon as reasonably possible and this LEASE shall continue in
full force and effect; provided, however, that LESSEE shall, at LESSOR'S
election, make the repair of any damage or destruction the total cost to repair
of which is $5,000 or less, and, in such event, LESSOR shall make any
applicable insurance proceeds available to LESSEE on a reasonable basis for
that purpose. Notwithstanding the foregoing, if the required insurance was not
in force or the insurance proceeds are not sufficient to effect such repair,
the Insuring Party shall promptly contribute the shortage in proceeds as and
when required to complete said repairs. In the event, however, such shortage
was due to the fact that, by reason of the unique nature of the improvements,
full replacement cost insurance coverage was not commercially reasonable and
available, LESSOR shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless LESSEE
provides LESSOR with the funds to cover same, or adequate assurance thereof,
within 10 days following receipt of written notice of such shortage and request
therefor. If LESSOR receives said funds or adequate assurance thereof within
said 10 day period, the party responsible for making the repairs shall
complete them as soon as reasonably possible and this LEASE shall remain in
full force and effect. If such funds or assurance are not received, LESSOR may
nevertheless elect by written notice to LESSEE within 10 days thereafter to:
(i) make such restoration and repair as is commercially reasonable with LESSOR
paying any shortage in proceeds, in which case this LEASE shall remain in full
force and effect, of (ii) have this LEASE terminate 30 days thereafter. LESSEE
shall not be entitled to reimbursement of any funds contributed by LESSEE to
repair any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE -- INSURED LOSS. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
LESSEE (in which event LESSEE shall make the repairs at LESSEE'S expense),
LESSOR may either: (i) repair such damage as soon as reasonably possible at
LESSOR'S expense, in which event this LEASE shall continue in full force and
effect, or (ii) terminate this LEASE by giving written notice to LESSEE within
30 days after receipt by LESSOR of knowledge of the occurrence of such damage.
Such termination shall be effective 60 days following the date of such notice.
In the event LESSOR elects to terminate this LEASE, LESSEE shall have the right
within 10 days after receipt of the termination notice to give written notice
to LESSOR of LESSEE'S commitment to pay for the repair of such damage without
reimbursement from LESSOR. LESSEE shall provide LESSOR with said funds or
satisfactory assurance thereof within 30 days after making such commitment. In
such event this LEASE shall continue in full force and effect, and LESSOR shall
proceed to make such repairs as soon as reasonably possible after the required
funds are available. If LESSEE does not make the required commitment, this
LEASE shall terminate as of the date specified in the termination notice.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this LEASE shall terminate 60 days following
such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of LESSEE, LESSOR shall have the right to
recover LESSOR'S damages from LESSEE, except as provided in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last 6 months of
this LEASE there is damage for which the cost to repair exceeds one month's
Base Rent, whether or not an insured Loss, LESSOR may terminate this LEASE
effective 60 days following the date of occurrence of such damage by giving a
written termination notice to LESSEE within 30 days after the date of
occurrence of such damage. Notwithstanding the foregoing, if LESSEE at that
time has an exercisable option to extend this LEASE or to purchase the Premises
then LESSEE may preserve this LEASE by, (a) exercising such option and (b)
providing LESSOR with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs on or before the earlier of (i) the date
which is 10 days after LESSEE'S receipt of LESSOR'S written notice purporting
to terminate this LEASE, or (ii) the day prior to the date upon which such
option expires. If LESSEE duly exercises such option during such period and
provides LESSOR with funds (or adequate assurance thereof) to cover any
shortage in insurance proceeds, LESSOR shall, at LESSOR'S commercially
reasonable expense, repair such damage as soon as reasonably possible and this
LEASE shall continue in full force and effect. If LESSEE fails to exercise such
option and provide such funds or assurance during such period, then this LEASE
shall terminate on the date specified in the termination notice and LESSEE'S
option shall be extinguished.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) ABATEMENT. In the event of Premises Partial Damage or Premises
Total Destruction or a Hazardous Substance Condition for which LESSEE is not
responsible under this LEASE, the Rent payable by LESSEE for the period
required for the repair, remediation or restoration of such damage shall be
abated in proportion to the degree to which LESSEE'S use of the Premises is
impaired, but not to exceed the proceeds received from the Rental Value
insurance. All other obligations of LESSEE hereunder shall be performed by
LESSEE, and LESSOR shall have no liability for any such damage, destruction,
remediation, repair or restoration except as provided herein.
(b) REMEDIES. If LESSOR shall be obligated to repair or restore the
Premises and does not commence, in a substantial and meaningful way, such repair
or restoration within 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 60 days
following the giving of such notice. If LESSEE gives such notice and such repair
or restoration is not commenced within 30 days thereafter, this LEASE shall
terminate as of the date specified in said notice. If the repair or restoration
is commenced within such 30 days, this LEASE shall continue in full force and
effect. "Commence" shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.
9.7 TERMINATION; ADVANCE PAYMENTS. Upon termination of this LEASE pursuant
to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by LESSEE to
LESSOR. LESSOR shall, in addition, return to LESSEE so much of LESSEE'S
Security Deposit as has not been, or is not then required to be, used by LESSOR.
9.8 WAIVE STATUTES. LESSOR and LESSEE agree that the terms of this LEASE
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this LEASE and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 DEFINITION. As used herein, the term "REAL PROPERTY TAXES" shall
include any form of ASSESSMENT, REAL ESTATE, general, special, ordinary or
extraordinary, or rental levy or tax (other than inheritance, personal income or
estate TAXES); improvement bond, and/or license fee imposed upon or levied
against any legal or equitable interest of LESSOR in the Project, LESSOR'S right
to other income therefrom, and/or LESSOR'S business of leasing, by any authority
having the direct or indirect power to tax and where the funds are generated
with reference to the Project address and where the proceeds so generated are to
be applied by the city, county or other local taxing authority of a jurisdiction
within which the Project is located. The term "REAL PROPERTY TAXES" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring during the term of this LEASE, including
but not limited to, a change in the ownership of the Project or any portion
thereof or a change in the improvements thereon. In calculating Real Property
TAXES for any calendar year, the Real Property TAXES for any real estate tax
year shall be included in the calculation of Real Property TAXES for such
calendar year based upon the number of days which such calendar year and tax
year have in common.
10.2 PAYMENT OF TAXES. LESSOR shall pay the Real Property TAXES applicable
to the Project, and except as otherwise provided in Paragraph 10.3, any such
amounts shall be included in the calculation of Common Area Operating Expenses
in accordance with the provisions of Paragraph 4.2.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not
include Real Property TAXES specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Project by
other LESSEES or by LESSOR for the exclusive enjoyment of such other LESSEES.
Notwithstanding Paragraph 10.2 hereof, LESSEE shall, however, pay to LESSOR at
the time Common Area Operating Expenses are payable under Paragraph 4.2, the
entirety of any increase in Real Property TAXES if assessed solely by reason of
Alterations, Trade Fixtures or Utility Installations placed upon the Premises by
LESSEE or at LESSEE'S request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real
Property TAXES allocated to the Building shall be an equitable proportion of the
Real Property TAXES for all of the land and improvements included within the
tax parcel assessed, such proportion to be determined by LESSOR from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available. LESSOR'S reasonable determination
thereof, in good faith, shall be conclusive.
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REVISED
<PAGE> 7
10.5 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes
assessed against and levied upon Lessee Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises. When possible, Lessee shall cause its
Lessee Owned Alterations and Utility Installations, 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
property shall be assessed with Lessor's real property, Lessee shall pay lessor
the taxes attributable to Lessee's property within 10 days after receipt of a
written statement setting forth the taxes applicable to Lessee's property.
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. Notwithstanding the provisions of
Paragraph 4.2, if at any time in Lessor's sole judgment, Lessor determines that
Lessee is using a disproportionate amount of water, electricity or other
commonly metered utilities, or that Lessee is generating such a large volume of
trash as to require an increase in the size of the dumpster and/or an increase
in the number of times per month that the dumpster is emptied, then Lessor may
increase Lessee's Base Rent by an amount equal to such increased costs.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.
(b) A change in the control of Lessee shall constitute an assignment
requiring consent. The transfer, on a cumulative basis, of 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,
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 by an amount greater than 25%
of such Net Worth as it was represented at the time of the execution 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, whichever was or is greater, shall be considered
an assignment of this Lease to which Lessor may withhold its consent. "NET
WORTH OF LESSEE" shall mean the net worth of Lessee (excluding any guarantors)
established under generally accepted accounting principles.
(d) An assignment or subletting without consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a noncurable
Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days
written notice, increase the monthly Base Rent to 110% of the Base Rent then in
effect. Further, in the event of such Breach and rental adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to 110% of the price previously in effect, and
(ii) all fixed and non-fixed rental adjustments scheduled during the remainder
of the Lease term shall be increased to 110% of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall
be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, no assignment or subletting
shall: (i) be effective without the express written assumption by such assignee
or sublessee of the obligations of Lessee under this Lease, (ii) release
Lessee of any obligations hereunder, or (iii) alter the primary liability of
Lessee for the payment of Rent or for the performance of any other obligations
to be performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment of subletting shall not
constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any
assignee or sublessee, without first exhausting Lessor's remedies against any
other person or entity responsible therefore to Lessor, or any security held by
Lessor.
(e) Each request for consent to an assignment or subletting shall be
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 fee of
$41,000 or 10% of the current monthly Base Rent applicable to the portion of the
Premises which is the subject of the proposed assignment or sublease, whichever
is greater, as consideration for Lessor's considering and processing said
request. Lessee agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed to have
assumed and agreed to conform and comply with each and every term, covenant,
condition and obligation herein to be observed or performed by Lessee during
the term of said assignment or sublease, other than such obligations as are
contrary to or inconsistent with provisions of an assignment or sublease to
which Lessor has specifically consented to in writing.
(g) Lessor's consent to any assignment or subletting shall not
transfer to the assignee or sublessee any Option granted to the original Lessee
by this Lease unless such transfer is specifically consented to by Lessor in
writing. (See Paragraph 39.2)
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all Rent payable on any sublease, and Lessor may collect such Rent
and apply same toward Lessee's obligations under this Lease; provided, however,
that until a Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or
any assignment of such sublease, nor by reason of the collection of Rent, be
deemed liable to the sublessee for any failure of Lessee to perform and comply
with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written notice
from Lessor stating that a Breach exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor all Rent due and to become due
under the sublease. Sublessee shall rely upon any such notice from Lessor and
shall pay all Rents to Lessor without any obligation or right to inquire as to
whether such Breach exists, notwithstanding any claim from Lessee to the
contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its option,
require sublessee to attorn to Lessor, in which event Lessor shall undertake
the obligations of the sublessor under such sublease from the time of the
exercise of said option to the expiration of such sublease; provided, however,
Lessor shall not be liable for any prepaid rents or security deposit paid by
such sublessee to such sublessor or for any prior Defaults or Breaches of such
sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The sublessee
shall have a right of reimbursement and offset from and against Lessee for any
such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to
comply with or perform any of the terms, covenants, conditions or Rules and
Regulations under this Lease. a "BREACH" is defined as the occurrence of one or
more of the following Defaults, and the failure of Lessee to cure such Default
within any applicable grace period:
(a) The abandonment of the Premises; or the vacating of the Premises
without providing a commercially reasonably level of security, or where the
coverage of the property insurance described in Paragraph 8.3 is jeopardized as
a result thereof, or without providing reasonable assurances to minimize
potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to Lessor or
to a third party, when due, to provide reasonable evidence of insurance or
surety bond, or to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of 3
business days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written evidence
of compliance with Applicable Requirements, (ii) the service contracts, (iii)
the rescission of an unauthorized assignment or subletting, (iv) an Estoppel
Certificate, (v) a requested subordination, (vi) evidence concerning any
guaranty and/or Guarantor, (vii) any document requested under Paragraph 41
(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 10 days following written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 2.9 hereof,
other than those descried in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of 30 days after written notice; provided,
however, that if the nature of Lessee's Default is such that more than 30 days
are reasonably required for its cure, then it shall not be deemed to be a
Breach if Lessee commences such cure within said 30 day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making of
any general arrangement of assignment for the benefit of creditors; (ii)
becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor statue
thereto (unless, in the case of a petition filed against Lessee, the same is
dismissed within 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 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 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 of
effect, and not affect the validity of the remaining provisions.
(f) The discovery that any financial statement of Lessee or of any
Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory basis, and
Lessee's failure,
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<PAGE> 8
within 60 days following written notice of any such event, to provide written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the Guarantors that existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any of its affirmative
duties or obligations, within 10 days after written notice (or in case of an
emergency, without notice), Lessor may, at its option, perform such duly or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises
by any lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonably attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent. Efforts by Lessor to mitigate damages
caused by Lessee's Breach of this Lease shall not waive Lessor's right to
recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable
therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or assign,
subject only to reasonable limitations. Acts of maintenance, efforts to relet,
and/or the appointment of a receiver to protect the Lessor's interests, shall
not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under
the laws or judicial decisions of the state wherein the Premises are located.
The expiration or termination of this Lease and/or the termination of Lessee's
right to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring during the term hereof or by
reason of Lessee's occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or
other charges, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering into this
Lease, all of which concessions are hereinafter referred to as "INDUCEMENT
PROVISIONS", shall be deemed conditioned upon Lessee's full and faithful
performance of all of the terms, covenants and conditions of this Lease. Upon
Breach of this Lease by Lessee, any such Inducement Provision shall
automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement Provision
shall be immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or
the cure of the Breach which initiated the operation of this paragraph shall not
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 or Rent will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within 5 days after such amount shall be due,
then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a
one-time late charge equal to 10% of each such overdue amount or $100, whichever
is greater. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such late
payment. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for 3 consecutive installments of Base Rent, then notwithstanding any provision
of this Lease to the contrary, Base Rent shall, at Lessor's option, become due
and payable quarterly in advance.
13.5 INTEREST. Any monetary payment due Lessor hereunder, other
than late charges, not received by Lessor, when due as to scheduled payments
(such as Base Rent) or within 30 days following the date on which it was due for
non-scheduled payment, shall bear interest from the date when due, as to
scheduled payments, or the 31st day after it was due as to non-scheduled
payments. The interest ("INTEREST") charged shall be equal to the prime rate
reported in the Wall Street Journal as published closest prior to the date when
due plus 4%, but shall not exceed the maximum rate allowed by law. Interest is
payable in addition to the potential late charge provided for in Paragraph
13.4.
13.6 BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in breach
of this Lease unless Lessor fails within a reasonable time to perform an
obligation required to be performed by Lessor. For purposes of this Paragraph, a
reasonable time shall in no event be less than 30 days after receipt by Lessor,
and any Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than 30 days are reasonably required for
its performance, then Lessor shall not be in breach if performance is commenced
within such 30 days period and thereafter diligently pursued to completion.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event
that neither Lessor nor Lender cures said breach within 30 days after receipt of
said notice, or if having commenced said cure they do not diligently pursue it
to completion, then Lessee may elect to cure said breach at Lessee's expense and
offset from Rent an amount equal to the greater of one month's Base Rent or the
Security Deposit, and to pay an excess of such expense under protest, reserving
Lessee's right to reimbursement from Lessor. Lessee shall document the cost of
said cure and supply said documentation to Lessor.
14. CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (collectively "CONDEMNATION"), this Lease shall terminate as to the part
taken as of the date the condemning authority takes title or possession,
whichever first occurs. If more than 10% of the floor area of the Unit, or more
than 25% of Lessee's Reserved Parking Spaces, is taken by Condemnation, Lessee
may, at Lessee's option, to be exercised in writing within 10 days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within 10 days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in proportion
to the reduction in utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such awards shall be made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocated expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that this Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. BROKERAGE FEES.
15.1 ADDITIONAL COMMISSION. In addition to the payments owed
pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise
agree in writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if
Lessee acquires from Lessor any right to the Premises or other premises owned by
Lessor and located within the Project, (c) if Lessee remains in possession of
the Premises, with the consent of Lessor, after the expiration of this Lease, or
(d) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then, Lessor shall pay Brokers a fee in accordance
with the schedule of the Brokers in effect at the time of the execution of this
Lease.
15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assumed Lessor's obligation
hereunder. Brokers shall be third party beneficiaries of the provisions of
Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to Brokers any amounts
due as and when due, Lessee's Broker may send written notice to Lessor and
Lessee of such failure and if Lessor fails to pay such amounts within 10 days
after said notice, Lessee shall pay said monies to its Broker and offset such
amounts against Rent. In addition, Lessee's Broker shall be deemed to be a third
party beneficiary of any commission agreement entered into by and/or between
Lessor and Lessor's Broker for the limited purpose of collecting any brokerage
fee owed.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS.
Lessee and Lessor each represent and warrant to the other that it has had no
dealings with any person, firm, broker or finder (other than the Brokers, if
any) in connection with this Lease, and that no one other than said named
Brokers is entitled to any commission or finder's fee in connection herewith.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the Indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.
16. ESTOPPEL CERTIFICATES.
(a) Each Party (as "RESPONDING PARTY") shall within 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 "ESTOPPEL CERTIFICATE" 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
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<PAGE> 9
Party.
(b) If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such 10 day period, the Requesting Party may execute
an Estoppel Certificate stating that: (i) the Lease is in full force and effect
without modification except as may be represented by the Requesting Party, (ii)
there are no uncured defaults in the Requesting Party's performance, and (iii)
if Lessor is the Requesting Party, not more than one month's rent has been paid
in advance. Prospective purchasers and encumbrances may rely on the Requesting
Party's Estoppel Certificate, and the Responding Party shall be estopped from
denying the truth of the facts contained in said Certificate.
(c) If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past 3 years. All such financial
statements shall be received by Lessor and any such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, and subject to the provisions of Paragraph
20 below, the original Lessor under this Lease, and all subsequent holders of
the Lessor's interest in this Lease shall remain liable and responsible with
regard to the potential duties and liabilities of Lessor pertaining to Hazardous
Substances as outlined in Paragraph 6.2 above.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. DAYS. Unless otherwise specifically indicated to the contrary, the word
"DAYS" as used in this Lease shall mean and refer to calendar days.
20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17 above,
the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against the individual partners of Lessor, or its or their individual partners,
directors, officers or shareholders, or any of their personal assets for such
satisfaction.
21. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
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 use, 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. The liability (including court costs and attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease
or applicable law shall be in writing and may be delivered in person (by hand or
by courier) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile transmission,
and shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease
shall be that Party's address for delivery or mailing of notices. Either Party
may by written notice to the other specify a different address for notice,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given 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 24 hours after delivery of the same to the Postal
Service or courier. Notices transmitted by facsimile transmission or similar
means shall be deemed delivered upon telephone confirmation or receipt
(confirmation report from fax machine is sufficient), provided a copy is also
delivered via delivery or mail. If notice is received on a Saturday, Sunday or
legal holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by
Lessee may be accepted by Lessor on account of moneys or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.
25. DISCLOSURES REGARDING THE NATURE OF A REAL ESTATE AGENCY RELATIONSHIP.
(a) When entering into a discussion with a real estate agent regarding a
real estate transaction, a Lessor or Lessee should from the outset understand
what type of agency relationship or representation it has with the agent or
agents in the transaction. Lessor and Lessee acknowledge being advised by the
Brokers in this transaction, as follows:
(i) Lessors' Agent. A Lessor's agent under a listing agreement with
the Lessor acts as the agent for the Lessor only. A Lessor's agent or subagent
has the following affirmative obligations. To the Lessor: A fiduciary duty of
utmost care, integrity, honesty, and loyalty in dealings with the Lessor. To the
Lessee and the Lessor: (a) Diligent exercise of reasonable skills and care in
performance of the agent's duties. (b) A duty of honesty and fair dealing and
good faith. (c) A duty to disclose all facts known to the agent materially
affecting the value or desirability of the property that are not known to, or
within the diligent attention and observation of, the Parties. An agent is not
obligated to reveal to either Party any confidential information obtained from
the other Party which does not involve the affirmative duties set forth above.
(ii) Lessee's Agent. An agent can agree to act as agent for the
Lessee only. In these situation, the agent is not the Lessor's agent, even if by
agreement the agent may receive compensation for services rendered, either in
full or in part from the Lessor. An agent acting only for a Lessee has the
following affirmative obligations. To the Lessee: A fiduciary duty of utmost
care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee
and the Lessor: (a) Diligent exercise of reasonable skills and care in
performance of the agent's duties. (b) A duty of honesty and fair dealing and
good faith. (c) A duty to disclose all facts known to the agent materially
affecting the value or desirability of the property that are not known to, or
within the diligent attention and observation of, the Parties. An agent is not
obligated to reveal to either Party any confidential information obtained from
the other Party which does not involve the affirmative duties set forth above.
(iii) Agent Representing Both Lessor and Lessee. A real estate agent,
either acting directly or through one or more associate licenses, can legally be
the agent of both the Lessor and the Lessee in a transaction, but only with the
knowledge and consent of both the Lessor and the Lessee. In a dual agency
situation, the agent has the following affirmative obligations to both the
Lessor and the Lessee: (a) A fiduciary duty of utmost care, integrity, honesty
and loyalty in the dealings with either Lessor or the Lessee. (b) Other duties
to the Lessor and the Lessee as stated above in subparagraphs (i) or (ii). In
representing both Lessor and Lessee, the agent may not without the express
permission of the respective Party, disclose to the other Party that the Lessor
will accept rent in an amount less than that indicated in the listing or that
the Lessee is willing to pay a higher rent than that offered. The above duties
of the agent in a real estate transaction do not relieve a Lessor or Lessee from
the responsibility to protect their own interests. Lessor and Lessee should
carefully read all agreements to assure that they adequately express their
understanding of the transaction. A real estate agent is a person qualified to
advise about real estate. If legal or tax advice is desired, consult a competent
professional.
(b) Brokers have no responsibility with respect to any default or breach
hereof by either Party. The liability (including court costs and attorneys'
fees), of any Broker with respect to any breach of duty, error or omission
relating to this Lease shall not exceed the fee received by such Broker pursuant
to this Lease; provided, however, that the foregoing limitation on each Broker's
liability shall not be applicable to any gross negligence or willful misconduct
of such Broker.
(c) Buyer and Seller agree to identify to Brokers as "Confidential" any
communication or information given Brokers that is considered by such Party to
be confidential.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
150% of the Base Rent applicable immediately preceding the expiration or
termination. Nothing contained herein shall be construed as consent by Lessor to
any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this
Lease to be observed or performed by Lessee are both covenants and conditions.
In construing this Lease, all headings and titles are for the convenience of the
Parties only and shall not be considered a part of this Lease. Whenever required
by the context, the singular shall include the plural and vice versa. This Lease
shall not be construed as if prepared by one of the Parties, but rather
according to its fair meaning as a whole, as if both Parties had prepared it.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
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30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed upon the Premises, to any and all advances made on the
security thereof, and to all renewals, modifications, and extensions thereof.
Lessee agrees that the holders of any such Security Devices (in this Lease
together referred to as "LENDER") shall have no liability or obligation to
perform any of the obligations of Lessor under this Lease. Any Lender may elect
to have this Lease and/or any Option granted hereby superior to the lien of its
Security Device by giving written notice thereof to Lessee, whereupon 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. In the event that Lessor transfers title to the
Premises, or the Premises are required by another upon the foreclosure or
termination of a Security Device to which this Lease is subordinated (i) Lessee
shall, subject to the non-disturbance provisions of Paragraph 30.3, attorn to
such new owner, and upon request, enter into a new lease, containing all of the
terms and provisions of this Lease, with such new owner for the remainder of
the term hereof, or, at the election of such new owner, this Lease shall
automatically become a new Lease between Lessee and such new owner, upon all
of the terms and conditions hereof, for the remainder of the term hereof, and
(ii) Lessor shall thereafter be relieved of any further obligations hereunder
and such new owner shall assume all of Lessor's obligations hereunder, except
that such new owner shall not: (a) be liable for any act or omission of any
prior lessor or with respect to events occurring prior to acquisition of
ownership; (b) be subject to any offsets or defenses which Lessee might have
against any prior lessor, (c) be bound by prepayment of more than one month's
rent, or (d) be liable for the return of any security deposit paid to any prior
lessor.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which
Non-Disturbance Agreement provides that Lessee's possession of the Premises,
and this Lease, including any options to extend the term thereof, will not be
disturbed so long as Lessee is not in Breach hereof and attorns to the record
owner of the Premises. Further, within 60 days after the execution of this
Lease, Lessor shall use its commercially reasonable efforts to obtain a
Non-Disturbance Agreement from the holder of any pre-existing Security Device
which is secured by the Premises. In the event that Lessor is unable to provide
the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee's
option, directly contact Lender and attempt to negotiate for the execution and
delivery of a Non-Disturbance Agreement.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
involving the Premises whether founded in tort, contract or equity, or to
declare rights hereunder, the Prevailing Party (as hereafter defined) in any
such proceeding, action, or appeal thereon, shall be entitled to reasonable
attorneys' fees. Such fees may be awarded in the same suit or recovered in a
separate suit, whether or not such action or proceeding is pursued to decision
or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a
Party or Broker who substantially obtains or defeats the relief sought, as the
case may be, whether by compromise, settlement, judgment, or the abandonment by
the other Party or Broker or its claim or defense. The attorneys' fees award
shall not be computed in accordance with any court fee schedule, but shall be
such as to fully reimburse all attorneys' fees reasonably incurred. In
addition, Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in the preparation and service of notices of Default and consultations
in connection therewith, whether or not a legal action is subsequently
commenced in connection with such Default or resulting Breach ($200 is a
reasonable minimum per occurrence for such services and consultation).
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 tenants, and making such
alterations, repairs, improvements or additions to the Premises as Lessor may
deem necessary. All such activities shall be without abatement of rent or
liability to Lessee. Lessor may at any time place on the Premises any ordinary
"FOR SALE" signs and Lessor may during the last 6 months of the term hereof
place on the Premises any ordinary "FOR LEASE" signs. Lessee may at any time
place on the Premises any ordinary "FOR SUBLEASE" sign.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent. Lessor shall
not be obligated to exercise any standard or reasonableness in determining
whether to permit an auction.
34. SIGNS. Except for ordinary "For Sublease" signs which may be placed only
on the Premises, Lessee shall not place any sign upon the Project without
Lessor's prior written consent. All signs must comply with all Applicable
Requirements.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, that Lessor may elect to continue any one
or all existing subtenancies. Lessor's failure within 10 days following any
such event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's selection to have such event
constitute the termination of such interest.
36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such
consent shall not be unreasonably withheld or delayed. Lessor's actual
reasonable costs and expenses (including but not limited to architects',
attorneys', engineers' and other consultants' fees) incurred in the
consideration of, or response to, a request by Lessee for any Lessor consent,
including but not limited to an assignment, a subletting or the presence or use
of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice
and supporting documentation therefor. Lessor's consent to any act, assignment
or subletting shall not constitute an acknowledgment that no Default or Breach
by Lessee of this Lease exists, nor shall such consent be deemed a waiver of
any then existing Default or Breach, except as may be otherwise specifically
stated in writing by Lessor at the time of such consent. The failure to specify
herein any particular condition to Lessor's consent shall not preclude the
imposition by Lessor at the time of consent of such further or other conditions
as are then reasonable with reference to the particular matter for which
consent is being given. In the event that either Party disagrees with any
determination made by the other hereunder and reasonably requests the reasons
for such determination, the determining party shall furnish its reasons in
writing and in reasonable detail within 10 business days following such request.
37. GUARANTOR.
37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty in
the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.
37.2 DEFAULT. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, (b) current financial statements, (c)
an Estoppel Certificate, or (d) written confirmation that the guaranty is still
in effect.
38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.
39. OPTIONS. If Lessee is granted an option, as defined below, then the
following provisions shall apply.
39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the term of
or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Any Option granted to Lessee
in this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original
Lessee is in full possession of the Premises and, if requested by Lessor, with
Lessee certifying that Lessee has no intention of thereafter assigning or
subletting.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later Option cannot be exercised
unless the prior Options have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option: (i) during
the period commencing with the giving of any notice of Default and continuing
until said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee), (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given 3 or more notices of separate Default, whether or not the Defaults
are cured, during the 12 month period immediately preceding the exercise of the
Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise
an Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or effect,
notwithstanding Lessee's due and timely exercise of the Option, if, after such
exercise and prior to the commencement of the extended term, (i) Lessee fails
to pay Rent for a period of 30 days after such Rent becomes due (without any
necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee 3 or
more notices of separate Default during any 12 month period, whether or not
the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease.
40. SECURITY MEASURES. Lessee hereby acknowledges that the Rent 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.
41. RESERVATIONS. Lessor reserves the right: (i) to grant, without the
consent or joinder of Lessee, such easements, rights and dedications that
Lessor deems necessary, (ii) to cause the recordation of parcel maps and
restrictions, and (iii) to create and/or install new utility raceways, so long
as such easements, rights, dedications, maps, restrictions, and utility
raceways do not unreasonably interfere with the use of the Premises by Lessee.
Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate such rights.
42. 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
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was not legally required to pay.
43. AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each party
shall, within 30 days after request, deliver to the other party satisfactory
evidence of such authority.
44. 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.
45. OFFER. Preparation of this Lease by either party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
46. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
47. MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
48. WAIVER OF JURY TRIAL. The Parties hereby waive their respective rights to
trial by jury in any action or proceeding involving the Property or arising out
of this Agreement.
49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease [ ] is [ ] is not attached to this Lease.
50. DUAL AGENCY. Both Landlord and Tenant understand and accept that Lee &
Associates represents both Landlord and Tenant as a Dual Agent.
51. OPTION TO PURCHASE. Lessee Shall have the option to purchase the property
from August 31, 2001 through January 31, 2002 at $1,350,000 all cash. Lessee
must notify Lessor of its election to exercise the option no later than August
31, 2001 and remove all of the contingencies by October 1, 2001 and escrow must
close no later than January 31, 2002. All closing costs such as title insurance,
escrow fees shall split 50/50 between Buyer and Seller. Seller to pay the
commission which will equal to six percent (6%) of the purchase price through
escrow at the close of escrow to Lee & Associates ("Broker") which is acting as
a dual agent for Lessor, Lessee, Buyer and Seller.
52. DISCLOSURE. Tenant will receive all relative information pertaining to the
CUP 329 and the amendment prior to the expiration of the option to purchase
expires. Tenant releases Lee & Associates, David Wilson, James Wilson, Jimmy
Jacobsen and Pyramid Films from any liability concerning the Tenant's proposed
use of the property.
53. PARKING. Upon occupancy Lessee shall be entitled to eleven reserved
parking spaces on the westside of the parking lot for $50/month/space for total
of $550.00 per month.
54. GARAGES. Lessee shall be entitled to use both garages for the term of the
lease.
55. 1031 EXCHANGE. Lessee agrees to cooperate with Lessor in a 1031 Exchange.
56. TENANT IMPROVEMENT. Lessee Agrees to accept the Premises in an "as is"
condition; however, Landlord will ensure that all mechanical systems are in
good working order prior to lease commencement.
57. BASE RENT. The base monthly rental rate for months 1-12 shall be equal to
$1.60/sf/month/NNN. The base monthly rental rate shall increase by four percent
(4%) each year of the lease term commencing on the 13th month.
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<PAGE> 12
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION
TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE ACT
AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES ARE LOCATED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Executed at:
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on: Jan. 14, 2000 on: Jan. 14, 2000
--------------------------------- ---------------------------------
By LESSOR: /s/ DENISE ADAMS By LESSEE: /s/ JEFF MICKEAL
-------------------------- --------------------------
Attorney in Fact Jeff Mickeal
C.F.O.
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By: By:
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Name Printed: Name Printed:
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Title: Title:
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By: By:
--------------------------------- ---------------------------------
Name Printed: Name Printed:
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Title: Title:
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Address: Address:
---------------------------- ----------------------------
- ------------------------------------ ------------------------------------
- ------------------------------------ ------------------------------------
Telephone: ( ) Telephone: ( )
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Facsimile: ( ) Facsimile: ( )
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Federal ID No. Federal ID No.
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THESE FORMS ARE OFTEN MODIFIED TO MEET CHANGING REQUIREMENTS OF LAW AND NEEDS OF
THE INDUSTRY. ALWAYS WRITE OR CALL TO MAKE SURE YOU ARE UTILIZING THE MOST
CURRENT FORM: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 SOUTH FLOWER
STREET, SUITE 600, LOS ANGELES, CA 90017. (213) 687-8777.
(c)COPYRIGHT 1999 BY AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION.
ALL RIGHTS RESERVED.
NO PART OF THESE WORKS MAY BE REPRODUCED
IN ANY FORM WITHOUT PERMISSION IN WRITING.
Page 12 of 12
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EXHIBIT 10.16
STANDARD FORM OF LOFT LEASE
The Real Estate Board of New York, Inc.
AGREEMENT OF LEASE, made as of this 17th day of February 2000, between 19TH
STREET ASSOCIATES c/o Kaufman Management Company, LLC with offices located at:
450 Seventh Avenue, New York, NY 10123 party of the first part, hereinafter
referred to as OWNER, and LAUNCH MEDIA, INC. with offices located at: 1370
Avenue of the Americas, New York, NY 10019, party of the second part,
hereinafter referred to as TENANT,
WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from Owner
space consisting of the entire second (2nd) floor in the building known as 121
West 19th Street, New York, NY 10011 in the Borough of Manhattan, City of New
York, for the term of eight (8) years and four (4) months (or until such term
shall sooner cease and expire as hereinafter provided) to commence on the (*see
par. #41.) day of _________________, and to end on the______________________
____________ day of _________________________and both dates inclusive, at an
annual rental rate of (see rental schedule in paragraph #42) which Tenant agrees
to pay in lawful money of the United States which shall be legal tender in
payment of all debts and dues, public and private, at the time of payment, in
equal monthly installments in advance on the first day of each month during
said term, at the office of Owner or such other place as Owner may designate,
without any set off or deduction whatsoever, except that Tenant shall pay the
first ______ monthly installment(s) on the execution hereof (unless this lease
be a renewal).
In the even that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant, add the
amount of such arrears to any monthly installment of rent payable hereunder and
the same shall be payable to Owner as additional rent.
The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby covenant
as follows:
RENT:
1. Tenant shall pay the rent as above and as hereinafter provided.
OCCUPANCY:
2. Tenant shall use and occupy demised premises for offices and music
studios provided such use is in accordance with the certificate of occupancy
for the building, if any, and for no other purpose.
ALTERATIONS:
3. Tenant shall make no changes in or to the demised premises of any
nature without Owner's prior written consent. Subject to the prior written
consent of Owner, and to the provisions of this article, tenant, at Tenant's
expense, may make alterations, installations, additions or improvements which
are nonstructural and which do not affect utility services or plumbing and
electrical lines, in or to the interior of the demised premises using
contractors or mechanics first approved in each instance by Owner. Tenant
shall, at its expense, before making any alterations, additions, installations
or improvements obtain all permits, approval and certificates required by any
governmental or quasi-governmental bodies and (upon completion) certificates of
final approval thereof and shall deliver promptly duplicates of all such
permits, approvals and certificates to Owner. Tenant agrees to carry and will
cause Tenant's contractors and sub-contractors to carry such workman's
compensation, general liability, personal and property damage insurance as
Owner may require. If any mechanic's lien is filed against the demised
premises, or the building of which the same forms a part, for work claimed to
have been done for, or materials furnished to, Tenant, whether or not done
pursuant to this article, the same shall be discharged by Tenant within thirty
days thereafter, at Tenant's expense, by payment or filing the bond required by
law or otherwise. All fixtures and all paneling, partitions, railings and like
installations, installed in the premises at any time, either by Tenant or by
Owner on Tenant's behalf, shall, upon installation, become the property of
Owner and shall remain upon and be surrendered with the demised premises unless
Owner, by notice to Tenant no later than twenty days prior to the date fixed as
the termination of this lease, elects to relinquish Owner's right thereto and
to have them removed by Tenant, in which event the same shall be removed from
the demised premises by Tenant prior to the expiration of the lease, at
Tenant's expense. Nothing in this Article shall be construed to give Owner
title to or prevent Tenant's removal of trade fixtures, moveable office
furniture and equipment, but upon removal of any such from the premises or upon
removal of other installations as may be required by Owner, Tenant shall
immediately and at its expense, repair and restore the premises to the
condition existing prior to installation and repair any damages to the demised
premises or the building due to such removal. All property permitted or
required to be removed by Tenant at the end of the term remaining in
the premises after Tenant's removal shall be deemed abandoned and may, at the
election of Owner, either be retained as Owner's property or removed from the
premises by Owner, at Tenant's expense.
REPAIRS:
4. Owner shall maintain and repair the exterior of and the public portions
of the building. Tenant shall, throughout the term of this lease, take good
care of the demised premises including the bathrooms and lavatory facilities
(if the demised premises encompass the entire floor of the building) and the
windows and window frames and, the fixtures and appurtenances therein and at
Tenant's sole cost and expense promptly make all repairs thereto and to the
building, whether structural or non-structural in nature, caused by or resulting
from the carelessness, omission, neglect or improper conduct of tenant,
Tenant's servants, employees, invitees, or licensees, and whether or not
arising from such Tenant conduct or omission, when required by other provisions
of this lease, including Article 6. Tenant shall also repair all damage to the
building and the demised premises caused by the moving of Tenant's fixtures,
furniture or equipment. All the aforesaid repairs shall be of quality or class
equal to the original work or construction. If Tenant fails, after ten days
notice, to proceed with due diligence to make repairs required to be made by
Tenant, the same may be made by the Owner at the expense of Tenant, and the
expenses thereof incurred by Owner shall be collectible, as additional rent,
after rendition of a bill or statement therefor. If the demised premises be or
become infested with vermin, Tenant shall, at its expense, cause the same to be
exterminated. Tenant shall give Owner prompt notice of any defective condition
in any plumbing, heating system or electrical lines located in the demised
premises and following such notice, Owner shall remedy the condition with due
diligence, but at the expense of Tenant, if repairs are necessitated by damage
or injury attributable to Tenant, Tenant's servants, agents, employees, invitees
or licensees as aforesaid. Except as specifically provided in Article 9 or
elsewhere in this lease, there shall be no allowance to the Tenant for a
diminution of rental value and no liability on the part of Owner by reason of
inconvenience, annoyance or injury to business arising from Owner, Tenant or
others making or failing to make any repairs, alterations, additions or
improvements in or to any portion of the building or the demised premises or in
and to the fixtures, appurtenances or equipment thereof. It is specifically
agreed that Tenant shall not be entitled to any set off or reduction of rent by
reason of any failure of Owner to comply with the covenants of this or any
other article of this lease. Tenant agrees that Tenant's sole remedy at law in
such instance will be by way of any action for damages for breach of contract.
The provisions of this Article 4 with respect to the making of repairs shall
not apply in the case of fire or other casualty with regard to which Article 9
hereof shall apply.
WINDOW CLEANING:
5. Tenant will not clean nor require, permit, suffer or allow any window in
the demised premises to be cleaned from the outside in violation of Section 202
of the New York State Labor Law or any other applicable law of the Rules of the
Board of Standards and Appeals, or of any other Board or body having or
asserting jurisdiction.
REQUIREMENTS OF LAW, FIRE INSURANCE:
6. Prior to the commencement of the lease term, if tenant is then in
possession, and at all times thereafter Tenant shall, at Tenant's sole cost and
expense, promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and boards and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire
Underwriters, or the Insurance Services Office, or any similar body which shall
impose any violation, order or duty upon Owner or Tenant with respect to the
demised premises, whether or not arising out of Tenant's use or manner of use
thereof, or, with respect to the building, if arising out of Tenant's use or
manner of use of the demised premises of the building (including the use
permitted under the lease). Except as provided in Article 30 hereof, nothing
herein shall require Tenant to make structural repairs or alterations unless
Tenant has, by its manner of use of the demised premises or method of operation
therein, violated any such laws, ordinances, orders, rules, regulations or
requirements with respect thereto. Tenant shall not do or
Page 1 of 14
<PAGE> 2
permit any act or thing to be done in or to the demised premises which is
contrary to law, or which will invalidate or be in conflict with public
liability, fire or other policies of insurance at any time carried by or for the
benefit of Owner. Tenant shall not keep anything in the demised premises except
as now or hereafter permitted by the Fire Department. Board of Fire
Underwriters, Fire Insurance Rating Organization and other authority having
jurisdiction, and then only in such manner and such quantity so as not to
increase the rate for fire insurance applicable to the building, nor use the
premises in a manner which will increase the insurance rate for the building or
any property located therein over that in effect prior to the commencement of
Tenant's occupancy. If by reason of failure to comply with the foregoing the
fire insurance rate shall, at the beginning of this lease or at any time
thereafter, be higher than it otherwise would be, then Tenant shall reimburse
Owner, as additional rent hereunder, for that portion of all fire insurance
premiums thereafter paid by Owner which shall have been charged because of such
failure by Tenant. In any action or proceeding wherein Owner and Tenant are
parties, a schedule or "make-up" or rate for the building or demised premises
issued by a body making fire insurance rates applicable to said premises shall
be conclusive evidence of the facts therein stated and of the several items and
charges in the fire insurance rates then applicable to said premises. Tenant
shall not place a load upon any floor of the demised premises exceeding the
floor load per square foot area which it was designed to carry and which is
allowed by law. Owner reserves the right to prescribe the weight and position of
all safes, business machines and mechanical equipment. Such installations shall
be placed and maintained by Tenant, at Tenant's expense, in settings sufficient,
in Owner's judgement, to absorb and prevent vibration, noise and annoyance.
SUBORDINATION:
7. This lease is subject and subordinate to all ground or underlying
leases and to all mortgages which may now or hereafter affect such leases or
the real property of which demised premises are a part and to all renewals,
modifications, consolidations, replacements and extensions of any such
underlying leases and mortgages. This clause shall be self-operative and no
further instrument or subordination shall be required by any ground or
underlying lessor or by any mortgagee, affecting any lease or the real property
of which the demised premises are a part. In confirmation of such subordination,
Tenant shall from time to time execute promptly any certificate that Owner may
request.
TENANT'S LIABILITY INSURANCE PROPERTY LOSS, DAMAGE, INDEMNITY:
8. Owner or its agents shall not be liable for any damage to property of
Tenant or of others entrusted to employees of the building, nor for loss of or
damage to any property of Tenant by theft or otherwise, nor for any injury or
damage to persons or property resulting from any cause of whatsoever nature,
unless caused by or due to the negligence of Owner, its agents, servants or
employees. Owner or its agents shall not be liable for any damage caused by
other tenants or persons in, upon or about said building or caused by operations
in connection of any private, public or quasi public work. If at any time any
windows of the demised premises are temporarily closed, darkened or bricked up
(or permanently closed, darkened or bricked up, if required by law) for any
reason whatsoever including, but not limited to Owner's own acts, Owner shall
not be liable for any damage Tenant may sustain thereby and Tenant shall not be
entitled to any compensation therefor nor abatement or diminution of rent nor
shall the same release Tenant from its obligations hereunder nor constitute an
eviction. Tenant shall indemnify and save harmless Owner against and from all
liabilities, obligations, damages, penalties, claims, costs and expenses for
which Owner shall not be reimbursed by insurance, including reasonable
attorney's fees, paid, suffered or incurred as a result of any breach by Tenant.
Tenant's agents, contractors, employees, invitees, or licensees, of any covenant
or condition of this lease, or the carelessness, negligence or improper conduct
of the Tenant, Tenant's agents, contractors, employees, invitees or licensees.
Tenant's liability under this lease extends to the acts or omissions of any
sub-tenant, and any agent, contractor, employee, invitee or licensee of any
sub-tenant. In case any action or proceeding is brought against Owner by reason
of any such claim, Tenant, upon written notice from Owner, will, at Tenant's
expense, resist or defend such action or proceeding by counsel approved by Owner
in writing, such approval not to be unreasonably withheld.
DESTRUCTION, FIRE AND OTHER CASUALTY:
9. (a) If the demised premises or any part thereof shall be damaged by
fire or other casualty, Tenant shall give immediate notice thereof to Owner and
this lease shall continue in full force and effect except as hereinafter set
forth. (b) If the demised premises are partially damaged or rendered partially
unusable by fire or other casualty, the damages thereto shall be repaired by and
at the expense of Owner and the rent and other items of additional rent, until
such repair shall be substantially completed, shall be apportioned from the day
following the casualty according to the part of the premises which is usable.
(c) If the demised premises are totally damaged or rendered wholly unusable by
fire or other casualty, then the rent and other items of additional rent as
hereinafter expressly provided shall be proportionately paid up to the time of
the casualty and thenceforth shall cease until the date when the premises shall
have been repaired and restored by Owner (or sooner reoccupied in part by Tenant
then rent shall be apportioned as provided in subsection (b) above, subject to
Owner's right to elect not to restore the same as hereinafter provided. (d) If
the demised premises are rendered wholly unusable or (whether or not the demised
premises are damaged in whole or in part) if the building shall be so damaged
that Owner shall decide to demolish it or to rebuild it, then, in any of such
events, Owner may elect to terminate this lease by written notice to Tenant,
given within 90 days after such fire or casualty, or 30 days after adjustment of
the insurance claim for such fire or casualty, whichever is sooner, specifying a
date for the expiration of the lease, which date shall not be more than 60 days
after the giving of such notice, and upon the date specified in such notice the
term of this lease shall expire as fully and completely as if such date were the
date set forth above for the termination of this lease and Tenant shall
forthwith quit, surrender and vacate the premises without prejudice however, to
Owner's rights and remedies against Tenant under the lease provisions in effect
prior to such termination, and any rent owing shall be paid up to such date and
any payments of rent made by Tenant which were on account of any period
subsequent to such date shall be returned to Tenant. Unless Owner shall serve a
termination notice as provided for herein, Owner shall make the repairs and
restorations under the conditions of (b) and (c) hereof, with all reasonable
expedition, subject to delays due to adjustment of insurance claims, labor
troubles and causes beyond Owner's control. After any such casualty, Tenant
shall cooperate with Owner's restoration by removing from the premises as
promptly as reasonably possible, all of Tenant's salvageable inventory and
movable equipment, furniture, and other property. Tenant's liability for rent
shall resume five (5) days after written notice from Owner that the premises are
substantially ready for Tenant's occupancy. (c) Nothing contained hereinabove
shall relieve Tenant from liability that may exist as a result of damage from
fire or other casualty. Notwithstanding the foregoing, including Owner's
obligation to restore under subparagraph (b) above, each party shall look first
to any insurance in its favor before making any claim against the other party
for recovery for loss or damage resulting from fire or other casualty, and to
the extent that such insurance is in force and collectible and to the extent
permitted by law, Owner and Tenant each hereby releases and waives all right of
recovery with respect to subparagraphs (b), (d) and (e) above, against the other
or any one claiming through or under each of them by way of subrogation or
otherwise. The release and waiver herein referred to shall be deemed to include
any loss or damage to the demised premises and/or to any personal property,
equipment, trade fixtures, goods and merchandise located therein. The foregoing
release and waiver shall be in force only if both releasors' insurance policies
contain a clause providing that such a release or waiver shall not invalidate
the insurance. If, and to the extent, that such waiver can be obtained only by
the payment of additional premiums then the party benefitting from the waiver
shall pay such premium within ten days after written demand or shall be deemed
to have agreed that the party obtaining insurance coverage shall be free of any
further obligation under the provisions hereof with respect to waiver of
subrogation. Tenant acknowledges that Owner will not carry insurance on Tenant's
furniture and or furnishings or any fixtures or equipment, improvements, or
appurtenances removable by Tenant and agrees that Owner will not be obligated to
repair any damage thereto or replace the same. (f) Tenant hereby waives the
provisions of Section 227 of the Real Property Law and agrees that the
provisions of this article shall govern and control in lieu thereof.
EMINENT DOMAIN:
10. If the whole or any part of the demised premises shall be acquired or
condemned by Eminent Domain for any public or quasi public use or purpose, then
and in that event, the term of this lease shall cease and terminate from the
date of title vesting in such proceeding and Tenant shall have no claim for the
value of any unexpired term of said lease. Tenant shall have the right to make
an independent claim to the condemning authority for the value of Tenant's
moving expenses and personal property, trade fixtures and equipment, provided
Tenant is entitled pursuant to the terms of the lease to remove such property,
trade fixtures and equipment at the end of the term and provided further such
claim does not reduce Owner's award.
ASSIGNMENT, MORTGAGE, ETC.:
11. Tenant, for itself, its heirs, distributees, executors,
administrators, legal representatives, successors and assigns, expressly
covenants that it shall not assign mortgage or encumber this agreement, nor
underlet, or suffer or permit the demised premises or any part thereof to be
used by others, without the prior written consent of Owner in each instance.
Transfer of the majority of the stock of a corporate Tenant or the majority
partnership interest of a partnership Tenant shall be deemed an assignment. If
this lease be assigned, or if the demised premises or any part thereof be
underlet or occupied by anybody other than Tenant, Owner may, after default by
Tenant, collect rent from the assignee, under-tenant or occupant, and apply the
net amount collected to the rent herein reserved, but no such assignment,
underletting, occupancy or collection shall be deemed a waiver of this covenant
or the acceptance of the assignee, undertenant or occupant as tenant, or a
release of Tenant from the further performance by Tenant of covenants on the
part of Tenant herein contained. The consent by Owner to an assignment or
underletting shall not in any way be construed to relieve Tenant from obtaining
the express consent in writing of Owner to any further assignment or
underletting.
ELECTRIC CURRENT:*
12. Rates and conditions in respect to submetering or rent inclusion, as
the case may be, to be added in RIDER attached hereto. Tenant covenants and
agrees that at all times its use of electric current shall not exceed the
capacity of existing feeders to the building or the risers or wiring
installation and Tenant may not use any electrical equipment which, in Owner's
opinion, reasonably exercised, will overload such installations or interfere
with the use thereof by other tenants of the building. The change at any time of
the character of electric service shall in no way make Owner liable or
responsible to Tenant, for any loss, damages or expenses which Tenant may
sustain.
ACCESS TO PREMISES:
13. Owner or Owner's agents shall have the right (but shall not be
obligated) to enter the demised premises in any emergency at any time, and, at
other reasonable times, to examine the same and to make such repairs,
replacements and improvements as Owner may deem necessary and reasonably
desirable to any portion of the building or which Owner may elect to perform in
the premises after Tenant's failure to make repairs or perform any work, which
Tenant is obligated to perform under this lease, or for the purpose of
complying with laws, regulations and other directions of governmental
authorities. Tenant shall permit Owner to use and maintain and replace pipes and
conduits in and through the demised premises and to erect new pipes and conduits
therein provided, whereever possible, they are within walls or otherwise
concealed. Owner may, during the progress of any work in the demised premises,
take all necessary materials and equipment into said premises, without the same
constituting an eviction nor shall the Tenant be entitled to any abatement of
rent while such work is in progress nor to any damages by reason of loss or
interruption of business or otherwise. Throughout the term hereof Owner shall
have the right to enter the demised premises at reasonable hours for the purpose
of showing the same to prospective purchasers or mortgagees of the building, and
during the last six months of the term for the purpose of showing the same to
prospective tenants and may, during said six months period, place upon
- ------------------
* RIDER TO BE ADDED IF NECESSARY.
Page 2 of 14
<PAGE> 3
the demised premises the usual notices "To Let" and "For Sale" which notices
Tenant shall permit to remain thereon without molestation. If Tenant is not
present to open and permit an entry into the demised premises, Owner or Owner's
agents may enter the same whenever such entry may be necessary or permissible by
master key or forcibly and provided reasonable care is exercised to safeguard
Tenant's property, such entry shall not render Owner or its agents liable
therefor, nor in any event shall the obligations of Tenant hereunder be
affected. If during the last month of the term Tenant shall have removed all or
substantially all of Tenant's property therefrom. Owner may immediately enter,
alter, renovate or redecorate the demised premises without limitation or
abatement of rent, or incurring liability to Tenant for any compensation and
such act shall have no effect on this lease or Tenant's obligation hereunder.
VAULT, VAULT SPACE, AREA:
14. No Vaults, vault space or area, whether or not enclosed or covered, not
within the property line of the building is leased hereunder anything contained
in or indicated on any sketch, blue print or plan, or anything contained
elsewhere in this lease to the contrary notwithstanding. Owner makes no
representation as to the location of the property line of the building. All
vaults and vault space and all such areas not within the property line of the
building, which Tenant may be permitted to use and/or occupy, is to be used
and/or occupied under a revocable license, and if any such license be revoked by
any federal, state or municipal authority or public utility, Owner shall not be
subject to any liability nor shall Tenant be entitled to any compensation or
diminution or abatement of rent, nor shall such revocation, diminution or
requisition be deemed constructive or actual eviction. Any tax, fee or charge of
municipal authorities for such vault or area shall be paid by Tenant, if used by
Tenant, whether or not specifically leased hereunder.
OCCUPANCY:
15. Tenant will not at any time use or occupy the demised premises in violation
of the certificate of occupancy issued for the building of which the demised
premises are a part. Tenant has inspected the premises and accepts them as is,
subject to the riders annexed hereto with respect to Owner's work, if any. In
any event, Owner makes no representation as to the condition of the premises and
Tenant agrees to accept the same subject to violations, whether or not of
record. If any governmental license or permit shall be required for the proper
and lawful conduct of Tenant's business, Tenant shall be responsible for and
shall procure and maintain such license or permit.
BANKRUPTCY:
16. (a) Anything elsewhere in this lease to the contrary notwithstanding, this
lease may be cancelled by Owner by sending of a written notice to Tenant within
a reasonable time after the happening of any one or more of the following
events. (1) the commencement of a case in bankruptcy or under the laws of any
state naming Tenant as the debtor; or (2) the making by Tenant of an assignment
or any other arrangement for the benefit of creditors under any state statute.
Neither Tenant nor any person claiming through or under Tenant, or by reason of
any statute or order of court, shall thereafter be entitled to possession of the
premises demised but shall forthwith quit and surrender the premises. If this
lease shall be assigned in accordance with its terms, the provisions of this
Article 16 shall be applicable only to the party then owning Tenant's interest
in this lease.
(b) It is stipulated and agreed that in the event of the termination of
this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any
other provisions of this lease to the contrary, be entitled to recover from
Tenant as and for liquidated damages an amount equal to the difference between
the rental reserved hereunder for the unexpired portion of the term demised and
the fair and reasonable rental value of the demised premises for the same
period. In the computation of such damages the difference between any
installment or rent becoming due hereunder after the date of termination and
the fair and reasonable rental value of the demised premises for the period for
which such installment was payable shall be discounted to the date of
termination at the rate of four percent (4%) per annum. If such premises or any
part thereof be relet by the Owner for the unexpired term of said lease, or any
part thereof, before presentation of proof of such liquidated damages to any
court, commission or tribunal, the amount of rent reserved upon such reletting
shall be deemed to be the fair and reasonable rental value for the part or the
whole of the premises so re-let during the term of the re-letting. Nothing
herein contained shall limit or prejudice the right of the Owner to prove for
and obtain as liquidated damages by reason of such termination, an amount equal
to the maximum allowed by any statute or rule of law in effect at the time
when, and governing the proceedings in which, such damages are to be proved,
whether or not such amount be greater, equal to, or less than the amount of
the difference referred to above.
DEFAULT:
17. (1) If Tenant defaults in fulfilling any of the covenants of this
lease other than the covenants for the payment or rent or additional rent, or
if the demised premises becomes vacant or deserted "or if this lease be rejected
under Section 235 of Title 11 of the U.S. Code (bankruptcy code)," or if any
execution or attachment shall be issued against Tenant or any of Tenant's
property whereupon the demised premises shall be taken or occupied by someone
other than Tenant, or if Tenant shall make default with respect to any other
lease between Owner and Tenant, or if Tenant shall have failed, after five (5)
days written notice, to redeposit with Owner any portion of the security
deposited hereunder which Owner has applied to the payment of any rent and
additional rent due and payable hereunder or failed to move into or take
possession of the premises within thirty (30) days after the commencement of
the term of this lease, of which fact Owner shall be the sole judge, then in
any one or more of such events, upon Owner serving a written fifteen (15) days
notice upon Tenant specifying the nature of said default and upon the
expiration of said fifteen (15) days, if Tenant shall have failed to comply
with or remedy such default, or if the said default or omission complained of
shall be of a nature that the same cannot be completely cured or remedied
within said fifteen (15) day period, and if Tenant shall not have diligently
commenced during such default within such fifteen (15) day period, and shall
not thereafter with reasonable diligence and in good faith, proceed to remedy
or cure such default, then Owner may serve a written five (5) days' notice of
cancellation of this lease upon Tenant, and upon the expiration of said five
(5) days this lease and the term thereunder shall end and expire as fully and
completely as if the expiration of such five (5) day period were the day herein
definitely fixed for the end and expiration of this lease and the term thereof
and Tenant shall then quit and surrender the demised premises to Owner but
Tenant shall remain liable as hereinafter provided.
(2) If the notice provided for in (1) hereof shall have been given, and
the term shall expire as aforesaid, or if Tenant shall make default in the
payment of the rent reserved herein or any item of additional rent herein
mentioned or any part of either or in making any other payment herein required,
then and in any of such events Owner may without notice, re-enter the demised
premises either by force or otherwise, and dispossess Tenant in summary
proceedings or otherwise, and the legal representative of Tenant or other
occupant of demised premises and remove their effects and hold the premises as
if this lease had not been made, and Tenant hereby waives the service of notice
of intention to re-enter or institute legal proceedings to that end. If
Tenant shall make default hereunder prior to the date fixed as the commencement
of any renewal or extension of this lease, Owner may cancel and terminate such
renewal or extension agreement by written notice.
REMEDIES OF OWNER AND WAIVER OF REDEMPTION:
18. In case of any such default, re-entry, expiration and/or dispossess
by summary proceedings or other wise, (a) the rent, and additional rent, shall
become due thereupon and be paid up to the time of such re-entry, dispossess
and/or expiration, (b) Owner may re-let the premises or any part or parts
thereof, either in the name of Owner or otherwise, for a term or terms, which
may at Owner's option be less than or exceed the period which would otherwise
have constituted the balance of the term of this lease and may grant
concessions or free rent or charge a higher rental than that in this lease; (c)
Tenant or the legal representatives of Tenant shall also pay Owner as
liquidated damages for the failure of Tenant to observe and perform said
Tenant's covenants herein contained, any deficiency between the rent hereby
reserved and or covenanted to be paid and the net amount, if any, of the rents
collected on account of the subsequent lease or leases of the demised premises
for each month of the period which would otherwise have constituted the balance
of the term of this lease. The failure of Owner to re-let the premises or any
part or parts thereof shall not release or affect Tenant's liability for
damages. In computing such liquidated damages there shall be added to the said
deficiency such expenses as Owner may incur in connection with re-letting, such
as legal expenses, reasonable attorneys' fees, brokerage, advertising and for
keeping the demised premises in good order or for preparing the same for
re-letting. Any such liquidated damages shall be paid in monthly installments by
Tenant on the rent day specified in this lease and any suit brought to collect
the amount of the deficiency for any month shall not prejudice in any way the
rights of Owner to collect the deficiency for any subsequent month by a similar
proceeding. Owner, in putting the demised premises in good order or preparing
the same for re-rental may, at Owner's option, make such alterations, repairs,
replacements, and/or decorations in the demised premises as Owner, in Owner's
sole judgment, considers advisable and necessary for the purpose of re-letting
the demised premises, and the making of such alterations, repairs,
replacements, and/or decorations shall not operate or be construed to release
Tenant from liability hereunder as aforesaid. Owner shall in no event be liable
in any way whatsoever for failure to re-let the demised premises, or in the
event that the demised premises are re-let, for failure to collect the rent
thereof under such re-letting, and in no event shall Tenant be entitled to
receive any excess, if any, of such net rents collected over the sums payable
by Tenant to Owner hereunder. In the event of a breach or threatened breach by
Tenant of any of the covenants or provisions hereof, Owner shall have the
right of injunction and the right to invoke any remedy allowed at law or
in equity as if re-entry, summary proceedings and other remedies were not herein
provided for. Mention in this lease of any particular remedy, shall not preclude
Owner from any other remedy, in law or in equity. Tenant hereby expressly waives
any and all rights of redemption granted by or under any present or future laws.
FEES AND EXPENSES:
19. If Tenant shall default in the observance or performance of any term
or covenant on Tenant's part to be observed or performed under or by virtue of
any of the terms or provisions in any article of this lease, after notice if
required and upon expiration of any applicable grace period if any, (except in
an emergency), then, unless otherwise provided elsewhere in this lease, Owner
may immediately or at any time thereafter and without notice perform the
obligation of Tenant thereunder. If Owner, in connection with the foregoing or
in connection with any default by Tenant in the covenant to pay rent hereunder,
makes any expenditures or incurs any obligations for the payment of money,
including but not limited to reasonably attorney's fees, in instituting,
prosecuting or defending, then Tenant will reimburse Owner for such sums so paid
or obligations incurred with interest and costs. The foregoing expenses incurred
by reason of Tenant's default shall be deemed to be additional rent hereunder
and shall be paid by Tenant to Owner within ten (10) days of rendition of any
bill or statement to Tenant therefor. If Tenant's lease term shall have expired
at the time of making of such expenditures or incurring of such obligations,
such sums shall be recoverable by Owner as damages.
BUILDING ALTERATIONS AND MANAGEMENT:
20. Owner shall have the right at any time without the same
constituting an eviction and without incurring liability to Tenant therefor to
change the arrangement and or location of public entrances, passageways, doors,
doorways, corridors, elevators, stairs, toilets or other public parts of the
building and to change the name, number or designation by which the building
may be known. There shall be no allowance to Tenant for diminution of rental
value and no liability on the part of Owner by reason of inconvenience,
annoyance or injury to business arising from Owner or other Tenant making any
repairs in the building or any such alterations, additions and improvements.
Furthermore, Tenant shall not have any claim against Owner by reason of Owner's
imposition of any controls of the manner of access to the building by Tenant's
social or business visitors as the Owner may deem necessary for the security of
the building and its occupants.
Page 3 of 14
<PAGE> 4
NO REPRESENTATIONS BY OWNER:
21. Neither Owner nor Owner's agents have made any representations or
promises with respect to the physical condition of the building, the land upon
which is created or the demised premises, the rents, leases, expenses of
operation or any other matter or thing affecting or related to the demised
premises or the building except as herein expressly set forth and no rights,
easements or licenses are acquired by Tenant by implication or otherwise except
as expressly set forth in the provisions of this lease. Tenant has inspected the
building and the demised premises and is thoroughly acquainted with their
condition and agrees to take the same "as is" on the date possession is
tendered and acknowledges that the taking of possession of the demised premises
by Tenant shall be conclusive evidence that the said premises and the building
of which the same form a part were in good and satisfactory condition at the
time such possession was so taken, except as to latent defects. All
understandings and agreements heretofore made between the parties hereto are
merged in this contract, which alone fully and completely expresses the
agreement between Owner and Tenant and any executory agreement hereafter made
shall be ineffective to change, modify, discharge or effect an abandonment of
it in whole or in part, unless such executory agreement is in writing and
signed by the party against whom enforcement of the change, modification,
discharge or abandonment is sought.
END OF TERM:
22. Upon the expiration or other termination of the term of this lease,
Tenant shall quit and surrender to Owner the demised premises, broom clean, in
good order and condition, ordinary wear and damages which Tenant is not required
to repair as provided elsewhere in this lease excepted, and Tenant shall remove
all its property from the demised premises. Tenant's obligation to observe or
perform this covenant shall survive the expiration or other termination of this
lease. If the last day of the term of this Lease or any renewal thereof, fails
on Sunday, this lease shall expire at noon on the preceding Saturday unless it
be a legal holiday in which case it shall expire at noon on the preceding
business day.
QUIET ENJOYMENT:
23. Owner covenants and agrees with Tenant that upon Tenant paying the
rent and additional rent and observing and performing all the terms, covenants
and conditions, on Tenant's part to be observed and performed. Tenant may
peaceably and quietly enjoy the premises hereby demised, subject, nevertheless,
to the terms and conditions of this lease including, but not limited to,
Article 34 hereof and to the ground leases, underlying leases and mortgages
hereinbefore mentioned.
FAILURE TO GIVE POSSESSION:
24. If Owner is unable to give possession of the demised premises on the
date of the commencement of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants or if the
demised premises are located in a building being constructed, because such
building has not been sufficiently completed to make the premises ready for
occupancy or because of the fact that a certificate of occupancy has not been
procured or if Owner has not completed any work required to be performed by
Owner, or for any other reason, Owner shall not be subject to any liability for
failure to give possession on said date and the validity of the lease shall not
be impaired under such circumstances, nor shall the same be construed in any
way to extend the term of this lease, but the rent payable hereunder shall be
abated (provided Tenant is not responsible for Owner's inability to obtain
possession or complete any work required) until after Owner shall have given
Tenant notice that Owner is able to deliver possession in the condition
required by this lease. If permission is given to Tenant to enter into the
possession of the demised premises or to occupy premises other than the demised
premises prior to the date specified as the commencement of the term of this
lease, Tenant covenants and agrees that such possession and/or occupancy shall
be deemed to be under all the terms, covenants, conditions and provisions of
this lease, except the obligation to pay the fixed annual rent set forth in page
one of this lease. The provisions of this article are intended to constitute
"an express provision to the contrary" within the meaning of Section 223-a of
the New York Real Property Law.
NO WAIVER:
25. The failure of Owner to seek redress for violation of, or to insist
upon the strict performance of any covenant or condition of this lease or of
any of the Rules or Regulations, set forth or hereafter adopted by Owner, shall
not prevent a subsequent act which would have originally constituted a violation
from having all the force and effect of an original violation. The receipt by
Owner of rent with knowledge of the breach of any covenant of this lease
shall not be deemed a waiver of such breach and no provision of this lease
shall be deemed to have been waived by Owner unless such waiver be in writing
signed by Owner. No payment by Tenant or receipt by Owner of a lesser amount
than the monthly rent herein stipulated shall be deemed to be other than on
account of the earliest stipulated rent, nor shall any endorsement or statement
of any check or any letter accompanying any check or payment as rent be
deemed an accord and satisfaction, and Owner may accept such check or payment
without prejudice to Owner's right to recover the balance of such rent or
pursue any other remedy in this lease provided. All checks tendered to Owner as
and for the rent of the demised premises shall be deemed payments for the
account of Tenant. Acceptance by Owner of rent from anyone other than Tenant
shall not be deemed to operate as an attornment to Owner by the payor of such
rent or as a consent by Owner to an assignment or subletting by Tenant of the
demised premises to such payor, or as a modification of the provisions of this
lease. No act or thing done by Owner or Owner's agents during the term hereby
demised shall be deemed an acceptance of a surrender of said premises and no
agreement to accept such surrender shall be valid unless in writing signed by
Owner. No employee of Owner of Owner's agent shall have any power to accept the
keys of said premises prior to the termination of the lease and the delivers of
keys to any such agent or employee shall not operate as a termination of the
lease or a surrender of the premises.
WAIVER OF TRIAL BY JURY:
26. It is mutually agreed by and between Owner and Tenant that the
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties hereto
against the other (except for personal injury or property damage) on any
matters whatsoever arising out of or in any way connect with this lease, the
relationship of Owner and Tenant, Tenant's use of or occupancy of said premises,
and any emergency statutory or any other statutory remedy. It is further
mutually agreed that in the event Owner commences any proceeding or action for
possession including a summary proceeding for possession of the premises, Tenant
will not interpose any counterclaim of whatever nature or description in any
such proceeding including a counterclaim under Article 4 except for
statutory mandatory counterclaims.
INABILITY TO PERFORM:
27. This Lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant
to be performed shall in no way be affected, impaired or excused because Owner
is unable to fulfill any of its obligations under this lease or to supply or is
delayed in supplying any service expressly or impliedly to be supplied or is
unable to make, or is delayed in making any repair, additions, alterations or
decorations or is unable to supply or is delayed in supplying any equipment,
fixtures or other materials if Owner is prevented or delayed from doing so by
reason of strike or labor troubles or any cause whatsoever beyond Owner's sole
control including, but not limited to government preemption or restrictions or
by reason of any rule, order or regulation of any department or subdivision
thereof of any government agency or by reason of the conditions which have been
or are affected, either directly or indirectly, by war or other emergency.
BILLS AND NOTICES:
28. Except as otherwise in this lease provided, a bill statement, notice
or communication which Owner may desire or be required to give to Tenant, shall
be deemed sufficiently given or rendered if, in writing, delivered to Tenant
personally or sent by registered or certified mail addressed to Tenant at the
building of which the demised premises form a part or at the last known
residence address or business address of Tenant or left at any of the aforesaid
premises addressed to Tenant, and the time of the rendition of such bill or
statement and of the giving of such notice or communication shall be deemed to
be the time when the same is delivered to Tenant, mailed, or left at the
premises as herein provided. Any notice by Tenant to Owner must be served by
registered or certified mail addressed to Owner at the address first hereinabove
given or at such other address as Owner shall designate by written notice.
WATER CHARGES:
29. If Tenant requires, uses or consumes water for any purpose in
addition to ordinary lavatory purposes (of which fact Tenant constitutes Owner
to be the sole judge) Owner may install a water meter and thereby measure
Tenant's water consumption for all purposes. Tenant shall pay Owner for the cost
of the meter and the cost of the installation, thereof and throughout the
duration of Tenant's occupancy Tenant shall keep said meter and installation
equipment in good working order and repair at Tenant's own cost and expense in
default of which Owner may cause such meter and equipment to be replaced or
repaired and collect the cost thereof from Tenant, as additional rent. Tenant
agrees to pay for water consumed, as shown on said meter as and when bills are
rendered, and on default in making such payment Owner may pay such charges and
collect the same from Tenant, as additional rent. Tenant covenants and agrees to
pay, as additional rent, the sewer rent, charge or any other tax, rent, levy or
charge which now or hereafter is assessed, imposed or a lien upon the demised
premises or the realty or which they are part pursuant to law, order or
regulation made or issued in connection with the use, consumption, maintenance
or supply of water, water system or sewage or sewage connection or system. If
the building or the demised premises or any part thereof is supplied with water
through a meter through which water is also supplied to other premises Tenant
shall pay to Owner, as additional rent, on the first day of each month, %
($50.00) of the total meter charges as Tenant's portion. Independently of and in
addition to any of the remedies reserved to Owner hereinabove or elsewhere in
this lease. Owner may sue for and collect any monies to be paid by Tenant or
paid by Owner for any of the reasons or purposes hereinabove set forth.
SPRINKLERS:
30. Anything elsewhere in this lease to the contrary notwithstanding, if
the New York Board of Fire Underwriters or the New York Fire Insurance Exchange
or any bureau, department or official of the federal, state or city government
recommend or require the installation of a sprinkler system or that any
changes, modifications, alterations, or additional sprinkler heads or other
equipment be made or supplied in an existing sprinkler system by reason of
Tenant's business, or the location of partitions, trade fixtures, or other
contents of the demised premises, or for any other reason, or if any such
sprinkler system installations, modifications, alterations, additional sprinkler
heads or other such equipment, become necessary to prevent the imposition of a
penalty or charge against the full allowance for a sprinkler system in the fire
insurance rate set by any said Exchange or by any fire insurance company.
Tenant shall, at Tenant's expense, promptly make such sprinkler system
installations, changes, modifications, alterations, and supply additional
sprinkler heads or other equipment as required whether the work involved shall
be structural or non-structural in nature. Tenant shall pay to Owner as
additional rent the sum of $50.00, on the first day of each month during the
term of this lease, as Tenant's portion of the contract price for sprinkler
supervisory service.
ELEVATORS, HEAT, CLEANING:
31. As long as Tenant is not in default under any of the covenants of
this lease beyond the applicable grace period provided in this lease for the
curing of such defaults, Owner shall (a) provide necessary passenger elevator
facilities on business days from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m.
to 1 p.m. (b) if freight elevator service is provided, same shall be provided
only on regular business days Monday through Friday inclusive, and on those
days only between the hours of 9 a.m. and 12 noon and between 1 p.m. and 5 p.m.,
(c) furnish heat, water and other services supplied by Owner to the demised
premises, when and as required by law, on business days from 8 a.m. to 6 p.m.
and on Saturdays from 8
Page 4 of 14
<PAGE> 5
a.m. to 1. p.m.; (d) clean the public halls and public portions of the building
which are used on common by all tenants. Tenant shall, at Tenant's expense keep
the demised premises, including the windows, clean and in order, to the
reasonable satisfaction of Owner, and for that purpose shall employ the person
or persons, or corporation approved by Owner. tenant shall pay to Owner the
cost of removal of any of Tenant's refuse and rubbish from the building. Bills
for the same shall be rendered by Owner to Tenant at such time as Owner may
elect and shall be due and payable hereunder, and the amount of such bills
shall be deemed to be, and be paid as, additional rent. Tenant shall, however,
have the option of independently contracting for the removal of such rubbish
and refuse in the event that Tenant does not with to have same done by
employees of Owner. Under such circumstances, however, the removal of such
refuse and rubbish by others shall be subject to such rules and regulations as
in the judgment of Owner are necessary for the proper operation of the
building. Owner reserves the right to stop service of the heating, elevator,
plumbing and electric systems, when necessary, by reason of accident, or
emergency, or for repairs, alterations, replacements or improvements, in the
judgment of Owner desirable or necessary to be made, until said repairs,
alterations, replacements or improvements shall have been completed. If the
building of which the demised premises are a part supplies manually operated
elevators service, Owner may proceed diligently with alterations necessary to
substitute automatic control elevator service without in any way affecting the
obligations of Tenant hereunder.
SECURITY:
32. Tenant has deposited with Owner the sum of $68,664.16 as security for
the faithful performance and observance by Tenant of the terms, provisions and
conditions of this lease; it is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this lease,
including, but not limited to, the payment of rent and additional rent, Owner
may use, apply or retain the whole or any part of the security so deposited to
the extent required for the payment of any rent and additional rent or any
other sum as to which Tenant is in default or for any sum which Owner may
expend or may be required to expend by reason of Tenant's default in respect of
any of the terms, covenants and conditions of this lease, including but not
limited to, any damages or deficiencies in the reletting of the premises,
whether such damages or deficiency accrued before or after summary proceeding
or other re-entry by Owner. If the event that Tenant shall fully and faithfully
comply with all of the terms, provisions, covenants and conditions of this
lease, the security shall be returned to Tenant after the date fixed as the end
of the Lease and after delivery of entire possession of the demised premises to
Owner. In the event of a sale of the land and building or leasing of the
building, of which the demised premises form a part, Owner shall have the right
to transfer the security to the vendee or lessee and Owner shall thereupon be
released by Tenant from all liability for the return of such security, and
Tenant agrees to look to the new Owner solely for the return of said security,
and it is agreed that the provisions hereof shall apply to every transfer or
assignment made of the security to a new Owner. Tenant further covenants that
it will not assign or encumber or attempt to assign or encumber the monies
deposited herein as security and that neither Owner nor its successors or
assigns shall be bound by any such assignment, encumbrance, attempted
assignment or attempted encumbrance.
CAPTIONS:
33. The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this lease nor
the intent of any provisions thereof.
DEFINITIONS:
34. The term "Owner" as used in this lease means only the owner of the fee
or of the leasehold of the building, or the mortgagee in possession, for the
time being of the land and building (or the owner of a lease of the building or
of the land and building) of which the demised premises for a part, so that in
the event of any sale or sales of said land and building or of said lease, or
in the event of a lease of said building, or of the land and building, the said
Owner shall be and hereby is entirely freed and relieved of all covenants and
obligations of Owner hereunder, and it shall be deemed and construed without
further agreement between the parties or their successors in interest, or
between the parties and the purchaser, at any such sale or the said lessee of
the building or of the land and building, that the purchaser or the lessee of
the building has assumed and agreed to carry our any and all covenants and
obligations of Owner hereunder. The words "re-enter" and "re-entry" as used in
this lease are not restricted to their technical legal meaning. The term "rent"
includes the annual rental rate whether so expressed or expressed in monthly
installments, and "additional rent." "Additional rent" means all sums which
shall be due to Owner from Tenant under this lease, in addition to the annual
rental rate. The term "business days" as used in this lease, shall exclude
Saturdays, Sundays and all days observed by the State or Federal Government as
legal holidays and those designated as holidays by the applicable building
service union employees service contract or by the applicable Operating
Engineers contract with respect to HVAC service. Wherever it is expressly
provided in this lease that consent shall not be unreasonably withheld, such
consent shall not be unreasonably delayed.
ADJACENT EXCAVATION - SHORING:
35 If an excavation shall be made upon land adjacent to the demised
premises, or shall be authorized to be made, Tenant shall afford to the person
causing or authorized to cause such excavation, license to enter upon the
demised premises for the purpose of doing such work as said person shall deem
necessary to preserve the wall or the building of which demised premises for a
part from injury or damage and to support the same by proper foundations
without any claim for damages or indemnity against Owner, or diminution or
abatement of rent.
RULES AND REGULATIONS:
36. Tenant and Tenant's servants, employees, agents, visitors, and
licensees shall observe faithfully, and comply strictly with, the Rules and
Regulations annexed hereto and such other and further reasonable Rules and
Regulations as Owner or Owner's agents may from time to time adopt. Notice of
additional rules or regulations shall be given in such manner as Owner may
elect In case Tenant disputes the reasonableness of any additional Rule or
Regulation hereafter made or adopted by Owner or Owner's agents, the parties
hereto agree to submit the question of the reasonableness of such Rule or
Regulation for decision to the New York office of the American Arbitration
Association, whose determination shall be final and conclusive upon the parties
hereto. The right to dispute the reasonableness of any additional Rule or
Regulation upon Tenant's part shall be deemed waived unless the same shall be
asserted by service of a notice, in writing upon Owner within fifteen (15) days
after the giving of notice thereof. Nothing in this lease contained shall be
construed to impose upon Owner any duty or obligation to enforce the Rules and
Regulations or terms, covenants or conditions in any other lease, as against
any other tenant and Owner shall not be liable to Tenant for violation of the
same by any other tenant, its servants, employees, agents, visitors or
licensees.
GLASS:
37. Owner shall replace, at the expense of the Tenant, any and all plate
and other glass damaged or broken from any cause whatsoever in and about the
demised premises. Owner may insure, and keep insured, at Tenant's expense, all
plate and other glass in the demised premises for and in the nema of Owner.
Bills for the premiums therefor shall be rendered by Owner to Tenant at such
times as Owner may elect, and shall be due from, and payable by, Tenant when
rendered, and the amount thereof shall be deemed to be, and be paid, as
additional rent.
ESTOPPEL CERTIFICATE:
38. Tenant, at any time,and from time to time, upon at least 10 days'
prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or
to any other person, firm or corporation specified by Owner, a statement
certifying that this Lease is unmodified in full force and effect (or, if there
have been modifications, that the same is in full force and effect as modified
and stating the modifications), stating the dates to which the rent and
additional rent have been paid, and stating whether or not there exists any
default by Owner under this Lease, and, if so, specifying each such default.
DIRECTORY BOARD LISTING:
39. If, at the request of and as accommodation to Tenant, Owner shall place
upon the directory board in the lobby of the building, one or more names of
persons other than Tenant, such directory board listing shall not be construed
as the consent by Owner to an assignment or subletting by Tenant to such person
or persons.
SUCCESSORS AND ASSIGNS:
40. The covenants, conditions and agreements contained in this lease shall
bind and inure to the benefit of Owner ant Tenant and their respective heirs,
distributees, executors, administrators, successors, and except as otherwise
provided in this lease, their assigns. Tenant shall look only to Owner's
estate and interest in the land and building for the satisfaction of Tenant's
remedies for the collection of a judgement (or other judicial process) against
Owner in the event of any default by Owner hereunder, and no other property or
assets of such Owner (or any partner, member, officer or director thereof,
disclosed or undisclosed), shall be subject to levy, execution or other
enforcement procedure for the satisfaction of Tenant's remedies under or with
respect to this lease, the relationship of Owner and Tenant hereunder, or
Tenant's use and occupancy of the demised premises.
- ----------------
Space to be filled in or deleted.
AS PER RIDER ATTACHED AND MADE PART OF LEASE DATED: February 7th, 2000
IN WITNESS WHEREOF, Owner and Tenant have respectively signed and sealed this
lease as of the say and year first above written.
19TH STREET ASSOCIATES
Witness for Owner: BY: /s/ [SIGNATURE ILLEGIBLE] L.S.
-----------------------------
- ----------------------------- -----------------------------
LAUNCH MEDIA, INC.
Witness for Owner: BY: /s/ JEFF MICKEAL L.S.
-----------------------------
Jeff Mickeal, C.F.O.
- ----------------------------- -----------------------------
Page 5 of 14
<PAGE> 6
ACKNOWLEDGEMENTS
CORPORATE TENANT
STATE OF NEW YORK, ss.:
COUNTY OF
On this day of , 19 , before me personally came
to me known, who being by me duly sworn, did depose and say
that he resides in that he is the of
the corporation described in and which executed the foregoing instrument, as
TENANT; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by order of the
Board of Directors of said corporation, and that he signed his name thereto by
like order.
INDIVIDUAL TENANT
STATE OF NEW YORK, ss.:
COUNTY OF
On this day of , 19 , before me personally came
to be known and known to me to be the individual described in
and who, as TENANT, executed the foregoing instrument and acknowledged to me
that he executed the same.
IMPORTANT -- PLEASE READ
RULES AND REGULATIONS ATTACHED TO AND
MADE A PART OF THIS LEASE IN
ACCORDANCE WITH ARTICLE 36.
1. The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or encumbered
by any Tenant or used for any purpose other than for ingress or egress from the
demised premises and for delivery of merchandise and equipment in a prompt and
efficient manner using elevators and passageways designated for such delivery by
Owner. There shall not be used in any space, or in the public hall of the
building, either by any Tenant or by jobbers or others in the delivery or
receipt of merchandise, any hand trucks, except those equipped with rubber
tires and sideguards. If said premises are situated on the ground floor of the
building, Tenant thereof shall further, at Tenant's expense, keep the sidewalk
and curb in front of said premises clean and free from ice, snow, dirt and
rubbish.
2. The water and wash closets and plumbing fixtures shall not be used
for any purposes other than those for which they were designed or constructed
and no sweepings, rubbish, rags, acids or other substances shall be deposited
therein, and the expense of any breakage, stoppage, or damage resulting from
the violation of this rule shall be borne by the Tenant who or whose clerks,
agents, employees or visitors, shall have caused it.
3. No carpet, rug or other articles shall be hung or shaken out of any
window of the building, and no Tenant shall sweep or throw or permit to be
swept or thrown from the demised premises any dirt or other substances into any
of the corridors or halls, elevators, or out of the doors or windows or
stairways of the building and Tenant shall not use, keep or permit to be used or
kept any foul or noxious gas or substance in the demised premises, or permit or
suffer the demised premises to be occupied or used in a manner offensive or
objectionable to Owner or other occupants of the building by reason of noise,
odors, and/or vibrations, or interfere in any way with other Tenants or those
having business therein, nor shall any bicycles, vehicles, animals, fish or
birds be kept in or about the building. Smoking or carrying lighted cigars or
cigarettes in the elevators of the building is prohibited.
4. No awnings or other projections shall be attached to the outside
walls of the building without the prior written consent of Owner.
5. No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any Tenant on any part of the outside of the
demised premises or the building or on the inside of the demised premises if
the same is visible from the outside of the premises without the prior written
consent of Owner, except that the name of Tenant may appear on the entrance
door of the premises. In the event of the violation of the foregoing by any
Tenant, Owner may remove the same without any liability and may charge the
expense incurred by such removal to Tenant or Tenants violating this rule.
Interior signs on doors and directory tablet shall be inscribed, painted or
affixed for each Tenant by Owner at the expense of such Tenant, and shall be of
a size, color and style acceptable to Owner.
6. No Tenant shall mark, paint, drill into, or in any way deface any
part of the demised premises or the building of which they form a part. No
boring, cutting or stringing of wires shall be permitted, except with the prior
written consent of Owner, and as Owner may direct. No Tenant shall lay
linoleum, or other similar floor covering, so that the same shall come in
direct contact with the floor of the demised premises, and, if linoleum or
other similar floor covering is desired to be used an interlining of builder's
deadening felt shall be first affixed to the floor, by a paste or other
material, soluble in water, the use of cement or other similar adhesive being
expressly prohibited.
7. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any Tenant, nor shall any changes be made in existing
locks or mechanism thereof. Each Tenant must, upon the termination of his
Tenancy, restore to Owner all keys of stores, offices and toilet rooms, either
furnished to, or otherwise procured by, such Tenant, and in the event of the
loss of any keys so furnished, such Tenant shall pay to Owner the cost thereof.
8. Freight, furniture, business equipment, merchandise and bulky matter
of any description shall be delivered to and removed from the premises only on
the freight elevators and through the service entrances and corridors and only
during hours and in a manner approved by Owner. Owner reserves the right to
inspect all freight to be brought into the building and to exclude from the
building all freight which violates any of these Rules and Regulations of the
lease of which these Rules and Regulations are a part.
9. No Tenant shall obtain for use upon the demised premises ice,
drinking water, towel and other similar services, or accept barbering or
bootblacking services in the demised premises, except from persons authorized
by Owner, and at hours and under regulations fixed by Owner. Canvassing,
soliciting and peddling in the building is prohibited and each Tenant shall
cooperate to prevent the same.
10. Owner reserves the right to exclude from the building all persons who
do not present a pass to the building signed by Owner. Owner will furnish passes
to persons for whom any Tenant requests same in writing. Each Tenant shall be
responsible for all persons for whom he requests such pass and shall be liable
to Owner for all acts of such persons. Notwithstanding the foregoing, Owner
shall not be required to allow Tenant or any persons to enter or remain in the
building, except on business days from 8:00 a.m. to 6:00 p.m. and on Saturdays
from 8 a.m. to 1 p.m. Tenant shall not have a claim against Owner by reason of
Owner excluding from the building any person who does not present such pass.
11. Owner shall have the right to prohibit any advertising by any Tenant
which in Owner's opinion, tends to impair the reputation of the building or its
desirability as a loft building, and upon written notice from Owner, Tenant
shall refrain from or discontinue such advertising.
12. Tenant shall not bring or permit to be brought or kept in or on the
demised premises, any inflammable, combustible, or explosive, or hazardous
fluid, material, chemical or substance, or cause or permit any odors of cooking
or other processes, or any unusual or other objectionable odors to permeate in
or emanate from the demised premises.
13. Tenant shall not use the demised premises in a manner which disturbs
or interferes with other Tenants in the beneficial use of their premises.
Address
Premises
- --------------------------------------------------------------------------------
TO
- --------------------------------------------------------------------------------
STANDARD FORM OF
[SEAL] LOFT [SEAL]
LEASE
The Real Estate Board of New York, Inc.
(c) Copyright 1994. All rights Reserved.
Reproduction in whole or in part prohibited.
- --------------------------------------------------------------------------------
Dated 19
Rent Per Year
Rent Per Month
Term
From
To
Drawn by ___________________________________
Checked by _________________________________
Entered by _________________________________
Approved by ________________________________
- --------------------------------------------------------------------------------
Page 6 of 14
<PAGE> 7
AMENDMENTS TO LEASE DATED: FEBRUARY 7, 2000
BETWEEN
19TH STREET ASSOCIATES
AND
LAUNCH MEDIA, INC.
AMENDMENTS TO PARAGRAPH #3 ARE AS FOLLOWS:
1. Landlord shall not unreasonably withhold or delay consent to
Tenant to perform alterations in the demised premises
2. Tenant shall not be required to restore demised premises at the
end of term
AMENDMENTS TO PARAGRAPH #4 ARE AS FOLLOWS:
1. Owner is responsible to maintain and repair public portions of
the building including the roof and to maintain heating system
in good repair
AMENDMENTS TO PARAGRAPH #6 ARE AS FOLLOWS:
1. Tenant shall not be required to make any structural changes to
the demised premises as a result of other Tenant improvements,
which are made in the building or for any reason other than the
Tenant's specific use and alteration
AMENDMENTS TO PARAGRAPH #7 ARE AS FOLLOWS:
1. Owner shall request and make good faith efforts to obtain a
non-disturbance agreement from the mortgagee
AMENDMENTS TO PARAGRAPH #9 ARE AS FOLLOWS:
1. Landlord shall carry an all risk policy of casualty insurance in
the amount of full replacement cost of the building
AMENDMENTS TO PARAGRAPH #11 ARE AS FOLLOWS:
1. Landlord's consent to any assignment shall not be unreasonably
withheld or delayed. The Tenant has the right to assign or
sublease upon any merger or consolidation or to any affiliated
corporation. Landlord has the right to reclaim the space within
30 days of Tenant notice to sublease to any non-merger,
non-consolidated or non-affiliated entity.
AMENDMENTS TO PARAGRAPH #17 ARE AS FOLLOWS:
1. Owner shall provide notice of at least five- (5) business days
with respect to any rent default
Page 7 of 14
<PAGE> 8
AMENDMENTS TO PARAGRAPH #20 ARE AS FOLLOWS:
1. Any building alterations made by Owner shall be done in a manner
which minimizes interference with Tenant's business
AMENDMENTS TO PARAGRAPH #31 ARE AS FOLLOWS:
1. Tenant shall have 24-hour, 7-day a week access to the building
and to the demised premises
2. Tenant shall have 24-hour, 7-day a week access to the automatic
passenger elevator
AMENDMENTS TO PARAGRAPH #32 ARE AS FOLLOWS:
1. Tenant shall receive interest on security deposit paid annually
at commercial bank savings account rates minus one (1)%.
Page 8 of 14
<PAGE> 9
February 7th, 2000
LAUNCH MEDIA, INC.
1370 AVENUE OF THE AMERICAS
NEW YORK, NY 10109
Re: Premises - 121 West 19th Street
Entire 2nd. Floor
New York, NY 10011
GENTLEMEN:
CONFIRMING OUR UNDERSTANDING WITH REFERENCE TO THE LEASE THIS DAY EXECUTED BY
YOU (THE "TENANT") WITH US (THE "OWNER"), FOR SPACE CONSISTING OF THE ENTIRE
SECOND (2ND) FLOOR IN THE BUILDING KNOWN AS 121 WEST 19TH STREET, NEW YORK, NY,
10018, WE HEREBY AGREE AT OUR OWN COST AND EXPENSE TO DO THE FOLLOWING WORK
("OWNER'S WORK") IN ACCORDANCE WITH ALL APPLICABLE LAWS AND BUILDING STANDARDS:
1. PAINT ENTIRE PREMISES;
2. DEMOLISH ENTIRE PREMISES;
3. INSTALL NEW FULL HEIGHT WINDOWS;
4. REFINISH FLOOR WHERE REQUIRED; LEAVE CONCRETE AREAS;
5. SUPPLY ELECTRICITY AS FOLLOWS: 600 amps, 3 PHASE WILL BE DELIVERED TO
PREMISES. ADDITIONAL 200 amps WILL BE AVAILABLE IN BUILDING OR IN 111
WEST 19TH STREET BASEMENT;
6. SUPPLY NEW RADIATORS.
7. SUPPLY NEW BATHROOMS IN COMPLIANT WITH ADA
IT IS ALSO UNDERSTOOD THE AFORESAID WORK WILL BE COMMENCED PROMPTLY AFTER
EXECUTION OF SAID LEASE AND VACATING OF THE PRESENT TENANT FROM THE DEMISED
PREMISES. YOU DO HEREBY GRANT US AN IRREVOCABLE LICENSE TO ENTER THE PREMISES
FOR THE PURPOSE OF DOING THE AFORESAID WORK. IT IS ALSO UNDERSTOOD YOU ARE TO
RECEIVE NO ABATEMENT OR DIMINUTION OF RENT, NOR ARE YOU TO MAKE ANY CLAIM FOR
INJURY TO PERSON, OR DAMAGE TO PROPERTY, FOR INTERRUPTION OR LOSS OF BUSINESS,
OR DISTURBANCE IN POSSESSION RESULTING DIRECTLY OR INDIRECTLY FROM THE DOING OF
THE AFORESAID WORK BY US. IT IS ALSO UNDERSTOOD THAT THE DOING OF SAID WORK IS
SUBJECT TO STRIKES AND/OR LOCKOUTS AND ALL OTHER CAUSES BEYOND THE OWNER'S
CONTROL.
VERY TRULY YOURS,
19th STREET ASSOCIATES
BY: /s/ [SIGNATURE ILLEGIBLE] L.S.
-------------------------
ACCEPTED & AGREED:
LAUNCH MEDIA
BY: /s/ JM MICKEAL L.S.
--------------------------
JEFF MICKEAL
C.F.O.
Page 9 of 14
<PAGE> 10
RIDER ATTACHED AND MADE PART OF LEASE DATED: FEBRUARY 7TH, 2000
- BETWEEN -
19th STREET ASSOCIATES
OWNER
- AND -
LAUNCH MEDIA, INC.
TENANT
FOR SPACE CONSISTING OF THE ENTIRE SECOND (2ND) FLOOR in THE BUILDING KNOWN AS
121 WEST 19TH STREET,
NEW YORK, NY 10011
#41. TERM & COMMENCEMENT OF LEASE: Owner hereby leases to Tenant and Tenant
hereby hires from Owner space consisting of the entire second (2nd) floor (the
"Demised Premises") in the Building known as 121 West 19th Street in the Borough
of Manhattan, City of New York (the "Building"), for the term of approximately
eight (8) years and four (4) months or until such term shall sooner cease and
expire as hereinafter provided) to commence as provided in the Work Letter
hereof and ending on the last day of the calendar month eight (8) years and four
(4) months following the commencement date (the "Expiration Date"), both dates
inclusive, at annual rental rates, as provided in Article #42 (the "Fixed
Rent"), which Tenant agrees to pay in lawful money of the United States which
shall be legal tender in payment of all debts and dues, public and private, at
the time of payment, in equal monthly installments in advance on the first day
of each month during said term, at the office of Owner or such other place as
Owner may designate, without any set off or deduction whatsoever.
For the purpose of this Article, Owner's work shall be deemed to be
substantially completed when all major construction is completed although minor
items are not completed, including, but not limited to touch-up painting or any
other uncompleted construction or improvement which does not unreasonably
interfere with Tenant's ability to carry on its business in the Demised
Premises. Tenant shall periodically inspect Owner's work and make any objections
thereto, if called for, without delay, so as to mitigate changes, delays and
costs.
The term of this Lease shall commence on a date fixed by Owner in a
written notice to Tenant, which notice shall (a) state that on or prior to that
date set forth in said notice, Owner's work shall be deemed substantially
completed and (b) notice which shall not be given earlier than five (5) days
prior to the substantial completion date.
#42. RENTAL SCHEDULE: Tenant shall pay base annual rental to Tenant as follows:
First (4) months - Free Rent;
Year 1 --- $324,000.00 per annum ($27,000.00 per mo.);
Year 2 --- $333,720.00 per annum ($27,810.00 per mo.);
Year 3 --- $343,731.00 per annum ($28,674.25 per mo.);
Year 4 --- $354,043.00 per annum ($29,503.58 per mo.);
Year 5 --- $377,024.00 per annum ($31,418.67 per mo.);
Year 6 --- $388,335.00 per annum ($32,361.25 per mo.);
Year 7 --- $399,985.00 per annum ($33,332.08 per mo.);
Year 8 --- $411,985.00 per annum ($34,332.08 per mo.).
(plus additional rental hereafter provided)
#43. REAL ESTATE TAX: The term Real Estate Taxes shall mean all the Real Estate
Taxes and assessments, special or otherwise, levied, assessed or imposed by the
federal, state or local governments against or upon the building of which the
Demised Premises form a part or the land upon which it is erected, and any
improvements or additions to the land or building whether existing now, or in
the future. If due to a future change in the method of taxation, any franchise,
income, profit or other tax, or other payment, shall be levied against Owner in
whole or in part in substitution for or in lieu of any tax which
Page 10 of 14
<PAGE> 11
would otherwise constitute a Real Estate Tax, such franchise, income, profit, or
other tax or payment, shall be deemed to be Real Estate Taxes for purposes
hereof.
In the event that the Real Estate Taxes levied on the property of which
the demised premises are a part shall for any year after the fiscal year
2000/2001 be in excess of the Real Estate Taxes levied against the said property
for the fiscal year 2000/2001 hereafter known as the "base tax year", the Tenant
shall pay to the Owner as additional rent an amount equal to 10% ("Tenant's
Share") of such excess, if any. In addition, Tenant shall pay for each and every
tax year, Tenant's Share of the business improvement district or special
assessment taxes levied against Owner for the district in which the building is
located. The submission of a duplicate original tax bill of the Owner shall be
deemed conclusive evidence of the amount of the taxes paid by the Owner for each
year and shall be the basis for the computation of any excess so to be paid by
the Tenant. Such excess in the case of Real Estate Taxes, and Tenant's share of
the business improvement district taxes shall each be payable within ten (10)
days of receipt of the bill. The obligation to make any payments of additional
rent pursuant to this Article shall survive the expiration or other termination
of this Lease.
#44. FIXTURES: All hanging fluorescent light fixtures and any other light
fixtures installed by the Tenant or Owner shall become the property of the Owner
and shall remain within the demised premises at the termination of this Lease
unless the Owner grants specific permission to the Tenant to remove said light
fixtures.
Any and all central air-conditioning unit(s) including duct work and window
air-conditioning unit(s) installed by the Tenant or the Owner, shall become the
property of the Owner and may not be removed unless the Owner grants specific
permission to the Tenant to remove said central air-conditioning unit(s) or
window air conditioning unit(s).
#45. INSURANCE: Tenant at its own cost and expense, shall maintain at all times
from the date that it shall first enter the premises for the mutual benefit of
Owner and Tenant comprehensive public liability insurance against claims for
personal injury or death or property damage occurring in or about the Demised
Premises or resulting directly or indirectly from any change, alteration,
construction, improvement or repair, or any installation thereat made by or on
behalf of the Tenant, with $1,000,000 combined single limit. The insurance
required hereunder shall be effected valid and enforceable policies issued by
insurance companies of recognized responsibility, authorized and licensed to do
business in the State of New York.
Prior to Tenant's entry into the Demised Premises and at hereafter no
less than thirty (30) days prior to the expiration date of any expiring policy,
originals of each such policy or renewal policy, as the case may be, shall be
delivered by Tenant to Owner with proof of payment of the respective premiums
therefore. Each such policy or renewal policy shall contain a requirement that
the same may not be cancelled without giving written notice to Owner at least
fifteen (15) days prior to the proposed date of cancellation.
In the event Tenant fails to furnish any such policy on the date
therefore, Owner may obtain the same, all at Tenant's expense, and the cost
thereof shall be deemed additional rent and shall be paid within ten (10) days
after the rendition of a bill therefore.
#46. BROKER: Tenant warrants and represents to Owner that it has had no dealings
with any broker or agent except Kaufman Management Company, LLC and the broker
listed below, if any, in connection with this Lease and covenants and agrees to
hold harmless and indemnify Owner and Kaufman Management Company, LLC from and
against any and all costs and expenses or liability for any compensation,
commissions, fees and charges claimed by any other broker or an agent with
respect to this Lease or the negotiation thereof. The obligation of Tenant
contained in this Article shall survive the expiration or earlier termination of
this Lease.
Broker: Legacy Real Estate/Kenneth Fishel
#47. CONCESSION: Tenant shall be granted a rent abatement period for the first
four (4) months of this Lease. However, Tenant shall be responsible for the
payment of additional rent and all other charges including electricity
commencing immediately upon Tenant having access to the demised premises.
Payment of rent commences upon the fifth (5th) month of Lease.
Page 11 of 14
<PAGE> 12
#48. HOLDOVER: If the Demised Premises are not surrendered and vacated as and at
the time required by this lease whether it be a natural expiration or an
expiration due to default (time being of the essence), Tenant shall be liable to
Owner for (a) all losses, costs, liabilities and damages which Owner may incur
by reason thereof, including without limitation, reasonable attorneys fees, and
Tenant shall indemnify, defend and hold harmless Owner against all claims made
by any succeeding tenants against Owner or otherwise arising out of or resulting
from the failure of tenant to timely surrender and vacate the Demised Premises
in accordance with the provisions of this Lease, and (b) per them use and
occupancy with respect to the Demised Premises equal to two times the fixed rent
and additional rent payable under this Lease for the last year of the term of
this Lease (which amount Owner and Tenant presently agree is the minimum to
which Owner would be entitled, is presently contemplated by them as being fair
and reasonable under such circumstances and is not a penalty). In no event,
however, shall this Article be construed as permitting Tenant to hold over in
possession of the Demised Premises after the expiration or termination of the
term of this Lease.
#49. RIGHT OF FIRST REFUSAL: Owner agrees, subject to any pre-existing options
which have been granted to any other Tenant and provided Tenant is not then in
default under this Lease, before Owner shall initially lease space consisting of
Store, basement and mezzanine and the third (3rd) floor located at 121 West 19th
Street (the "Offered Space"), Owner shall first send a notice ("Owner's Notice")
to Tenant, offering to lease the Offered Space to Tenant upon the rental rates
and such other terms as Owner shall wish to include ("Offered Term").
Tenant shall have the right, exercisable only by written notice received
by Owner within five (5) days after the date Owner shall have given Owner's
Notice, to notify Owner that Tenant accepts the offer contained in Owner's
Notice and is willing to execute formal lease documents within ten (10) days
thereafter, upon the Offered Terms and otherwise upon all of the same provisions
as are contained in this Lease (except there shall be no broker). In the event
Tenant shall lease the Offered Space, Tenant shall and does hereby agree to,
indemnify and hold harmless Owner of and from all claims and demands for
commission or other compensation made by any real estate broker, including
without limitation the broker named in the lease, in connection with such
leasing, but excluding any exclusive Building renting agent.
#50. EXECUTION & DELIVERY: The submission of this Lease to Tenant shall not be
construed as an offer, nor shall Tenant have any rights with respect thereto
unless and until Owner shall execute a copy of this Lease and deliver the same
to Tenant. Until such execution and delivery, any action taken or expense
incurred by Tenant shall be at its sole risk and account.
19TH STREET, ASSOCIATES
BY: /s/ [SIGNATURE ILLEGIBLE] L.S.
--------------------------
LAUNCH MEDIA, INC.
BY: /s/ JEFF MICKEAL L.S.
---------------------------------
JEFF MICKEAL
C.F.O.
Page 12 of 14
<PAGE> 13
RIDER TO LEASE DATED FEBRUARY 7TH, 2000 BETWEEN
LAUNCH MEDIA, INC. AS TENANT AND
19TH STREET ASSOCIATES AS LANDLORD,
FOR SPACE CONSISTING OF THE ENTIRE SECOND (2ND) FLOOR IN THE BUILDING KNOWN AS
121 WEST 19TH STREET, NEW YORK, NY 10018
#53. The Tenant agrees to purchase from Consolidated Electric Meter Co., Inc.
hereinafter referred to as the Meter Company supplying electric current to the
building, all electric current consumed, used or to be used in the demised
premises, and all bulbs, lamps or electric fixtures and to pay for the
installation thereof. The amount to be paid by the Tenant for current consumed
shall be determined by the meter or meters on the premises, or to be installed
and billed according to each meter. Bills for current consumed shall be rendered
by the meter company to the Tenant at such times as the Meter Company may elect.
The Meter Company shall have the right, in the event of any non-payment by the
Tenant of such bill within three (3) days after rendition, to discontinue and
cut off the use of electric current to the Tenant without further notice and
without releasing the Tenant from any liability under this lease, and without
the Landlord or said Meter Company incurring any liability for any damage caused
by such discontinuance of service. The Tenant further agrees, on demand by the
Meter Company, to sign an application for electric service and to place with the
Meter Company, a cash deposit sufficient to secure a two (2) month payment for
the peak current consumed by the Tenant in the demised premises, as estimated by
the Meter Company. Tenant agrees to pay for all electric current consumed, at a
rate specified as the Tenant's base rate as of the date of this lease, as
designed and established by the Meter Company supplying electric current to the
building. If any increased utility rate, component of the utility rate,
component of the utility bill, charge or cost, is imposed on the building at any
time from any source after the date of this lease, such increase or increases
shall be charged to and paid by the Tenant to the Meter Company at a sum equal
to the same percentage of increase as received by the building and said same
percentage of increase shall be charged to the Tenant over and above the
Tenant's base rate in effect as of the date of such increase provided such
increase, if any, results in a higher yield to the Meter Company. The Tenant
also agrees to pay its proportionate share of the building's monthly public
light and power electric consumption and usage as determined by the Meter
Company based upon the building's monthly utility bill as received from
Consolidated Edison Company of New York, Inc., its successors or any other
company supplying electrical current to the building, and said proportionate
electrical consumption and usage shall be added to the Tenant's monthly bill.
If, in the opinion of the Meter Company, the Tenant's installation overloads any
riser or risers, and/or switch or switches, and/or meter or meters in the
building of which the demised premises are a part, the Tenant will at the
Tenant's own expense, provide, install and maintain any riser or risers, and/or
any or all switch and/or switches or meter or meters that may be necessary, but
no riser or risers, and/or switch or switches or meter and/or meters will be
installed without the written permission of the Meter Company. All meters to be
installed will be purchased from the Meter Company and all risers, switches and
meters so installed shall be, become and remain the property of the building but
the building may, at its option, demand of the Tenant and the Tenant shall, upon
such demand remove all such meters, switches or related equipment at Tenant's
own cost and expense. Any tax or charge now in effect or hereinafter imposed
upon the receipts of the Meter Company from the sale or resale of electrical
energy to the Tenant by any Municipal, State or Federal agency shall be passed
on to the Tenant and included in the bill and paid by the Tenant to the Meter
Company. In the event that permission is granted by the Meter Company for any
alternating current installations, the Tenant will, at its own expense, furnish
and install all equipment, risers, service wiring, switches and meters that may
be necessary for such installation and will at its own cost and expense maintain
and keep in good repair all such riser, risers, wiring and/or switch or
switches, and/or meter or meters. The Meter Company and/or the Landlord shall
not in any way be liable or responsible to the Tenant for any loss or damage or
expense which Tenant may sustain or incur if either the quantity, quality or
character of electric service is changed, is not available or suitable for
Tenant's requirements. In the event any legislature, order of the Public Service
Commission, any judicial or governmental body enacts any law, ruling or
regulation to effect the service classification, rate or charge under which the
Tenant now purchases electric current from the Meter Company, then and in such
event, Tenant will pay, in addition to such newly promulgated rate or change,
such additional or further payments to the Meter Company for the rental, use
maintenance and amortization of the building electrical distribution system in
an amount as, together with such newly promulgated rates or charges shall equal
the rates or charges in effect prior to the rates or charges as set forth by any
legislature, order of the Public Service Commission or any judicial or
governmental body after date hereof. In the event any legislature, order of the
Public Service Commission, or any judicial or governmental body, or any
executive order or decree from any governmental body after the date hereof
establishes, enacts, orders or decrees any wage and price controls of any kind,
establishing, limiting, freezing or reducing the rates charged by the public
utility company supplying electric current to the building containing the
demised premises, then the Meter Company, at its option, may increase its
charges from and after the effective date of said order or decree, by the same
percentage of increase as the United States Consumer Price Index for Urban
Consumers prepared by the United States Government, Department of Labor, Bureau
of Labor Statistics, or successor thereto is increased over and above the index
in effect on the effective date of such order or decree, such increase(s) to be
billed to tenant monthly or for any greater period not exceeding every six
months, but in no event shall a decrease in said Consumer Price Index reduce the
rates charged by the Meter Company below the rate in effect at the time of such
order or decree.
In the event the sale of the electric current in the building containing the
demised premises is hereafter prohibited and/or regulated by any law hereinafter
enacted, or by any order or ruling of the Public Service Commission of the State
of New York, or by any judicial decision of any appropriate court, then the
Meter Company, by reason of such prohibition, and/or regulation and/or for any
other reason whatsoever, may, at its option and in its sole and absolute
discretion, elect to terminate the practice of submetering in the building
containing the demised premises; and upon such election, the Tenant will, upon
notice from the Meter Company, apply within five (5) days thereafter to the
appropriate Public Service Corporation servicing the building containing the
demised premises for electric service, and comply with all the rules and
regulations of such Public Service Corporation, and all costs associated with
and pertaining thereto, and the Meter Company shall be relieved of any further
obligation to furnish electric current to the Tenant pursuant to this rider. The
Meter Company may, however, if it so elects, furnish unmetered current to the
Tenant, and the Tenant shall pay to the Meter Company on the first day of the
month next following such furnishing of unmetered current to be pro rated to the
first of the month and monthly thereafter during the term of this lease, so long
as unmetered electric current is furnished to the Tenant, a sum equal to
one-twelfth of the invoices billed to the Tenant for all electric current
consumed in the demised premises for the twelve month period directly preceding
the month in which the furnishing of unmetered current to the Tenant is
commenced by the Meter Company and/or as estimated at any time by the Meter
Company as hereinabove and below provided. The Tenant also agrees to pay its
proportionate share of the building's monthly public light and power electric
consumption and usage as determined by the Meter Company based upon the
building's monthly utility bill as received from Consolidated Edison Company of
New York, Inc., its successor or any other company supplying electrical current
to the building and said proportionate electrical consumption and usage shall be
added to the Tenant's monthly bill. In the event the Meter Company supplies
unmetered electric current to the Tenant, any and all applications and security
already on deposit with the Meter Company from the Tenant, to secure payment for
current consumed, shall be held by the Meter Company to secure payment of
Tenant's monthly charge for the supply of unmetered current to the Tenant by the
Meter Company plus additions thereto, including new applications, from tenants
receiving unmetered electric current in the demised premises, as may be demanded
by the Meter Company to secure two month's payment of Tenant's monthly charge as
estimated by the Meter Company. The Meter Company shall have the right, in the
event of any non-payment by the Tenant of such bill within three (3) days after
rendition, to discontinue and cut off the use of electric current to the Tenant
without further notice without releasing the Tenant from any liability under
this lease, and without the Landlord or said Meter Company incurring any
liability for any damage caused by such discontinuance of service. Tenant will
not install or use any electrically operated equipment, machinery
Page 13 of 14
<PAGE> 14
or appliances which were not in the demised premises during the twelve month
period immediately preceding the Meter Company supplying unmetered electric
current to the demised premises, as aforesaid, nor shall Tenant make any change
in the wiring of the demised premises without the prior written consent of the
Meter Company first obtained. If after the date the Meter Company commences
supplying unmetered current to the Tenant, any additional electrically operated
equipment is installed in the premises or the hours of usage of the electric
installation are increased in the demised premises, then the monthly payment to
the Meter Company shall be increased to equal the value of the additional
electric current consumed by such newly installed electrically operated
equipment and/or increased hours of usage of the electric installation, such
increased value to be determined by the Tenant's base rate in effect at the time
of such installation of additional electrically operated equipment and/or
increased hours of usage, same to be determined by the Meter Company. Tenant
shall pay the amount of such increase or increases retroactively to the date of
the installation of all newly installed electrically operated equipment and/or
the increase in usage by the Tenant. If after the date the Meter Company
commences supplying unmetered electric current to the Tenant there is any
increase in the utility bill, charge or cost is imposed upon the building at any
time from any source, such increase or increases shall be charged to and paid by
the Tenant to the Meter Company at a sum equal to the same percentage of
increase as received by the building and said same percentage of the increase
shall be charged to the Tenant over and above the Tenant's monthly base rate
then in effect as of the date of such increase, provided such increase, if any,
results in a higher yield to the Meter Company. In the event any legislature,
order of the Public Service Commission, or any judicial or governmental body, or
any executive order or decree from any governmental body after the date hereof
establishes, enacts, orders or decrees any wage and price controls, of any kind,
establishing, limiting, freezing or reducing the rates charged by the public
utility company supplying electric current to the building containing the
demised premises, then the Meter Company, at its option, may increase the
monthly charges for supplying unmetered current from and after the effective
date of said order or decree by the same percentage of increase as the United
States Consumer Price Index for Urban Consumers prepared by the United States
Government, Department of Labor, Bureau of Labor Statistics, or successor
thereto is increased over and above the index in effect on the effective date of
such order or decree; such increase(s) to be billed to tenant monthly or for any
greater period not exceeding every six months, but in no event shall a decrease
in Consumer Price Index reduce the monthly charges for the supply of unmetered
current by the Meter Company below the charges in effect at the time of such
order or decree. If for any reason the Meter Company, within it sole and
absolute discretion, elects or is required to terminate the furnishing or
unmetered current, as hereinabove described, or in the event permission is
granted to the Tenant by the Meter Company for direct service from the utility,
the Tenant will, at its own cost and expense, furnish and install all risers,
service wiring, switches, meter equipment and meters and any and all other
equipment or related expenses, charges or costs that may be necessary for such
installation and will, at its own cost and expense, maintain and keep in good
repair, all such riser or risers, wiring and/or switch or switches, metering
equipment and/or meter or meters; and all such wiring and/or and/or switches
and/or meters so installed shall be, become and remain the property of the
building but the building may, at its option, demand of the Tenant and the
Tenant shall, upon such demand, remove all such meters or switches at Tenant's
own cost and expense. In the event any legislature, order of the Public Service
Commission or any judicial or governmental body enacts an law, ruling or
regulation to effect the service classification, rate or charge under which the
Tenant receives unmetered electric current from the Meter Company, then and in
such event Tenant will pay to the Meter Company that rate or charge as set forth
by said legislature, order of the Public Service Commission or judicial or
governmental body and an additional amount as determined by the Meter Company
for the rental, use maintenance and amortization of the building electrical
distribution system including any and all switches, risers, meters, wiring and
other equipment that together with the rate set forth by said legislature, order
of the Public Service Commission shall equal the rates or charges hereinabove
described and set forth for furnishing unmetered electric current.
Notwithstanding anything hereinabove set forth, the Tenant agrees to pay the
Meter Company for metered or unmetered electric current a minimum service charge
of $25.00 a month, in addition to any and all rates and charges billed to
tenant. Anything to the contrary notwithstanding, if at any time the Meter
Company elects to furnish unmetered current or sell electric current from any
source whatsoever to the Tenant, then and in either of such events, Tenant
agrees to discontinue the purchase of electric service within ten (10) days from
the date of notice thereof from the Public Service Company servicing the part of
the city where the building is located, or from any other source, and to sign a
release, or any other necessary papers required by said utility company for the
discontinuance of electric service; and the Tenant agrees to purchase from or
pay to the Meter Company, as the case may be, the cost and installation of all
meters as may be necessary in the sole discretion of the Meter Company and for
all electric current consumed in the demised premises subject to all of the
terms and conditions as set forth above. No current shall be furnished until the
equipment of the Tenant has been approved by the proper public authorities, the
New York Board of Fire Underwriters and the New York Fire Insurance Rating
Organization or similar organization having jurisdiction, and no changes shall
be made in such equipment without the consent of the Meter Company. The Tenant
shall make no changes in and/or additions to the electrical equipment, wiring
and/or appliances in the demised premises, without the written consent of the
Meter Company first had and obtained. Rigid conduit only will be allowed by the
Landlord for exposed work.
Tenant's rate for electric shall be Con Edison's Service Classification #4 + 10%
Page 14 of 14
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION PERCENT OWNERSHIP
- ---- ----------------------------- -----------------
<S> <C> <C>
Launch Networks, Inc. Delaware 100%
SW Holdings, Inc. Delaware 100%
National Video Subscriptions, Inc. California 100%
</TABLE>
24
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statement on Form S-8 (File No. 33-89113) of Launch Media, Inc. of
our report dated January 25, 2000, relating to the financial statements and
financial statement schedules which appear in this Form 10-K.
PricewaterhouseCoopers LLP
Woodland Hills, California,
March 28, 2000
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 878
<SECURITIES> 55,886
<RECEIVABLES> 4,027
<ALLOWANCES> (13)
<INVENTORY> 273
<CURRENT-ASSETS> 64,163
<PP&E> 7,404
<DEPRECIATION> (1,680)
<TOTAL-ASSETS> 94,218
<CURRENT-LIABILITIES> 7,178
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 151,221
<TOTAL-LIABILITY-AND-EQUITY> 94,218
<SALES> 0
<TOTAL-REVENUES> 16,626
<CGS> 3,493
<TOTAL-COSTS> 56,107
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 552
<INCOME-PRETAX> (37,493)
<INCOME-TAX> (12)
<INCOME-CONTINUING> (37,506)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,506)
<EPS-BASIC> (4.15)
<EPS-DILUTED> (4.15)
</TABLE>
