U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
AMENDMENT NO. 1
TO
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION
12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
TANGIBLE ASSET GALLERIES, INC.
(Name of small business issuer in its charter)
NEVADA 88-0396772
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
1550 S. PACIFIC COAST HIGHWAY, SUITE 103
LAGUNA BEACH, CALIFORNIA 92651
(Address of Principal Executive Offices) (Zip Code)
(949) 376-2660
(Registrant's Telephone Number, Including Area Code)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(None)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $0.001
Title of Class
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TABLE OF CONTENTS
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PART I
Item 1 Description of Business.
Item 2 Management's Discussion and Analysis or Plan of Operation.
Item 3 Description of Property.
Item 4 Security Ownership of Certain Beneficial Owners and Management.
Item 5 Directors, Executive Officers, Promoters and Control Persons.
Item 6 Executive Compensation.
Item 7 Certain Relationships and Related Transactions.
Item 8 Description of Securities.
PART II
Item 1 Market Price of and Dividends on the Registrant's Common Equity
and Other Shareholder Matters.
Item 2 Legal Proceedings.
Item 3 Changes In and Disagreements With Accountants.
Item 4 Recent Sales of Unregistered Securities.
Item 5 Indemnification of Directors and Officers.
PART F/S
Financial Statements.
PART III
Item 1 Index to Exhibits.
Item 2 Description of Exhibits.
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PART I
This Registration Statement includes forward-looking statements within the
meaning of the Securities Exchange Act of 1934 (the "Exchange Act"). These
statements are based on management's beliefs and assumptions, and on information
currently available to management. Forward-looking statements include the
information concerning possible or assumed future results of operations of the
Company set forth under the heading "Financial Information-Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Forward-looking statements also include statements in which words such as
"expect," "anticipate," "intend," "plan," "believe," "estimate," "consider" or
similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. The Company's future results and
shareholder values may differ materially from those expressed in these
forward-looking statements. Readers are cautioned not to put undue reliance on
any forward-looking statements. In addition, the Company does not have any
intention or obligation to update forward-looking statements after the
effectiveness of this Registration Statement, even if new information, future
events or other circumstances have made them incorrect or misleading.
ITEM 1 - DESCRIPTION OF BUSINESS
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Tangible Asset Galleries, Inc. ("Tangible" or the "Company") is a retailer and
wholesaler of rare coins, fine art, and antique collectibles. The Company was
organized as a Nevada corporation on August 30, 1995 and is currently based in
Laguna Beach, California.
On April 28, 1999, Tangible Asset Galleries, Inc. (which at the time was
designated Austin Land & Resources, Inc., a Nevada corporation ("Austin"))
acquired all of the outstanding common stock of Tangible Investments of America,
Inc., a Pennsylvania corporation ("TIA") in a business combination described as
a "reverse acquisition." For accounting purposes, the acquisition has been
treated as the acquisition of Austin (the Registrant) by TIA. TIA was
originally incorporated in Pennsylvania in 1984. At the time of its reverse
acquisition with Austin, TIA operated as retailer and wholesaler of rare coins,
fine art, and antique collectibles. TIA agreed to be acquired by the Company in
order to become a publicly trade company. Management of TIA believes that the
Company's status as a publicly traded company would facilitate the raising of
capital. Prior to the acquisition by Austin, management of TIA had no
relationship with the Company.
Immediately prior to the acquisition, Austin had 1,650,000 shares of Common
Stock outstanding. As part of Austin's reorganization with TIA, Austin issued
16,000,000 shares of its Common Stock to the shareholders of TIA in exchange for
490 (100%) shares of TIA Common Stock. Immediately following the merger, TIA
changed its name to "Tangible Asset Galleries, Inc." Austin had no revenues and
no significant operations prior to the merger. Subsequent to the acquisition,
the former shareholders of TIA constituted approximately 88% of the total
outstanding shares of the Common Stock of the Company and the original
shareholders of Austin constituted approximately 9% of the total outstanding
shares of the Common Stock of the Company.
BUSINESS OF THE ISSUER
The Company's principal line of business is the sale of rare coins on a retail
and wholesale basis. Additionally, the Company also offers primarily on a
retail basis, collectibles such as fine artworks, antique furniture, lamps,
pottery, and china. The Company's primary storefront is currently located in
Laguna Beach, California. This location serves as the Company's headquarters
and primary retail outlet. Beginning in January 2000, the Company intends to
relocate all of its Southern California operations to its new headquarters and
primary retail outlet located in Newport Beach, California. The Company's
services are also marketed nationwide through broadcasting and print media and
independent sales agents.
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Beginning on September 1, 1999, the Company launched the first phase of its
Internet auction Web site located at www.tangibleassets.com. The first phase
offered the sale of rare coins by the Company to the public via an auction
format. On October 1, 1999, the Company initiated the second phase of its
Internet auction Web site, expanding it to offer the sale collectibles via an
auction format. The Company's auction site offers graded and certified coins
and guarantees as to authenticity and condition of all items offered for sale.
In contrast to other auction sites such as Ebay.com, where the site operator
merely acts as a facilitator of transactions, the Company will act as principals
in its auctions. This means that the Company will evaluate offerings, collect
funds, pay consignors, and therefore seek to eliminate the risks to the public
of bidding on items sold by unknown third parties. To date, there are only a
small number of auction Web sites which offer guarantees comparable to the
Company's.
The Company also currently publishes a monthly newsletter, distributed to its
existing customers detailing and describing current events in the numismatic and
collectibles world. The Company's newsletter also provides customers with the
opportunity to view the Company's current rare coin and collectibles offerings
as well as order such offerings via telephone.
On May 28, 1999, the Company expanded its operations by opening a retail outlet
in the Las Vegas area. The Company believes that the Las Vegas area is viewed
as a prime location for development in the coin and art collection arena and the
Company is working on strategies to significantly expand that marketplace. In
June 1999, the Company opened a Tustin, California customer service center,
staffed by trained professionals who are tasked with answering customer
inquiries regarding the Company's monthly newsletter as well responding to
customer requests regarding availability of certain collectibles.
HISTORY OF THE COMPANY
TIA, the Company's predecessor, was originally founded by the Company's current
president, Silvano DiGenova in 1977 when Mr. DiGenova first exhibited his coins
at a national coin dealer's convention. That same year, Mr. DiGenova first
became involved in other collectibles such as fine arts and antiques. Mr.
DiGenova has collected rare coins since 1971 (when he was nine years old) and by
age 13 was trading coins among his peers. While attending the Wharton School of
Business in the early 1980s, Mr. DiGenova continued to develop TIA, and in May
1984, Mr. DiGenova, prior to graduating, took a leave of absence from Wharton
and incorporated TIA in Pennsylvania.
In 1991, Mr. DiGenova relocated TIA to Laguna Beach, California and continued to
develop TIA's rare coin, fine art and collectibles retail and wholesale
business, continuing to expand it on a national level. The Company currently
provides coins, fine arts and collectibles on a wholesale level to many retail
outlets across the nation and conducts retail sales via telephone to virtually
every state in the United States and several countries around the world.
As previously discussed above, TIA was acquired by the Company on April 28,1999.
BACKGROUND OF THE COIN AND COLLECTIBLES INDUSTRY
Throughout history, from ancient time to the present day, coins have been highly
prized and universally regarded as a store of value, particularly those struck
in precious metals. Coins have been highly esteemed for their beauty and appeal
as a solid store of wealth. Over the past three hundred years, coin collecting
for enjoyment and profit has gained increasing prominence. The coin industry
has been actively traded since the 17th century.
The legendary House of Rothschild (famed European Banking Family) actually got
its start dealing in rare coins and medals at Frankfurt's great spring and
summer fairs. Meyer Rothschild, the founder of the banking empire, began by
selling coins at the fairs as well as running a mail-order coin business.
Starting in 1771, he published the first of many printed coin catalogs which he
sent out during the next 20 years at regular intervals to potential customers
all over Germany. To this day, many prestigious European banks still maintain
active numismatic departments.
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THE REVOLUTION IN THE COIN BUSINESS
Determining the market value of a given coin plays a vital role. Rare coins are
graded on a numerical scale from 0 to 70. Zero represents the basal state and
70 represents an uncirculated (or mint state) specimen that is perfect in every
aspect. The higher its numerical grade, the more valuable a coin is to
collectors or dealers. A one-point difference, not even discernible to a
layman's eye, can mean literally thousands of dollars difference in value.
Therefore, the importance of consistent grading, according to a universally
accepted standard by the marketplace cannot be overemphasized. In 1986, the
first uniform grading system was implemented by the Professional Coin Grading
Service (the "PCGS"). Silvano DiGenova, the Company's president, was a
co-founder of PCGS and helped to develop the grading system used by PCGS. Mr.
DiGenova sold his interest in PCGS in 1987 and has not been affiliated with
PCGS, except as a customer of its services, since that time. A year after the
founding of the PCGS, the Numismatic Guaranty Corporation ("NGC") was formed.
Mr. DiGenova is not affiliated with NGC in any way except as a customer of its
services.
These two firms established a uniform coin-grading standard, which has gained
almost universal acceptance throughout the world. Once a coin has been graded
and certified, both firms encapsulate the coin in tamper-proof acrylic holders,
register them by number, grade, date and mintmark. If applicable, they identify
variety and pedigree as well. Rare coins graded and certified by either one of
these services can now be traded with confidence. The advent of certified
grading has led to another revolution of sorts, the formation of the Certified
Coin Exchange (CCE). Mr. DiGenova was a founder and board member of CCE, and
helped to organize the association. Mr. DiGenova sold his interests in CCE in
the late 1980s and has not been affiliated with the company in any way since
that time except as a user of their services. CCE is a nationwide computerized
trading network for rare coins. CCE is also the number one source of
instantaneous price information. Coins can be bought and sold sight unseen
because of the certification and confidence instilled in the market place by
CCE, PCGS and NGC
COMPETITION
The business of selling rare coins and other collectibles is highly competitive.
The Company competes with a number of smaller, comparably-sized, and larger
firms throughout the United States. These include: Heritage Rare Coin, a large
scale coin firm in Dallas, Texas; National Gold, a large wholesale coin and
bullion seller located in Tampa, Florida; Spectrum, a medium sized coin
wholesaler located in Newport Beach, California; Coin Universe, a publicly
traded company; and U.S. Coins, a medium size coin wholesaler located in
Houston, Texas. These competitors are generally larger and better capitalized.
However, the Company believes that it is able to compete with these competitors
due to its generally higher quality inventory, staff expertise, and Web
presence. However, there can be no assurances that the Company can continue to
compete successfully with other established companies with greater financial
resources, experience and market share.
In an effort to remain competitive in the marketplace, the Company has
implemented the following policies so its customers can be confident in their
purchases:
-Certified Coins: All coins purchased through the Company are independently
graded and certified by either the Professional Coin Grading Service or the
Numismatic Guaranty Corporation. These are nationally recognized unbiased
third-party grading services that render an expert consensus opinion by the
industry's foremost numismatic experts. Although Mr. DiGenova was a founder of
PCGS, he is no longer affiliated with the Company and does not take part in
PCGS's grading of the Company's coins. The coins, along with their grade
designations, are sonically sealed in a tamper proof acrylic holder designed to
protect the coin's condition from environmental damage. The coin cannot be
removed from its holder, or the grade change, without destroying the holder.
-Guaranteed Authenticity: the Company unconditionally guarantees the
authenticity of every coin it sells. This guarantee is limited to a full refund
of the original purchase price plus ten (10) percent per annum simple interest
on the original purchase price from the date purchased from the Company to the
date returned because of lack of authenticity, provided that the coin is
returned in its original unbroken holder.
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-Guaranteed Liquidity and Buy Back at Grade: the Company guarantees to
repurchase any coin originally sold by the Company to the original retail
purchaser at the same numerical grade level at which the coin was originally
purchased from the Company. The repurchase would be at the Company's current
"Bid" price for the grade level indicated on the holder (the amount the Company
is then offering to buy similar coins of the same grade on a below wholesale
basis or "Bid"). The Company guarantees that this "Bid" price will be between
5% to 17.5%, and will never exceed 17.5%, below the then current retail asking
price for coins with similar grades. The Company's current bid price and the
corresponding retail price could be substantially below the purchaser's original
purchase price. The Company does not guarantee that a purchaser will be able to
recover his or her entire original purchase price but does guarantee liquidity
based on current market conditions. The Company guarantees to provide an
immediate cash offer, or at the client's discretion, a consignment sale
estimate on any coin which was originally purchased from the Company. The
Company's pledge is to provide our clientele with a liquid marketplace at any
and all times.
-Unconditional Fifteen-Day Refund: Every coin purchased (not including
bullion) through the Company carries an unconditional 15-day full money back
guarantee. If, after inspecting the purchase, the customer wishes to return any
coin for a full refund under this guarantee, the coin must be received by the
Company no later than fifteen-days after postmark (or air bill date) of said
coin. The purchaser is, therefore, encouraged to carefully inspect and evaluate
all coins during this period. Fine art and collectibles returns privilege is 30
days.
-Thirty-Day Same as Cash Exchange: Any item(s) sold by the Company may be
exchanged for other item(s) of equal or greater value (at the full original
purchase price) within 30-days of the sale. Bullion and generic coins, however,
are excluded. Generic coins (or generic issues) are U.S. coins which are very
common coins with graded populations of 1,000 or more.
-Approval Service: The Company may send coins and fine art (on a case by
case basis) on an approval basis (i.e. allow qualified customers to view items
in their homes or to have such items independently inspected) to qualified
buyers subject to credit verification and approval.
-Low Price Guarantee: If any item purchased from the Company (excluding
bullion and selected common generic issues) is advertised by a legitimate dealer
for less than the Company's selling price (within 30 days), The Company will
refund the difference, plus 10% of the difference.
-Statements of Value: A thorough and complete evaluation of the coins and
fine art purchased from The Company will be provided to all clients upon
request. These reports provide current liquidation values as well as accurate
data concerning profit and/or loss position.
-Commission Free Selling Service: The Company will liquidate gold and silver
bullion or generic U.S. coins for top market prices, free of commissions or
selling fees, provided that the proceeds are used to purchase coins from the
Company. Otherwise, a service charge of 2.5% (for bullion and/or common
generic: issues) or 10% (for rare U.S. coinage) will be assessed.
-Appraisals of Currently Owned Materials: The Company will evaluate grade,
performance potential and identify liquidation or hold strategy for its
customers. This service is free of charge if the proceeds from the coins that
are liquidated are used to acquire coins through the Company. Otherwise, a
service charge of 2.5% of the total appraised value will be assessed.
-Auction Representation: The Company attends most major numismatic auctions,
and will act as an agent on customers' behalf, for the purpose of acquisition,
for a nominal fee of 2.5% to 10%, depending upon the amount purchased.
-Full service PCGS and NGC Submission Center: The Company will examine
customer's uncertified coins to determine suitability for grading (there is no
charge for this service). The Company will then submit the coins on the
customers' behalf (at our dealer cost) to PCGS or NGC for grading.
-Rare Coin Strategy Planning Sessions: The Company provides personal
one-on-one consultations with an experienced, knowledgeable numismatic
professional to assist with portfolio planning, rare coin acquisitions and/or
liquidations. This is a free service provided to qualified individuals.
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Research Services: The Company will provide a free complete historical,
providence, price history and current population data for any coin(s) and fine
art purchased from the Company.
REGULATION
The rare coin and collectibles markets are not currently subject to direct
federal, state or local regulation, although the sales of certain artwork and
autographed sports memorabilia is regulated in some states. However, the Federal
Trade Commission and many state attorneys general have shown an interest in
regulating the sales of rare coins and other tangible assets as investments, and
the State of New York has determined that under certain circumstances rare coins
may be treated as securities under state law, thereby requiring rare coin
dealers to register as broker-dealers and permitting investors all legal and
equitable remedies otherwise available to buyers of securities. The Company
relies upon the February 1998 ruling of U. S. District Court Judge Kimba Wood in
the case of Llewellyn v. North American Trading that the ordinary retail sale of
rare coins to investors is not a security under the federal securities laws, and
believes that its operations are not subject to regulation as the sale of
securities. There is no assurance, however, that at some time in the future the
sale of rare coins will be so regulated, and that the Company's business will
not be materially adversely affected thereby.
Over the past 15 years, the FTC has filed suits against numerous rare coin
dealers alleging that the dealers' representations about coins were false or
misleading to a person of average intellect, or that the dealers' retail markups
were so high that their representations about investment risk and appreciation
potential became misleading or untrue. These cases have not, however, created
any clear rules by which dealers such as the Company can assure themselves of
compliance. On January 1, 1996, the FTC's Telemarketing Sales Rule, authorized
by the 1994 Telemarketing and Consumer Fraud and Abuse Prevention Act, took
effect. "Telemarketing" is defined as any plan, program, or campaign which is
conducted to induce payment for goods and services by use of more than one
interstate telephone call. The Rule applies to all sales of "investment
opportunities", which is defined by whether the seller's marketing materials
generally promote items. On the basis of representations about "income, profit,
or appreciation." The Company believes that all of its retail sales are covered
by the Rule, even those to collectors.
The Telemarketing Sales Rule requires the Company to inform customers of the
following before accepting payment: the number of items being sold, the purchase
price, and the Company's refund / exchange / buyback policy. The Rule also
prohibits the Company from misrepresenting the "risk, liquidity, earnings
potential, and profitability" of the items it sells. This in itself did not
materially change prior law. However, during debates on the Telemarketing Sales
Rule in 1995, FTC staff attorneys tried to impose additional specific
requirements that dealers in "tangible assets" disclose to retail customers
their actual cost for the items they sell, and also disclose "all material
facts" about their goods before accepting any money from the customer. This
would have required the Company to disclose its actual margins to its retail
customers, as well as impose on the Company a near impossible burden of
determining what facts were material to the purchase of coins or other
collectibles. Although the FTC ultimately removed these additional requirements
from the final version of the Rule, the FTC staff's behavior demonstrated its
particular concern for telemarketing of coins as investments. There is no
assurance that the FTC will not amend the Rule in the future to impose these or
other additional regulations, or that individual states will not impose such
regulations, and that the Company's business will not be materially adversely
affected thereby.
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In addition, rare coins are favored by many investors because they can be
bought, owned and sold privately, i.e., without registering with or notifying
any Government agency. However, the Internal Revenue Service now requires
dealers such as the Company to report on Form 8300 all sales of coins in which
more than $10,000 in cash or cash-like instruments is used as payment. The
private nature of rare coin ownership has occasionally resulted in rare coins
being purchased by taxpayers for the purpose of concealing unreported income, or
used to "launder" income derived from unlawful activities. This has caused local
authorities to consider imposing registration and/or reporting requirements upon
rare coin dealers, although the only such regulation enacted to date (in the
City of Chicago) has not been enforced against full-time dealers in rare coins.
There is no assurance that additional regulations will not be imposed upon the
Company in the future, and that the Company's business will not be materially
adversely affected thereby.
Taxation of Mail Order Sales.
The Company does not collect California sales tax on mail order sales to
out-of-state customers, because interstate sales generally are tax-exempt. Nor
does the Company collect use tax on its interstate mail order sales. Most
states impose a use tax on "retailer(s) engaged in business in this state" on
sales of "tangible personal property for storage, use, or other consumption in
this state" (language from '6203 of the California Sales and Use Tax Law). Use
tax is usually set at the same rate as sales tax, and its purpose is to level
the playing field between local retailers who pay sales tax and out-of-state
mail order companies who do not. Some states exempt rare coin sales over $1,000
from sales or use tax, but most do not. Although the federal Constitution
restricts the right of states to tax interstate commerce, states can assess use
tax-on any transaction where the out-of-state mail order firm has a "nexus",
i.e., any physical presence, in the state, regardless of whether the sales
themselves arise from that local presence. "Nexus" includes attending
conventions, although at least one state (California) provides a seven-day "safe
harbor" for out-of-state dealers attending conventions and whose sales are less
than a certain dollar threshold. It also would include attending auctions or
making buying or selling trips. On that basis, the Company may be deemed to have
"nexus" in many states.
Use tax is the buyer's obligation, but states require retailers to collect the
tax and remit it to the state along with a use tax return. There is no statute
of limitations for use tax if no return has been filed by the dealer. To date,
the Company has not been assessed for use tax by the taxing authority of any
other state, nor has it received any inquiry indicating that it was being
audited for purposes of such an assessment. However, there is no assurance that
the Company will not be audited by taxing authorities of the states and be
assessed for unpaid use taxes (plus interest and penalties) for a period of many
years.
In addition to use tax, many states impose income and franchise taxes on
out-of-state companies that derive net income from business with their
residents. For example, California applies an income-based franchise tax to
out-of-state corporations operating in California for the privilege of using the
corporate form. The maximum tax rate is 11%, with a minimum tax of $800 per
year. Income derived outside California is not taxed, and in-state income of
taxpayers liable for tax in more than one state is calculated using a formula
contained in the Uniform Division of Income for Taxation Purposes Act, a statute
in effect in Alabama, Alaska, Arizona, Arkansas, California, Colorado, Hawaii,
Idaho, Kansas, Kentucky, Maine, Michigan, Missouri, Montana, Nebraska, Nevada,
New Mexico, North Dakota, Oregon, South Carolina, South Dakota, Texas, Utah, and
Washington. As with use tax, nexus principles apply, and the U.S. Supreme Court
requires "a minimal connection between the interstate activities and the taxing
state, and a rational relationship between the income attributed to the State
and the intrastate values of the enterprise."
Assuming the existence of nexus, the Company could be subject to income-based
taxes in each of the states in which it has had a physical presence at
conventions, auctions or otherwise. The only exceptions would be in states where
the Company is protected by a federal law, 15 U.S.C. '381, which immunizes
companies from state income taxes if the company's only business activities in
the taxing state consist of "solicitation of orders for interstate sales." There
is no statute of limitations for income or franchise tax if no return has been
filed by the dealer. To date, the Company has not been assessed for income tax
or franchise tax by the taxing authority of any other state, nor has it received
any inquiry indicating that it was being audited for purposes of such an
assessment. However, there is no assurance that the Company will not be audited
by taxing authorities of the states and be assessed for unpaid income or
franchise taxes (plus interest and penalties) for a period of many years.
MAJOR SUPPLIERS
The Company obtains its coins and collectibles from many different individuals
and entities and is not dependent on any major suppliers.
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DEPENDENCE ON KEY CUSTOMERS
The Company is not dependent on any key customers but rather sells to a large
variety of individual retail purchasers as well as several wholesale purchasers
throughout the nation and world. However, during 1997 and 1998, one wholesale
purchaser, Mike's Coin Gallery, located in Redondo Beach, California represented
16% and 13% of the Company's wholesale sales, respectively. The Company
anticipates that Mike's Coin Gallery will represent less than 10% of the
Company's sales through 1999.
PATENTS, TRADEMARKS, LICENSES
The Company does not depend upon any patents, trademarks, or licenses to conduct
its business; nor does the Company hold any such patents or trademarks.
COST OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The Company currently has no costs associated with compliance with environmental
regulations. However, there can be no assurances that the Company will not
incur such costs in the future.
NUMBER OF EMPLOYEES
As of June 30, 1999, the Company employed 22 people on a full time basis.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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The following discussion contains certain forward-looking statements that are
subject to business and economic risks and uncertainties, and the Company's
actual results could differ materially from those forward-looking statements.
The following discussion regarding the financial statements of the company
should be read in conjunction with the financial statements and notes thereto.
Prior to the acquisition of TIA by the Company, the Company had no revenues or
expenses for the fiscal years ended December 31, 1997 and December 31, 1998, or
for the three-month period ended March 31, 1999. Following the acquisition,
management of the Company resigned and was replaced by TIA's officers and
directors. The Company then adopted TIA's business plan. The following
discussion assumes that the acquisition of TIA by the Company occurred as of
January 1, 1997 and reflects the combined operations of the two entities.
GENERAL OVERVIEW
Beginning in 1998, the Company began shifting its focus away from the wholesale
marketing of coins and began focusing its efforts on the retail coin as well as
the collectibles market. Coupled with an overall heathy economy, the Company
began realizing increased sales in fiscal year 1998.
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Commencing in early 1999, Tangible Investments of America, Inc. began to shift
its resources and adjust its conceptual philosophy with the goal of developing
the Company into a public company as well as developing an Internet presence.
As a result, large supplementary capital expenditures were required to implement
the new infrastructure. Expansion of management and sales personnel, as well as
considerable expense in computer hardware, software and extensive programming
for the Company's E-Commerce Web-site (which will include two state-of-the-art
auction sites), were all direct costs incurred as a result of this effort.
Senior management was enhanced with the addition of a Vice President of Finance
along with a Vice President of Sales and Marketing who will be responsible for
the development and implementation of the Company's customer service and sales
organization. As a result, the Company dramatically increased its sales staff,
which required extensive training of new personnel. Moreover, the Company
instituted a very aggressive marketing campaign, which includes national TV
advertising on CNBC and MSNBC. Although an expensive endeavor, Management of
the Company believes that such media campaigns are effective and that such
campaigns have begun to attract new customers to the Company's products.
The Company's efforts and expenditures in the first half of 1999 allowed it to
implement its objective to assume a strong market position as an
electronic-commerce company ("E-Commerce"). In the third quarter, the Company
initiated its Web site operations in its continuing efforts to penetrate the
E-Commerce market.
FOR THE YEAR ENDED DECEMBER 31, 1998 AND 1997
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The company's net income for the year ended December 31, 1998 was $1,397,865, an
increase of 89%, as compared to $740,897 for the year ended December 31, 1997.
This increase was primarily a result of increased sales of 24% and an increase
in gross profit of 41%.
NET SALES
As previously discussed, beginning in 1998, the Company began to shift its focus
from the wholesale to the retail market. The table below reflects the shift in
the Company's business toward the retail trade and the collectibles market.
Year Ended Year Ended
---------- ----------
December 31, 1998 December 31, 1997
----------------- -----------------
Amount % Amount %
--------------------------------------------
Net Revenues
Coins - Wholesale $ 11,722,016 60.0% $ 10,911,290 69.2%
Coins - Retail 6,999,860 36.8 4,536,493 28.8
Collectibles 814,102 4.2 320,145 2.0
---------------------- -------------------------
Total Net Revenues $ 19,535,978 100.0% $ 15,767,928 100.0%
====================== =========================
Net revenues increased 23.9% to $19,535,978 for the year ended December 31, 1998
as compared to $15,767,928 for the year ended December 31, 1997. Coins -
wholesale increased 7.4% to $11,722,016 during 1998 as compared to $10,911,290
representing steady but slower growth in this segment due to a decreased
emphasis in this market. Coins-retail increased 54.3% to $6,999,860 during 1998
as compared to $4,536,493 in 1997 and collectibles increased 154.3% to $814,102
during 1998 as compared to $320,145 in 1997. The increases in these two retail
segments were due to increased and continued marketing emphasis and efforts over
the past year.
COST OF SALES
Cost of sales for the year ended December 31, 1998 increased 21% to $16,146,584
from $13,363,844 for the fiscal year ended December 31, 1997 while the cost of
sales as a percentage of net revenue decreased to 82.6% during 1998 as compared
to 84.8% during 1997. The increase in cost of sales was primarily due to the
Company's increased sales. The decrease in the cost of sales as a percentage of
sales was the result of the larger percentage of retail sales and the
corresponding higher margins.
GROSS PROFIT
Gross Profit increased 41% from $2,404,084 for the fiscal year ended December
31, 1997 to $3,389,394 for the fiscal year ended December 31, 1998. This
increase in gross profit was primarily due to the higher mark-ups associated
with retail sales and greater sales.
8
<PAGE>
TOTAL OPERATING EXPENSES
Total Operating Expenses for the year ended December 31, 1998 increased 18.8% to
1,971,521 from $1,659,560 for the year ended December 31, 1997. This increase
in Total Operating Expenses was primarily due to the increased cost associated
with the Company's greater focus on retail sales.
OTHER INCOME AND EXPENSES
Other Expenses for the year ended December 31, 1998 increased to $5,308 as
compared to Other Income of $4,343 for the year ended December 31, 1997.
PROVISION FOR INCOME TAXES
The Provision for Income Taxes for the year ended December 31, 1998 was $14,700
as compared to $8,000 for year ended December 31, 1997. Prior to the Company's
reverse acquisition on April 28, 1999, the Company had elected to be taxed as a
S corporation for federal and state purposes. Under the provisions of this
election, with the exception of the California 1.5% surtax, the Company did not
pay corporate tax on its income. However, the stockholders were liable for
their respective share of income taxes on the company's taxable income.
Subsequent to the reverse acquisition, the Company began to provide for
corporate income taxes based on the combined federal and state statutory rates.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased $17,740 for the year ended December 31, 1998 primarily due to an
increase in profitability. However, this increase was offset by increased
inventory levels as the Company expanded its retail operations. Comparatively,
cash decreased $52,961 for the year ended December 31, 1997 due to an increase
in accounts receivable that were largely offset by net income.
Net cash provided by operating activities for the year ended December 31, 1998
was $914,103 consisting primarily of the Company's net income of $1,397,865
adjusted for by an increase in inventory, a decrease in accounts receivable and
an increase in accounts payable. Net cash provided by operating activities for
year ended December 31, 1997 was $308,074, consisting primarily of the company's
net income of $740,897 adjusted by an increase in inventory and an increase in
accounts payable.
Net cash used in investing activities for the year ended December 31, 1998
was $12,574 consisting primarily of an investment in Numismatic Interactive
Network, LLC. Net cash used in financing activities for the year ended
December 31, 1997 was $2,653 consisting primarily of additions to property
and equipment offset by the proceeds from the sales of an automobile and
investments.
Net cash used in financing activities for the year ended December 31, 1998 was
$883,789 consisting primarily of stockholder distributions and the repayment of
a cash overdraft offset by the proceeds from the Company's line of credit. Net
cash used in financing activities for the year ended December 31, 1997 was
$358,382, consisting primarily of stockholder distributions offset by the
proceeds from the Company's line of credit.
On December 1, 1998, the Company's predecessor, TIA, entered into a revolving
credit agreement with a limit of up to $600,000 with a rate of interest at the
prime plus 2.625%, collateralized by the Company's assets and personal guarantee
of the Company's president. The outstanding balance on December 31, 1998 was
$600,000.
In September 1999, the revolving credit agreement was terminated, the
outstanding balance was repaid in full and the credit facility was replaced with
a revolving credit agreement with a limit of up to $2,000,000, with a rate of
interest at the prime rate plus 1.50%, which is collateralized by the Company's
assets and a personal guarantee of the Company's president.
CAPITAL EXPENDITURES
The Company incurred no significant capital expenditures for the year ended
December 31, 1998. Comparatively, the Company incurred capital expenditures of
$34,088 during the year ended December 31, 1997 consisting primarily of office
equipment and computer hardware.
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations.
9
<PAGE>
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
- ------------------------------------------------------
NET REVENUES
The table below reflects the breakdown of the Company's primary areas of
revenue.
Six-Months Ended Six-Months Ended
June 30, 1999 June 30, 1998
----------------- -----------------
Amount % Amount %
--------------------------------------------
Net Revenues
Coins - Wholesale $ 8,019,557 75.2% $ 7,012,904 64.5%
Coins - Retail 2,292,696 21.5 3,522,761 32.4
Collectibles 351,918 3.3 337,054 3.1
---------------------- -------------------------
Total Net Revenues $ 10,664,171 100.0% $ 10,872,719 100.0%
====================== =========================
Net revenues for the six months ended June 30, 1999 decreased 1.9% to
$10,664,171 from $10,872,719 for the six months ended June 30, 1998. This
decrease was due to the unanticipated weakness in the retail rare coin market
and the flat sales growth for collectibles. Revenues from collectibles sales
have not yet fully compensated for the overall decrease in the Company's rare
coin sales. Retail rare coin sales have decreased from $3,522,761 for the
six-months ended June 30, 1998 to $2,292,696 for the six months ended June 30,
1999 while wholesale rare coin sales increased from $7,012,904 for the six
months ended June 30, 1998 to $8,019,557 for the six months ended June 30, 1999.
Although the Company continued to focus its efforts on retail sales, market
forces resulted in higher wholesale sales than expected. During the six months
period ended June 30, 1999, the Company focused on the accumulation of its
collectibles inventory rather than on generating collectibles sales. This
strategy was employed in anticipation of the launching of auction and online
sales scheduled for the fourth quarter. Collectible sales increased slightly
for the six-months ended June 30, 1999 to $351,918 from $337,054 for the six
months ended June 30, 1998.
COST OF SALES
Cost of sales for the six months ended June 30, 1999 increased 1.2% to
$8,689,535 from $8,584,938 for the six months ended June 30, 1998. The cost of
sales as a percentage of net revenue increased to 81.5% from 79.0% during the
comparable periods. This increase was due to the unfavorable mix of products
sold during the period. The Company's cost of sales as percentage of net revenue
will vary from period to period depending on the prevailing market forces and
the mix of products sold.
GROSS PROFIT
10
<PAGE>
Gross profit for the six months ended June 30, 1999 decreased 13.7% to
$1,974,636 from $2,287,781 for the six months ended June 30, 1998. The gross
profit as a percentage of net revenue decreased to 18.5% from 21.0% during the
comparable periods. This decrease was due primarily to the unfavorable mix of
products sold during the period. The ability of the Company to realize the
highest possible gross profit on the sales of products is dependent on market
demand for specific types of products that may or may not be readily available
to Company. In the interest of satisfying the demand for products, the Company
may acquire and sell products with less than desired gross profit.
Additionally, during the six month period ended June 30, 1999, several large
private collections of rare coins were sold into the marketplace causing a
temporary oversupply and consequently reduced margins on the sale of rare coins.
This market weakness is anticipated to continue to the end of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six months ended June 30,
1999 increased 76.0% to $1,493,615 from $848,844 for the six months ended June
30, 1998. The increase in these expenses were due to increases in selling
expenses relating to the shift in focus toward retail sales; the expansion of
the administrative infrastructure to support the requirements of public company
reporting and the Company's growing retail operations and the costs associated
with developing an Internet based auction site. The increase in expenditures
included a one-time consulting expense to the Michelson Group in the amount of
$134,185 that was the assigned fair value of stock warrants granted in exchange
for services rendered in connection with the reverse acquisition. See Certain
Relationship and Related Transactions section of this Registration Statement for
further details.
OTHER INCOME AND EXPENSES
Other expenses for the six months ended June 30, 1999 increased to $1,580 from
$0 for the six months ended June 30, 1998. This increase was due to the
write-down of the Company's investment in Numismatic Interactive Network, LLC to
a zero value. The write-down in the amount of $4,550 was offset by interest
income of $2,970 during the period.
PROVISION FOR INCOME TAXES
The provision for income taxes for the six months ended June 30, 1999 were
$60,000 as compared to $8,000 for the six months ended June 30, 1998. Prior to
the Company's reverse acquisition on April 28, 1999, the Company had elected to
be taxed as an S-corporation for federal and state purposes. Under the
provisions of this election, with the exception of the California 1.5% surtax,
the Company did not pay corporate tax on its income. However, the stockholders
were liable for their respective share of income taxes on the Company's taxable
income. Subsequent to the reverse acquisition the Company began to provide for
corporate income taxes based on the combined federal and state statutory rates.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased $14,144 for the six months ended June 30, 1999, primarily due to
increased expenditures and the increased inventory levels that were required as
the Company continued to expand into rare coins and fine art and collectibles on
a retail level. Comparatively, cash increased $97,143 for the six months ended
June 30, 1998 due to increased sales and profitability during the period.
Net cash provided by operating activities for the six months ended June 30, 1999
was $303,313, consisting primarily of the Company's net income of $419,441
adjusted for non-cash operating expenses including consulting and legal services
exchanged for exercised stock warrants and common stock, depreciation and
amortization and the write-down of customer lists, and increased inventory and
accounts receivable and accounts payable. Net cash provided by operating
activities for the six months ended June 30, 1998 was $66,189 consisting
primarily of the Company's net income of $1,430,937 adjusted by an increase in
inventory and decreases in accounts receivable and payable.
Net cash used in investing activities for the six months ended June 30, 1999 was
$51,264 consisting primarily of additions to property and equipment. Net cash
used in investing activities for the six months ended June 30, 1998 was $18,409,
consisting of additions to property and equipment.
11
<PAGE>
Net cash used in financing activities for the six months ended June 30, 1999 was
$ 265,833, consisting primarily stockholder distributions that were partially
offset by the proceeds of a convertible, interest bearing stockholder note
payable. Net cash provided by financing activities for the six months ended June
30, 1998 was $49,363 consisting primarily consisting of the proceeds of
short-term note payable that were partially offset by the repayment of a
stockholder loan payable.
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the six month period ended June 30, 1999, the Company issued 70,000
common shares in exchange for inventory with a fair value of $135,000. There
were no non-cash investing and financing activities during the six month period
ended June 30, 1998.
On December 1, 1998, the Company's predecessor, TIA entered into a revolving
credit agreement with a limit of up to $600,000 with a rate of interest at the
prime rate plus 2.625% collateralized by the Company's assets and personal
guarantee of the Company's president. The outstanding balance of loan at June
30, 1999 was $ 600,000. In September 1999, the revolving credit agreement was
terminated, the outstanding balance was repaid in full and the credit facility
was replaced with a revolving credit agreement with a limit of up to $2,000,000,
with a rate of interest at the prime rate plus 1.50%, which is collateralized by
the Company's assets and a personal guarantee of the Company's president. In
addition, the Company is currently negotiating an increase in its line of credit
to $7,500,000. The Company has also retained the services of the Michelson
Group to assist the Company in a potential bridge financing in order to finance
future growth. See Certain Relationships and Related Transactions. The Company
anticipates that the additional line of credit and funds from the possible
bridge financing will be used for increased inventory, capital expenditures, and
potential acquisitions. However, there can be no assurances that the Company
will be able to secure such financing.
On March 31, 1999 the Company's predecessor, TIA, executed a convertible,
interest-bearing note payable in exchange for cash advanced by the Company's
principal stockholder and president in the amount of $1,400,000. The note bears
interest at the rate of 9.0% per annum and the interest is payable quarterly.
The note, including, any unpaid interest, will become due and payable on March
31, 2004. The note's conversion provision grants the holder the right to
convert the principal amount, in whole or in part, into shares of common stock
of the Company at a conversion price of $1.00 per share at any time. The note
grants the holder the right to extend payment for up to five renewal periods of
one year each. Management may accelerate the repayment of the note based on
the availability of cash flow.
CAPITAL EXPENDITURES
The Company incurred capital expenditures of $50,868 during the six month period
ended June 30, 1999 consisting primarily of computer hardware, computer software
and office equipment. The Company will continue to incur capital expenditures to
further enhance its auction, marketing and accounting computer hardware and
software through the end of the fiscal year ended December 31, 1999.
Effective October 7, 1999, the Company began leasing 11,270 square feet of
administrative, customer support, retail, gallery, and auction space located in
Newport Beach, California at a monthly rental rate of $11,000 per month.
Beginning in January 2000, the Company intends to consolidate its Laguna Beach
and Tustin operations into this location. The lease is scheduled to terminate
on October 7, 2001. Unless the Company is able to negotiate the termination or
sublease of its Laguna Beach and Tustin offices on more favorable terms, the
company will be required to pay an aggregate of approximately $120,000 in rental
payments for its Laguna Beach premises and approximately $9,000 for its Tustin
premises over the course of their respective leases.
12
<PAGE>
YEAR 2000 DISCLOSURE
The Company has completed a review of its computer systems and non-information
technology ("non-IT") systems to identify all systems that could be affected by
the inability of many existing computer and microcontroller systems to process
time-sensitive data accurately beyond the year 1999, referred to as the Year
2000 or Y2K issue. The Company is dependent on third-party applications,
particularly with respect to such critical tasks as accounting, billing, and
inventory control. The Company also relies on its own computer and non-IT
systems (which consists of personal computers, internal telephone systems,
internal network server, and operating systems). In conducting the Company's
review of its internal systems, the Company performed operational tests of its
systems which revealed no Y2K problems. As a result of its review, the Company
has discovered no problems with its systems relating to the Y2K issue and
believes that such systems are Y2K compliant. Costs associated with the
Company's review were not material to its results of operations.
While the Company believes that its procedures have been designed to be
successful, because of the complexity of the Year 2000 issue and the
interdependence of organizations using computer systems, there can be no
assurances that the Company's efforts, or those of third parties with whom the
Company interacts, have fully resolved all possible Year 2000 issues. Failure
to satisfactorily address the Year 2000 issue could have a material adverse
effect on the Company. The most likely worst case Y2K scenario which management
has identified to date is that, due to unanticipated Y2K compliance problems,
the Company may be unable to bill its customers, in full or in part, for product
sold. Should this occur, it would result in a material loss of some or all
gross revenue to the Company for an indeterminable amount of time, which could
cause the Company to cease operations. Although the Company has received
written assurances from all of its major suppliers (coin and collectibles
suppliers such as Heritage Wholesale and Lipton Rare Coins) that they are, or
will be, Year 2000 compliant, should any such supplier fail to adequately
address the Year 2000 problem, the Company's only recourse for any damages
suffered as a result would be through litigation. The Company has not yet
developed a contingency plan to address this worst case Y2K scenario, and does
not intend to develop such a plan in the future.
ITEM 3 - DESCRIPTION OF PROPERTY
- -------------------------------------
Effective June 15, 1996, the Company began leasing approximately 4,092 square
feet of administrative and retail space in Laguna Beach, California at a monthly
rental rate of $5,000 per month beginning on September 1, 1996. This facility
serves as the Company's headquarters and primary retail location. The monthly
rental rate is scheduled to increase in accordance with the Consumer Price Index
on an annual basis, up to a limit of 6% per year but subject to a 3% minimum
increase. The lease is scheduled to terminate on June 30, 2001. However, the
Company has an option to extend the lease for an additional five year term.
Effective March 31, 1999, the Company began leasing approximately 1,722 square
feet of administrative space in Tustin, California at a monthly rental rate of
$2,066.40. This facility serves as the Company's customer service site. The
lease is scheduled to terminate on April 30, 2000.
Beginning on May 1, 1999, the Company began leasing approximately 2,350 square
feet of retail space in Las Vegas, Nevada pursuant to an oral month-to-month
lease with Commercial West Property Management at a rate of $2,022.57 per month.
The Company is currently investigation alternative retail locations for its Las
Vegas operations.
Effective October 7, 1999, the Company began leasing 11,270 square feet of
administrative, customer support, retail, gallery, and auction space located in
Newport Beach, California at a monthly rental rate of $11,000 per month.
Beginning in January 2000, the Company intends to consolidate its Laguna Beach
and Tustin operations into this location. The lease is scheduled to terminate
on October 7, 2001.
13
<PAGE>
ITEM 4 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
The following table sets forth, as of June 30, 1999, certain information with
respect to the Company's equity securities owned of record or beneficially by
(i) each Officer and Director of the Company; (ii) each person who owns
beneficially more than 5% of each class of the Company's outstanding equity
securities; and (iii) all Directors and Executive Officers as a group.
<TABLE>
<CAPTION>
Name and Address of Common Stock Percent of
Title of Class Benefical Owner Outstanding Outstanding
<S> <C> <C> <C>
Common Stock Silvano A. DiGenova 15,492,000 85.2%
1550 S. Pacific Coast Highway, Ste 10
Laguna Beach, California
Common Stock Mike Bonham(1) 0 0%
1550 S. Pacific Coast Highway, Ste 10
Laguna Beach, California
Common Stock Paul Biberkraut(2) 0 0%
1550 S. Pacific Coast Highway, Ste 10
Laguna Beach, California
All Directors and 15,492,000 85.2%
Officers as a Group ========== ====
(3 Persons)
</TABLE>
(1) Does not include 75,000 options to acquire shares of the Company's
common stock which vest in 20% increments each year over a five year period
beginning on April 30, 1999 at an exercise price of $1.00 per share.
(2) Does not include 75,000 options to acquire shares of the Company's
common stock which vest in 20% increments each year over a five year period
beginning on October 26, 1999 at an exercise price of $2.00 per share.
The Company believes that the beneficial owners of securities listed above,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable. Beneficial ownership is determined in accordance with the rules of
the Commission and generally includes voting or investment power with respect to
securities. Shares of stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding for purposes
of computing the percentage of the person holding such options or warrants, but
are not deemed outstanding for purposes of computing the percentage of any other
person.
ITEM 5 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
- ------------------------------------------------------------------------------
The following table sets forth the names and ages of the current directors and
executive officers of the Company, the principal offices and positions with the
Company held by each person and the date such person became a director or
executive officer of the Company. The executive officers of the Company are
elected annually by the Board of Directors. The directors serve one year terms
until their successors are elected. The executive officers serve terms of one
year or until their death, resignation or removal by the Board of Directors.
There are no family relationships between any of the directors and executive
officers. In addition, there was no arrangement or understanding between any
executive officer and any other person pursuant to which any person was selected
as an executive officer.
14
<PAGE>
The directors and executive officers of the Company are as follows:
Name Age Positions
- ---- --- ---------
Silvano A. DiGenova 37 Chief Executive Officer, President,
Secretary, and Chairman of the Board
Michael Bonham 41 Vice President of Sales & Marketing,
and Director
Paul Biberkraut 38 Controller and Vice President of
Finance
SILVANO A. DIGENOVA is currently the Company's Chief Executive Officer,
President, Secretary, and Chairman of the Company's Board of Directors. Mr.
DiGenova founded Tangible Investments of America, what would later become the
Company, in 1977. Mr. DiGenova is a recognized leader in the numismatic and
fine arts field. In 1986, Mr. DiGenova helped form the Professional Coin
Grading Service, the first widely accepted uniform grading system for rare
coins. Mr. DiGenova has also worked with several very noted museums,
institutions and world class auction houses, including the San Francisco Mint
Museum, the Philadelphia International Coin Museum, Sotheby's, and Christie's,
functioning as an agent on appraisals and private sales. Mr. DiGenova is on the
Board of Directors of the Professional Numismatists Guild, a non-profit body
overseeing coin and precious metal dealers. Mr. DiGenova is also on the Board
of Directors of ICTA, which represents all tangibles and collectibles dealers in
Washington, D.C. Mr. DiGenova attended the Wharton School of Business at the
University of Pennsylvania for four years. However, Mr. DiGenova left Wharton
in his fourth year to develop TIA, the Company's predecessor and did not obtain
a degree from Wharton.
MICHAEL BONHAM is currently the Company's Vice President of Sales & Marketing
and a member of the Company's Board of Directors. From March 1991 to May 1999,
Mr. Bonham assisted the Tangible Investments of America as an independent
contractor responsible for sales and marketing. Mr. Bonham has extensive
experience in the bullion markets. Between January 1987 through March 1991, Mr.
Bonham worked with International Rare Coin & Bullion.
PAUL BIBERKRAUT is currently the Company's Controller and Vice-President of
Finance. From November 1997 to June 1999, Mr. Biberkraut was the Controller of
Quality Systems, Inc., a publicly traded healthcare software company. From
August 1995 to October 1997, Mr. Biberkraut was the Managing director of
Stampendous, Inc., a privately held manufacturer of decorative rubber stamps and
accessories. From June 1991 to June 1995, Mr. Biberkraut was the Vice-President
of Finance of First National Lenders, a privately held mortgage brokerage
company. Mr. Biberkraut attended McGill University where he received a Bachelor
of Commerce and Graduate Diploma in Public Accountancy in 1981 and 1983
respectively. Mr. Biberkraut is a Chartered Accountant and has been a member of
the Canadian Institute of Chartered Accountants since 1984. Mr. Biberkraut
received a Master of Business Administration from Pepperdine University in 1994.
Mr. Biberkraut is also the Chairman of the Supervisory Committee of the Anaheim
Area Credit Union.
ITEM 6 - EXECUTIVE COMPENSATION
- -----------------------------------
On April 30,1999 the Company entered into an oral employment Agreement with
Silvano DiGenova, the Company's President, CEO, Secretary, and Chairman of the
Board of Directors, whereby the Company will pay Mr. DiGenova an annual salary
of $250,000. This agreement may be canceled at any time by either the Company or
Mr. DiGenova. Additionally, the Company has agreed to provide Mr. DiGenova with
an automobile at a cost of up to $10,000 per year.
On April 30,1999 the Company entered into an oral employment Agreement with
Michael Bonham, the Company's Vice President of Sales and Marketing, whereby the
Company will pay Mr. Bonham an annual salary of $50,000 plus commissions on
sales attributable to Mr. Bonham. In addition to his annual salary,the Agreement
confirmed the prior issuance of options to purchase 75,000 shares of the
Company's common stock at an exercise price of $1.00 per share which vest over
a period of five years.
15
<PAGE>
On October 26,1999 the Company entered into an oral employment Agreement with
Paul Biberkraut, the Company's Controller and Vice President of Finance, whereby
the Company will pay Mr. Biberkraut an annual salary of $87,000.00 plus
discretionary bonus to be determined by the company's Board of Directors. In
addition to his annual salary, the Agreement issued options to purchase 75,000
shares of the Company's common stock at an exercise price of $2.00 per share
which vest over a period of five years.
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities for the six months ending June 30, 1999, the
fiscal year ended December 31, 1998, and the fiscal year ended December 31,
1997. Other than as set forth herein, no executive officer's salary and bonus
exceeded $100,000 in any of the applicable years. The following information
includes the dollar value of base salaries, bonus awards, the number of stock
options granted and certain other compensation, if any, whether paid or
deferred.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Awards Payouts
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compensation Awards ($) Options Payouts Compensation
Principal Year ($) ($) ($) SARs (#) ($) ($)
Position
Silvano 1999 110,000 -0- -0- -0- -0- -0- -0-
DiGenova (6/30)
(President,
CEO)
1998 250,000 -0- -0- -0- -0- -0- -0-
1997 150,000 -0- -0- -0- -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<S> <C> <C> <C> <C>
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SAR'S
OPTIONS/SAR'S GRANTED TO EMPLOYEES EXERCISE OF BASE EXPIRATION
NAME GRANTED (#) IN FISCAL YEAR PRICE ($/SH) DATE
Silvano DiGenova -0- n/a n/a n/a
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<S> <C> <C> <C> <C>
Number of Unexercised Value of
Securities Underlying Unexercised In-
Shares Acquired Options/SARs At FY-End The-Money Option/SARs
On Exercise Value (#) At FY-End ($)
Name (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
Silvano DiGenova -0- n/a n/a n/a
</TABLE>
COMPENSATION OF DIRECTORS
Currently, Directors of the Company receive no compensation.
16
<PAGE>
ITEM 7 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------
On February 5, 1999, Tangible Investments of America, the Company's predecessor,
entered into a Corporate Development Agreement with the Michelson Group, Inc.
("Michelson"). As part of the agreement, Michelson has agreed to provide
consultation and corporate development services on behalf of the Company. In
return, the Company has agreed to compensate Michelson in the amount of $6,500
per month in addition to warrants to purchase up to 4.9% of the outstanding
shares of the Common Stock of the Company (as calculated following the
completion of a private placement by the Company (the "Offering")) at an
exercise price of $0.01. Pursuant to the Agreement, Michelson has agreed that
the exercise of the warrants adhere to the following schedule: one half of the
warrants can be exercised upon execution of the Agreement; an additional one
fourth when the Company breaks escrow on a bridge financing in the amount of
$1,000,000; and the remaining one fourth upon the Company breaking escrow on an
equity financing of $3,000,000 or more. As of June 30, 1999, 432,854 options
have been exercised, resulting in net proceeds of approximately $4,321 to
Company. The Company reflected compensation expense totaling $134,185 in its
unaudited interim statement of operations for the six months ended June 30,
1999, to reflect the fair value of such warrant grant.
On March 15, 1999 Tangible Investments of America, Inc. the Company's
predecessor, pursuant to the unanimous consent of the Board of Directors,
declared a distribution of $1,400,000 to Silvano DiGenova, it's sole
shareholder. On March 31, 1999 the Directors of the Company, in consideration
of funds advanced by the sole shareholder to the Company in the amount of
$1,400,000, executed a convertible note in favor of Silvano DiGenova of the same
amount. Interest is payable quarterly at an annual rate of 9%. The note,
including any unpaid accrued interest thereon will become due and payable on
March 31, 2004. The note contains certain acceleration, extension and
conversion provisions. The conversion provision allows Mr. DiGenova the right
to convert the principal amount on this note, or any portion of the principal
amount into shares of the common stock of the Company at a conversion price for
each share equal to $1.00 at any time. The note grants the holder the right to
extend payment for up to five renewal periods of one year each.
On April 28, 1999, the Company (which at the time was designated Austin Land &
Resources, Inc., acquired all of the outstanding common stock of Tangible
Investments of America, Inc., a Pennsylvania corporation ("TIA") in a business
combination described as a "reverse acquisition." As part of the
reorganization, the Company issued 16,000,000 shares of its Common Stock to the
shareholders of TIA in exchange for all of the outstanding shares of Common
Stock of TIA. Such shares include the shares owned by officers and directors of
the Company as set forth in the Section "Security Ownership of Certain
Beneficial Owners and Management" hereunder.
ITEM 8 - DESCRIPTION OF SECURITIES
- ---------------------------------------
COMMON STOCK
The Company's Articles of Incorporation authorize the issuance of 50,000,000
shares of Common Stock, $0.001 par value per share, of which 18,170,354 were
outstanding as of November 18, 1999. Pursuant to the Agreement and Plan of
Reorganization dated April 28, 1999, the Company approved a 2-for-1 reverse
stock split of its Common Stock. All references to the numbers of shares of the
Company's Common Stock are adjusted to reflect the 2-for-1 reverse split of the
Company's Common Stock. Holders of shares of Common Stock are entitled to one
vote for each share on all matters to be voted on by the stockholders. Holders
of Common Stock have no cumulative voting rights. Holders of shares of Common
Stock are entitled to share ratably in dividends, if any, as may be declared,
from time to time by the Board of Directors in its discretion, from funds
legally available therefor. In the event of a liquidation, dis-solution or
winding up of the Company, the holders of shares of Common Stock are entitled to
share pro rata all assets remaining after payment in full of all liabilities.
Holders of Common Stock have no pre-emptive rights to purchase the Company's
common stock. There are no conversion rights or redemption or sinking fund
provisions with respect to the common stock. All of the outstanding shares of
Common Stock are fully paid and non-assessable.
TRANSFER AGENT
The transfer agent for the Common Stock is Alpha Tech Stock Transfer, 4505
South Wasatch Blvd., Suite 205, Salt Lake City, UT 84124.
17
<PAGE>
PART II
MARKET INFORMATION
The following table sets forth the high and low bid prices for shares of the
Company Common Stock for the periods noted, as reported by the National Daily
Quotation Service and the NASDAQ Bulletin Board. Quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. The Company's Common Stock was listed on the
NASDAQ Over-the-Counter Bulletin Board on August 10, 1998 under the trading
symbol ASLR. However, the Company's Common Stock did not begin trading until
subsequent to its acquisition of Tangible; whereas on May 18, 1999, the
Company's Common Stock was changed to TAGZ. As the Company has not yet complied
with the NASD's Eligibility Rule 6530 (as further discussed below), the
Company's trading symbol was changed to TAGZE on August 6, 1999.
BID PRICES
YEAR PERIOD HIGH LOW
---- ----
1999 First Quarter n/a n/a
Second Quarter (3/18/1999 to 6/30/1999) 7.38 3.25
Third Quarter 6.25 1.25
Pursuant to NASD Eligibility Rule 6530 (the "Rule") issued on January 4, 1999,
issuers who do not make current filings pursuant to Sections 13 and 15(d) of the
Securities Act of 1934 are ineligible for listing on the NASDAQ Over-
the-Counter Bulletin Board. Pursuant to the Rule, issuers who are not current
with such filings are subject to de-listing pursuant to a phase-in schedule
depending on each issuer's trading symbol as reported on January 4, 1999. As
previously discussed, the Company's trading symbol on January 4, 1999 was ASLR.
Therefore, pursuant to the phase-in schedule, the Company is subject to
de-listing on September 1, 1999. One month prior to an issuer's de-listing
date, non complying issuers will have their trading symbol appended with an "E".
As a result the Company's trading symbol was changed to TAGZE on August 6, 1999.
The Company is not currently in compliance with the Rule, and in the past, has
not made filings pursuant to Sections 13 and 15(d) of the Securities Act of
1934. The Company has filed this Registration Statement on Form 10-SB in order
to become a "reporting" company and therefore comply with the Rule. As a
result, on September 1, 1999, the Company's Common Stock was de-listed and will
remain de-listed until such time as the Securities and Exchange Commission has
reviewed the Company's Form 10-SB and has stated that it has no further
comments. Once the Company has complied with the Rule, it will once again
become eligible for listing on the NASDAQ Over-the-Counter Bulletin Board and
will seek to be reinstated on the NASDAQ Over-the-Counter Bulletin Board.
NUMBER OF SHAREHOLDERS
The number of beneficial holders of record of the Common Stock of the company as
of the close of business on November 18, 1999 was 47. Many of the shares of the
Company's Common Stock are held in "street name" and consequently reflect
numerous additional beneficial owners.
DIVIDEND POLICY
To date, the Company has declared no cash dividends on its Common Stock, and
does not expect to pay cash dividends in the near term. The Company intends to
retain future earnings, if any, to provide funds for operation of its business.
18
<PAGE>
ITEM 2 - LEGAL PROCEEDINGS
- ------------------------------
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract actions incidental to the operation of its business. The
Company is not currently involved in any such litigation which it believes could
have a materially adverse effect on its financial condition or results of
operations.
ITEM 3 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- --------------------------------------------------------------
Prior to the acquisition of TIA by Austin, as previously described, the Company
engaged Barry L. Friedman, P.C., Certified Public Accountants, to audit the
Company' s financial statements for the fiscal years ended December 31, 1997,
and December 31, 1998. TIA's Certified Public Accountants were Goldenberg
Rosenthal LLP (prior to October 1, 1998, the Company's Certified Public
Accountants were Schmeltzer Master Group, PC which merged with Goldenberg
Rosenthal Friedlander, LLP to become Goldenberg Rosenthal LLP).
The Company is currently in the process of locating and engaging a national
certified accounting firm to audit its Fiscal year 1999 financial statements,
and anticipates to engage such firm within 30 to 60 days.
There have been no disagreements between management and its accountants of the
type required to be reported under this Item 3 since their date of engagement.
ITEM 4 - RECENT SALES OF UNREGISTERED SECURITIES
- -------------------------------------------------------
On April 28, 1999, Tangible Asset Galleries, Inc. (which at the time was
designated Austin Land & Resources, Inc., a Nevada corporation ("Austin")
acquired all of the outstanding common stock of Tangible Investments of America,
a Pennsylvania corporation ("TIA") in a business combination described as a
"reverse acquisition." As part of the reorganization, the Company issued
16,000,000 shares of its "restricted" (as that term is defined under Rule 144 of
the Securities Act of 1933) Common Stock to the shareholders of TIA in exchange
for all of the outstanding shares of TIA. Such shares include the shares owned
by officers and directors of the Company as set forth in the Section "Security
Ownership of Certain Beneficial Owners and Management" hereunder. This issuance
was an isolated transaction not involving a public offering conducted pursuant
to Section 4(2) of the Securities Act of 1933.
On April 28, 1999, the Company issued 17,500 shares of "restricted" (as that
term is defined under Rule 144 of the Securities Act of 1933) Common Stock to
MRC Legal Services Corp., the Company's securities counsel, in consideration for
legal services rendered valued at $17,500. The issuance was an isolated
transaction not involving a public offering conducted pursuant to Section 4(2)
of the Securities Act of 1933.
On April 28, 1999, the Company issued 432,854 shares of "restricted" Common
Stock to the Michelson Group, an accredited unrelated third-party, pursuant to a
Corporate Development Agreement entered into between the Company and the
Michelson Group in exchange for consulting services valued at $134,184. The
issuance was an isolated transaction not involving a public offering conducted
pursuant to Section 4(2) of the Securities Act of 1933.
On June 4, 1999, the Company issued 70,000 shares of "restricted" Common Stock
to an accredited unrelated third party in exchange for inventory valued at
$135,000. The issuance was an isolated transaction not involving a public
offering conducted pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 5 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
- ---------------------------------------------------------
The Corporation Laws of the State of Nevada and the Company's Bylaws provide for
indemnification of the Company's Directors for liabilities and expenses that
they may incur in such capacities. In general, Directors and Officers are
indemnified with respect to actions taken in good faith in a manner reasonably
believed to be in, or not opposed to, the best interests of the Company, and
with respect to any criminal action or proceeding, actions that the indemnitee
had no reasonable cause to believe were unlawful. Furthermore, the personal
liability of the Directors is limited as provided in the Company's Articles of
Incorporation.
The Company does not currently maintain any Directors and Officers Liability
Insurance policy.
19
<PAGE>
PART F/S
FINANCIAL STATEMENTS
- ---------------------
The Financial Statements required by this Item are included at the end of this
report beginning on Page F-1 as follows:
Index to Financial Statements . . . . . . . . . . . F-1
Tangible Asset Galleries, Inc. Pro Forma
Combined Financial Statements . . . . . . . . . . . . F-2
Interim Financial Statements of Tangible Asset
Galleries, Inc. for the Six Month Period Ending
June 30, 1999 . . . . . . . . . . . . . . . . . . . . . F-7
Tangible Investments of America, Inc. Financial
Statements for the Fiscal Years ended December
31, 1998 and December 31, 1997 . . . . . . . . . . F-14
Austin Land & Resources, Inc., Financial
Statements for the Fiscal Years ended
December 31, 1998, December 31, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . F-29
The above financial statements are presented pursuant to an Acquisition
Agreement dated April 28, 1999 by which Tangible Investments of America, Inc.
("Tangible") was acquired by Austin Land & Resources, Inc. ("Austin"). For
financial reporting purposes, Tangible is considered the acquiror and therefore
the predecessor, and Austin is considered the acquiree, and therefore, its
financial statements are included pursuant to Item 310(c) of Regulation S-B.
20
<PAGE>
PART III
ITEM 1 - INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
(1) Acquisition Agreement dated April 28, 1999 by and between
Austin Land & Resources, Inc. and Tangible Investments of
America, Inc.
(3.1) Articles of Incorporation of Austin Land &
Resources, Inc. filed on August 30, 1995.
(3.2) Amendments to the Articles of Incorporation
of Austin Land & Resources, Inc., changing
the name of the Company to Tangible Asset
Galleries, Inc.
(3.3) Bylaws of the Company
(10.1) Lease dated June 15, 1996 by and between Tangible
Investments of America and LBP Enterprises for the
lease of real property located at 1550 South Coast
Highway, Laguna Beach, California.
(10.2) Lease dated March 31, 1999 by and between Tangible
Investments of America and Tustin Business Center,
L.P. for the lease of real property located at 17842
Irvine, Boulevard, Tustin, California.
(10.3) Line of Credit between Tangible Investments of
America, Inc. and Wells Fargo Bank, dated December
1, 1999.
(10.4) Investment Banking Agreement by and between Tangible
Investments of America and the Michelson Group
dated February 3, 1999.
(10.5) Convertible Note by and between Tangible Investments
of America and Silvano DiGenova dated
March 31, 1999.
(10.6) Lease dated September 20, 1999 by and between
Tangible Asset Galleries, Inc. and LJR Lido
Partners LP.
ITEM 2 - DESCRIPTION OF EXHIBITS
Not applicable
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
TANGIBLE ASSET GALLERIES, INC.
Date: November 22, 1999 By: /s/ Silvano DiGenova
Silvano DiGenova
President & Chief Executive Officer
21
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Tangible Asset Galleries, Inc. Pro Forma
Combined Financial Statements . . . . . . . . . . . . F-2
Interim Financial Statements of Tangible Asset
Galleries, Inc. for the Six Month Period Ending
June 30, 1999 . . . . . . . . . . . . . . . . . . . . . F-7
Tangible Investments of America, Inc. Financial
Statements for the Fiscal Years ended December
31, 1998 and December 31, 1997 . . . . . . . . . . F-14
Austin Land & Resources, Inc., Financial
Statements for the Fiscal Years ended
December 31, 1998, December 31, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . F-29
F-1
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
The Unaudited Pro Forma Statements of Operations for the six month period ended
June 30,1999 and the year ended December 31, 1998, give effect to the reverse
merger of Tangible Asset Galleries, Inc. (the "Company"), formerly known as
Tangible Investments of America, Inc. ("TIA"), and Austin Land & Resources, Inc.
("ALR"), as if such reverse merger had occurred at the beginning of each of the
periods presented. The Unaudited Pro Forma Statements of Operations also include
an adjustment for the income taxes, which would have been recorded if the
Company had been a C-Corporation during each of the periods presented. An
Unaudited Pro Forma Balance Sheet as of June 30, 1999, has not been presented as
the reverse merger occurred prior to June 30, 1999, and the effects of the
reverse merger have been reflected in the Unaudited Historical Balance Sheet of
the Company as of that date.
The pro forma adjustments reflect the Company's determination of all adjustments
necessary to present fairly the Company's pro forma results of operations. These
adjustments are based on available information and assumptions the Company
considers reasonable under the circumstances. The Unaudited Pro Forma Statements
of Operations are provided for informational purposes only. This information is
not necessarily indicative of the results of operations of the Company had the
transactions referred to above occurred on the dates specified. In addition,
this information is not necessarily indicative of the results of operations,
which may occur in the future. You should read the Unaudited Pro Forma
Statements of Operations information together with the Historical Financial
Statements of the Company, its predecessors, TIA and ALR, and the related notes
included elsewhere in this Registration Statement.
F-2
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE ASSET GALLERIES, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
Tangible Austin Land
Investments & Resources, Combined Pro Forma Pro Forma
Of America, Inc. Inc. Total Adjustments Total
---------------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Revenues . . . . . . . . . . . . . . . . . $ 19,535,978 $ - $19,535,978 $ - $ 19,535,978
Cost of Sales. . . . . . . . . . . . . . . . . 16,146,584 - 16,146,584 - 16,146,584
----------------------------------------------------------------------------
Gross Profit . . . . . . . . . . . . . . . . . 3,389,394 - 3,389,394 - 3,389,394
Selling, General and Administrative Expenses . 1,971,521 897 1,972,418 126,000 (A) 2,098,418
----------------------------------------------------------------------------
Income from Operations . . . . . . . . . . . . 1,417,873 897 1,416,976 (126,000) 1,290,976
Other Income (Expense) . . . . . . . . . . . . (5,308) - (5,308) (5,308)
----------------------------------------------------------------------------
Income Before Provision for Income Taxes . . . 1,412,565 897 1,411,668 (126,000) 1,285,668
Provision for Income Taxes . . . . . . . . . . 14,700 - 14,700 501,300 (B) 516,000
----------------------------------------------------------------------------
Net Income . . . . . . . . . . . . . . . . . . $ 1,397,865 $ 897 $ 1,396,968 $ (627,300) $ 769,668
============================================================================
Net Income Per Share
Basic. . . . . . . . . . . . . . . . . . . . $ 0.09 $ 0.04
================ ============
Diluted. . . . . . . . . . . . . . . . . . . $ 0.09 $ 0.04
Weighted Average Number of Shares Outstanding
Basic. . . . . . . . . . . . . . . . . . . . 16,000,000 18,082,854
Stock Options and Warrants . . . . . . . . . - -
Convertible Debt . . . . . . . . . . . . . . - -
---------- ----------
Diluted. . . . . . . . . . . . . . . . . . . 16,000,000 18,082,854
========== ==========
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Statements of Operations
F-3
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE ASSET GALLERIES, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999
(UNAUDITED)
Tangible Austin Land
Investments & Resources, Combined Pro Forma Pro Forma
of America, Inc. Inc. Total Adjustments Total
<S> <C> <C> <C> <C> <C>
Net Revenues . . . . . . . . . . . . . . . . . $ 10,664,171 $ - $10,664,171 $ - $ 10,664,171
Cost of Sales. . . . . . . . . . . . . . . . . 8,689,535 - 8,689,535 - 8,689,535
----------------------------------------------------------------------------
Gross Profit . . . . . . . . . . . . . . . . . 1,974,636 - 1,974,636 - 1,974,636
Selling, General and Administrative Expenses . 1,493,615 - 1,493,615 31,500 (C) 1,525,115
----------------------------------------------------------------------------
Income from Operations . . . . . . . . . . . . 481,021 - 481,021 (31,500) 449,521
Other Income (Expense) . . . . . . . . . . . . (1,580) - (1,580) (1,580)
----------------------------------------------------------------------------
Income Before Provision for Income Taxes . . . 479,441 - 479,441 (31,500) 447,941
Provision for Income Taxes . . . . . . . . . . 60,000 - 60,000 119,000 (D) 179,000
----------------------------------------------------------------------------
Net Income . . . . . . . . . . . . . . . . . . $ 419,441 $ - $ 419,441 $ (150,500) $ 268,941
----------------------------------------------------------------------------
Net Income Per Share
Basic. . . . . . . . . . . . . . . . . . . . $ 0.02 $ 0.01
================= ============
Diluted. . . . . . . . . . . . . . . . . . . $ 0.02 $ 0.01
================= ============
Weighted Average Number of Shares Outstanding
Basic. . . . . . . . . . . . . . . . . . . . 17,921,308 18,096,854
Stock Options and Warrants . . . . . . . . . 398,804 398,804
Convertible Debt . . . . . . . . . . . . . . -
Diluted. . . . . . . . . . . . . . . . . . . 18,320,112 18,495,658
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Statements of Operations
F-4
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO PRO FORMA
STATEMENTS OF OPERATIONS
JUNE 30, 1999
(UNAUDITED)
NOTE 1 - PRO FORMA ADJUSTMENTS
For the Year Ended December 31, 1998
- ------------------------------------------
(A) Selling, General and Administrative Expenses have been increased by
$126,000 to reflect the interest on the Convertible Stockholder Note Payable of
$ 1,400,000 at a rate of 9% per annum as if such note was outstanding during
the year ended December 31, 1998.
(B) The Provision for Income Taxes had been increased by $501,300 to provide
for income taxes based on an estimated combined federal and statutory corporate
income tax rate of 40%. Prior to the reverse merger on April 28, 1999, the
predecessor company, TIA, had elected to be taxed as an S corporation for
federal and state purposes. Under the provisions of this election, with the
exception of the California 1.5% surtax, TIA did not pay corporate tax on its
income. However, the stockholders were liable for their respective share of
income taxes on the Company's taxable income.
For the Six Month Period Ended June 30, 1999
- ----------------------------------------------------
(C) Selling, General and Administrative Expenses have been increased by
$31,500 to reflect the interest on the Convertible Stockholder Note Payable of $
1,400,000 at a rate of 9% per annum as if such note was outstanding for the
entire six month period ended June 30, 1999.
(D) The Provision for Income Taxes has been increased by $119,300 to provide
for income taxes based on an estimated combined federal and statutory corporate
income tax rate of 40% for the period January 1, 1999 to April 28, 1999. Prior
to the reverse merger on April 28, 1999, the predecessor company, TIA, had
elected to be taxed as an S corporation for federal and state purposes. Under
the provisions of this election, with the exception of the California 1.5%
surtax, TIA did not pay corporate tax on its income. However, the stockholders
were liable for their respective share of income taxes on the Company's taxable
income. Subsequent to the reverse acquisition, the Company began to provide for
corporate income taxes at the combined federal and state statutory rates.
F-5
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO PRO FORMA
STATEMENTS OF OPERATIONS
JUNE 30, 1999
(UNAUDITED)
NOTE 2 - NET INCOME PER SHARE
The following table reconciles the net income and weighted average shares
outstanding for basic and diluted pro forma net income per share for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1998 June 30, 1999
------------------------------------------
<S> <C> <C>
Basic:
Net income . . . . . . . . . . . . . . . . . $ 769,668 $ 268,941
========= =========
Basic net income per common shares:
Weighted average number of common
shares outstanding . . . . . . . . . . 18,082,854 18,096,854
========= =========
Basic net income per common share. . . . . . $ 0.04 $ 0.01
========= =========
Diluted:
Net income . . . . . . . . . . . . . . . . . $ 769,668 $ 268,941
Adjustment to net income -
Interest on convertible stockholder
note payable (net of income tax) . . . - -
--------- ---------
Diluted net income . . . . . . . . . . . . . $ 769,668 $ 306,741
========= =========
Weighted average number of common
shares outstanding. . . . . . . . . . . . 18,082,854 18,096,854
Weighted average number of common
share equivalents
Stock options and warrants . . . . . . - 398,804
Convertible stockholders note payable. - -
--------- ---------
Weighted average number of common and
Common equivalent shares. . . . . . . . . 18,082,854 18,495,658
========= =========
Diluted net income per common share. . . . . $ 0.04 $ 0.01
========= =========
</TABLE>
The effects of the convertible stockholder note payable were anti-dilutive and
accordingly have been excluded from the calculation of diluted net income per
common share.
F-6
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE ASSET GALLERIES, INC.
BALANCE SHEET
(UNAUDITED)
June 30,
1999
---------
<S> <C>
ASSETS
Current Assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . $ 28,141
Accounts receivable, net. . . . . . . . . . . . . . . 2,015,478
Inventory . . . . . . . . . . . . . . . . . . . . . . 5,713,530
Other current assets. . . . . . . . . . . . . . . . . 42,316
---------
Total current assets. . . . . . . . . . . . . . . . 7,799,465
Property and equipment, net . . . . . . . . . . . . . . 125,729
Other assets, net . . . . . . . . . . . . . . . . . . . 10,741
Total Assets. . . . . . . . . . . . . . . . . . . . $7,935,935
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Advances under revolving credit agreement . . . . . . $ 600,000
Accounts payable. . . . . . . . . . . . . . . . . . . 3,087,669
Stockholder loan payable. . . . . . . . . . . . . . . 23,138
Other current liabilities . . . . . . . . . . . . . . 271,300
---------
Total current liabilities . . . . . . . . . . . . . 3,982,107
Convertible stockholder note payable. . . . . . . . . . 1,400,000
Deferred tax liability. . . . . . . . . . . . . . . . . 10,000
Obligations under capital lease, net of current portion 5,212
---------
Total Liabilities . . . . . . . . . . . . . . . . . 5,397,319
---------
Shareholders' Equity
Common stock. . . . . . . . . . . . . . . . . . . . . 18,170
Additional paid in capital. . . . . . . . . . . . . . 2,123,433
Retained earning. . . . . . . . . . . . . . . . . . . 397,013
---------
Total shareholders' equity. . . . . . . . . . . . . 2,538,616
---------
Total liabilities and shareholders' Equity. . . . . . . $7,935,935
=========
</TABLE>
See Accompanying Notes to Interim Financial Statements
F-7
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE ASSET GALLERIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
June 30,
1999 1998
---------------------------
<S> <C> <C>
Net Revenues . . . . . . . . . . . . . . . . . $ 10,664,171 $10,872,719
Cost of Sales. . . . . . . . . . . . . . . . . 8,689,535 8,584,938
---------------------------
Gross Profit . . . . . . . . . . . . . . . . . 1,974,636 2,287,781
Selling, General and Administrative Expenses . 1,493,615 848,844
---------------------------
Income from Operations . . . . . . . . . . . . 481,021 1,438,937
Other Income (Expense) . . . . . . . . . . . . (1,580) -
---------------------------
Income Before Provision for Income Taxes . . . 479,441 1,438,937
Provision for Income Taxes . . . . . . . . . . 60,000 8,000
---------------------------
Net Income . . . . . . . . . . . . . . . . . . $ 419,441 $ 1,430,937
---------------------------
Earnings Per Share
Basic. . . . . . . . . . . . . . . . . . . . $ 0.02 $ 0.09
===========================
Diluted. . . . . . . . . . . . . . . . . . . $ 0.02 $ 0.09
===========================
Weighted Average Number of Shares Outstanding
Basic. . . . . . . . . . . . . . . . . . . . 17,921,308 16,000,000
Stock Options and Warrants . . . . . . . . . 398,804 -
Convertible Debt . . . . . . . . . . . . . . - -
------------------------
Diluted. . . . . . . . . . . . . . . . . . . 18,320,112 16,000,000
========================
</TABLE>
See Accompanying Notes to Interim Financial Statements
F-8
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE ASSET GALLERIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
<S> <C> <C>
1999 1998
Cash Flows from operating activities: ------------------------
Net Income. . . . . . . . . . . . . . . . . . . . . . . $ 419,441 $ 1,430,937
Adjustments to reconcile net income to cash
used in operating activities
Depreciation and Amortization . . . . . . . . . . . 17,291 9,958
Write-down of Investment. . . . . . . . . . . . . . 4,550 -
Write-down of Customer List . . . . . . . . . . . . 21,247 -
Deferred taxes. . . . . . . . . . . . . . . . . . . 10,000 -
Issuance of common stock for legal services . . . . 17,500 -
Fair value of stock warrants granted. . . . . . . . 134,185 -
Changes in operating assets and liabilities
Accounts receivable . . . . . . . . . . . . . . . (1,330,980) 432,796
Inventory . . . . . . . . . . . . . . . . . . . . (857,253) (1,232,665)
Other current assets. . . . . . . . . . . . . . . 19,765 4,899
Accounts payable. . . . . . . . . . . . . . . . . 1,596,411 (506,746)
Other current liabilities . . . . . . . . . . . . 251,156 (72,990)
------------------------
Net cash provided by (used in) operating activities . . . 303,313 66,189
Cash flows provided by (used in) investing activities
Additions to property and equipment . . . . . . . . . . (50,868) (18,409)
Proceeds from sale of property and equipment
Increase in deposits. . . . . . . . . . . . . . . . . . (756) -
------------------------
Net cash flows provided by (used in) investing activities (51,624) (18,409)
------------------------
Cash flows provided by (used in) financing activities
Payments on stockholder loan payable. . . . . . . . . . (88,363) (200,637)
Issuance of Convertible stockholder note payable in
connection with stockholder distribution. . . . . . . 1,400,000 -
Payments on obligations under capital lease . . . . . . 2,657 -
Proceeds from short term loan payable . . . . . . . . . - 250,000
Stockholder distribution. . . . . . . . . . . . . . . . (1,584,456) -
Issuance of common stock upon exercise of stock options 4,329 -
------------------------
Net cash flows provided by (used in) financing activities (265,833) 49,363
------------------------
Net increase (decrease) in cash . . . . . . . . . . . . . (14,144) 97,143
Cash at beginning of period . . . . . . . . . . . . . . . 42,285 24,545
------------------------
Cash at end of period . . . . . . . . . . . . . . . . . . $ 28,141 $ 121,688
========================
Supplemental Disclosure of Cash Flow Information
Interest paid . . . . . . . . . . . . . . . . . . . . . $ 54,902 $ 48,286
========================
Income taxes paid . . . . . . . . . . . . . . . . . . . $ 34,525 $ 11,920
========================
Non-Cash Investing and Financing Activities
Issuance of common stock for inventory. . . . . . . . . $ 135,000 $ -
========================
</TABLE>
See Accompanying Notes to Interim Financial Statements
F-9
TANGIBLE ASSET GALLERIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The management of Tangible Asset Galleries, Inc. (the "Company") formerly known
as Tangible Investments of America, Inc. ("TIA") has prepared the financial
statements herein without audit or review by Goldenberg Rosenthal, LLP or any
other independent auditor.
Such financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. The unaudited condensed
financial statements include all adjustments, consisting of all normal recurring
adjustments, which are in the opinion of management necessary to fairly state
the financial position of the Company as of June 30, 1999, and the results of
its operations and cash flows for the six month interim period ended June 30,
1999 and 1998. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. Operating results
for the six month interim period ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999, or for any other period.
The Company is the successor to Austin Land & Resources, Inc. ("ALR"), which was
merged with the Company's predecessor, TIA on April 28, 1999 (see discussion
below).
It is suggested that these unaudited financial statements are read in
conjunction with the annual 1998 and 1997 audited financial statements and the
notes related thereto of TIA included elsewhere in this Registration Statement
on Form 10-SB. Such financial statements and the notes related thereto contain
the accounting policies and other relevant information with respect to the
Company.
NOTE 2 - DESCRIPTION OF THE BUSINESS AND MERGER
The Company is the successor to ALR, which was originally incorporated in the
state of Nevada. On April 28, 1999, ALR acquired all the outstanding shares of
common stock of TIA and merged the operations of TIA into ALR in a reverse
merger acquisition. Effective with the merger, TIA became the successor company
and ALR's name was changed to Tangible Asset Galleries, Inc.
Prior to the merger, ALR had 1,650,000 shares of common stock outstanding. As
part of the merger, ALR issued 16,000,000 shares of common stock to shareholders
of TIA in exchange of 490 shares of TIA common stock. The 490 shares represented
100% of the outstanding common stock of TIA. ALR had no revenue and no
significant operations prior to the merger. Subsequent to the merger, the former
shareholders of TIA constituted approximately 88% of the total outstanding
common shares of the Company and the former shareholders of ALR constituted
approximately 9% of the total outstanding shares of common stock of the Company.
The Company is a wholesaler and retailer of rare coins, fine art and
collectibles based in Laguna Beach, California. The company operates a retail
rare coin outlet in Las Vegas, Nevada, a customer service center in Tustin,
California and a buying office in Chicago, Illinois.
NOTE 3 - ADVANCES UNDER REVOLVING CREDIT AGREEMENTS
On December 1, 1998, the Company's predecessor, TIA entered into a revolving
credit agreement with a limit of up to $600,000 with a rate of interest at the
prime rate plus 2.625% collateralized by the
F-10
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
Company's assets and a personal guarantee by the Company's president. The
outstanding balance of the loan as at June 30, 1999 was $600,000.
In September 1999, the revolving credit agreement was terminated, the
outstanding balance was repaid in full and the credit facility was replaced with
a revolving credit agreement with a limit of up to $2,000,000, with a rate of
interest at the prime rate plus 1.50% collateralized by the Company's assets and
a personal guarantee by the Company's president.
NOTE 4 - CONVERTIBLE STOCKHOLDER NOTE PAYABLE
On March 31, 1999 the Company issued a convertible stockholder note payable to
Silvano DiGenova, the president and CEO of the Company, in the amount of
$1,400,000 in consideration for cash. The note bears interest at the rate of
9.0% per annum and is payable at the end of each quarter. The note and any
unpaid interest are repayable on March 31, 2004. The note contains provisions
that allow for the acceleration based on certain conditions as set forth
therein. The note grants the stockholder the right to convert at any time and
for any portion of the note principal into common shares of the Company at the
conversion price of $1.00 per share. The extension provision allows the note
holder, at his option, to extend the note for up to five one-year periods. As at
June 30, 1999 the balance of the note was $1,400,000.
NOTE 5 - STOCK OPTIONS AND WARRANTS
On February 6, 1999 the Company, in connection with consulting services rendered
relating to the reverse acquisition and future equity financing, granted The
Michelson Group stock warrants representing 4.9% of the outstanding common
shares. The number of shares was determined by applying the number of
outstanding shares at the closing date of the reverse acquisition. The total
stock warrants granted amounted to 865,708 shares based on 17,650,000 common
shares outstanding at the close of the reverse acquisition. On March 15, 1999,
432,854 stock warrants became exercisable under the terms of the stock warrant
grant agreement. The Company recorded compensation expense related to such
warrants totaling $134,185 for the six-month period ended June 30, 1999. The
balance of the stock warrants will be exercisable in equal portions based upon
The Michelson Group's ability to fulfill two equity-financing requirements on
behalf of the 'Company'. As at June 30, 1999 432,854 stock warrants remained
outstanding, were not exercisable, and had an exercise price of $0.01 per share.
On April 30, 1999 the Company granted to certain employees and independent
contractors 345,000 stock options to purchase common stock at an exercise price
of $1.00. The stock options are exercisable on a pro-rata basis over five years
with the first pro-rata portion vesting one year from the date of grant.
On May 21, 1999 the Company granted to certain employees and independent
contractors 165,000 stock options to purchase common stock at an exercise price
of $4.46. The stock options are exercisable on a pro-rata basis over either four
or five years with first pro-rata portion vesting one year from the date of
grant. As of June 30, 1999, 5,000 of stock options had been cancelled
On May 28, 1999 the Company granted to certain employees, in connection with
opening of a retail rare coin outlet in Las Vegas, Nevada, 210,003 stock
options to purchase common stock at an exercise price of $4.46. The stock
options are exercisable on a pro-rata basis over three years with the first
pro-rata portion vesting one year from the date of grant.
F-11
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
All options granted expire at the earlier of five years after the vesting date
of each option or six months after the termination of employment or independent
contractor agreement for vested option grants only. As of June 30, 1999, 715,003
stock options remained outstanding.
<TABLE>
<CAPTION>
NOTE 6 - NET INCOME PER SHARE
Six Months Ended
June 30, 1999 June 30, 1998
----------------- --------------
<S> <C> <C>
Basic:
Net income . . . . . . . . . . . . . . . . . $ 419,441 $ 1,430,937
========= =========
Basic net income per common shares:
Weighted average number of common
shares outstanding . . . . . . . . . . 17,921,308 16,000,000
========= =========
Basic net income per common share. . . . . . $ 0.02 $ 0.09
========= =========
Diluted:
Net income . . . . . . . . . . . . . . . . . $ 419,441 $ 1,430,937
Adjustment to net income -
Interest on convertible stockholder
note payable (net of income tax) . . . - -
--------- ---------
Diluted net income . . . . . . . . . . . . . $ 438,341 $ 1,430,937
========= =========
Weighted average number of common
shares outstanding. . . . . . . . . . . . 17,921,308 16,000,000
Weighted average number of common
share equivalents
Stock options and warrants . . . . . . 398,804 -
Convertible stockholders note payable. - -
--------- ---------
Weighted average number of common and
Common equivalent shares. . . . . . . . . 18,320,112 16,000,000
========= =========
Diluted net income per common share. . . . . $ 0.02 $ 0.09
========= =========
</TABLE>
The effects of the convertible stockholder note payable were anti-dilutive and
accordingly have been excluded from the calculation of diluted net income per
common share.
NOTE 7 - SUBSEQUENT EVENTS
On July 25, 1999, the Company entered into a an agreement to purchase 50%
ownership of "Metalsman.com" Internet domain name, web site and software for
$8,000. The software will be used for the Company's on-line auction activities
and to expand precious metal bullion trading opportunities. The Company further
agreed to cancelable monthly consulting agreement with one of the principals of
F-12
<PAGE>
TANGIBLE ASSET GALLERIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
Metalsman.com for a period of six months at the rate of $2,000 per month for
programming services related to the auction software acquired as part of the
agreement.
On September 20, 1999, the Company entered into lease agreement to rent 11,270
square feet of administrative, customer support, retail gallery and auction
space in Newport Beach, California effective October 7, 1999 at rental rate of
$11,000 per month. Beginning in January 2000, the Company intends to consolidate
its Laguna Beach and Tustin operations into this location. The lease is
scheduled to terminate of October 7, 2001.
On October 26, 1999 the Company granted to certain employees 75,000 stock
options to purchase common stock at an exercise price of $2.00. The stock
options are exercisable on a pro-rata basis over five years with first pro-rata
portion vesting one year from the date of grant.
F-14
<PAGE>
TANGIBLE INVESTMENTS
OF AMERICA, INC.
______________________________
Financial Statements and
Supplementary Information
YEARS ENDED DECEMBER 31, 1998 AND 1997
--------------------------------------------
F-15
<PAGE>
INDEPENDENT AUDITOR'S REPORT
January 23, 1999
May 14, 1999 as to Note 6
August 17, 1999
Board of Directors
Tangible Investments of America, Inc.
Laguna Beach, California
We have audited the accompanying balance sheets of TANGIBLE
INVESTMENTS OF AMERICA, INC. as of December 31, 1998 and 1997, and the related
statements of income and retained earnings, and of cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The 1997 financial statements of TANGIBLE INVESTMENTS OF AMERICA, INC.
were audited by Schmeltzer - Master Group, PC, whose report dated February 6,
1998 expressed an unqualified opinion on the balance sheet and disclaimed an
opinion on the statements of income and retained earnings and of cash flows.
Their report expressed a disclaimer of opinion on the statements of income and
retained earnings and of cash flows because they did not observe the physical
inventory taken as of December 31, 1996, since that date was prior to their
initial engagement as auditors for the Company. Goldenberg Rosenthal, LLP has
performed the necessary procedures to satisfy ourselves as to the balances of
inventory and other assets and liabilities as of December 31, 1996.
<PAGE>
In addition, Goldenberg Rosenthal, LLP has performed the necessary
procedures to enable us to express an opinion on the 1997 financial statements.
Accordingly, our opinion on the 1997 financial statements, as presented herein,
is different from that expressed in the Schmeltzer - Master Group, PC report.
Our procedures related to the 1997 financial statements were completed
as of August 17, 1999 and our opinion is as of that date only as it relates to
the 1997 financial statements.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of TANGIBLE INVESTMENTS
OF AMERICA, INC. as of December 31, 1998 and 1997 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The information included in the
accompanying schedule of selling, general and administrative expenses is
presented for supplementary analysis purposes. Such information has not been
subjected to the auditing procedures applied in the audits of the basic
financial statements, and, accordingly, we express no opinion or any other form
of assurance on that supplementary information.
/S/ Goldenberg Rosenthal, LLP
Jenkintown, Pennsylvania
F-16
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE INVESTMENTS OF AMERICA, INC.
BALANCE SHEETS
December 31
------------------------
<S> <C> <C>
1998 1997
------------ ----------
ASSETS
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . $ 42,285 $ 24,545
Accounts receivable . . . . . . . . . . . . . . 684,498 1,367,099
Other receivables . . . . . . . . . . . . . . . 49,650 3,400
Inventory . . . . . . . . . . . . . . . . . . . 4,856,277 3,051,508
Prepaid expenses. . . . . . . . . . . . . . . . 12,431 4,899
------------ ----------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . 5,645,141 4,451,451
------------ ----------
PROPERTY AND EQUIPMENT
Furniture and equipment . . . . . . . . . . . . 119,572 101,049
Automotive equipment. . . . . . . . . . . . . . - 13,823
Leasehold improvements. . . . . . . . . . . . . 41,601 41,601
------------ ----------
161,173 156,473
Less accumulated depreciation . . . . . . . . . . 68,187 55,017
------------ ----------
92,986 101,456
------------ ----------
OTHER ASSETS
Investment. . . . . . . . . . . . . . . . . . . 4,550 -
Customer list (net of accumulated amortization
of $3,753 in 1998 and $2,085 in 1997) . . . . 21,247 22,915
Security deposits . . . . . . . . . . . . . . . 9,150 9,150
------------ ----------
34,947 32,065
------------ ----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . $ 5,773,074 $4,584,972
============ ==========
</TABLE>
<TABLE>
<CAPTION>
TANGIBLE INVESTMENTS OF AMERICA, INC.
BALANCE SHEETS
(Continued)
December 31
---------------------
<S> <C> <C>
1998 1997
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit . . . . . . . . . . . . . $ 600,000 $ 200,637
Current obligation under capital lease . 4,445 -
Accounts payable . . . . . . . . . . . . 1,626,259 1,663,747
Accrued expenses . . . . . . . . . . . . 37,269 74,872
Shareholder loan payable . . . . . . . . 80,000 -
Taxes payable. . . . . . . . . . . . . . 4,843 6,118
------------- ----------
TOTAL CURRENT LIABILITIES. . . . . . . . . 2,352,816 1,945,374
------------- ----------
COMMITMENTS
LONG-TERM DEBT
Obligation under capital lease net
of current portion . . . . . . . . . . 7,642 -
------------- ----------
STOCKHOLDER'S EQUITY
Common stock, no par value,
Authorized . . . . . 1,000 shares .
Issued and outstanding . 490 shares . 10 10
Additional paid in capital . . . . . . . 1,850,579 1,850,579
Retained earnings. . . . . . . . . . . . 1,562,027 789,009
------------- ----------
3,412,616 2,639,598
------------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 5,773,074 $4,584,972
============= ==========
</TABLE>
See notes to financial statements
F-17
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE INVESTMENTS OF AMERICA, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31
------------------------
<S> <C> <C>
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . $ 1,397,865 $ 740,897
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization . . . . . 25,436 25,090
Gain on sale of property and
equipment . . . . . . . . . . . . . . (775) (804)
Loss on investment. . . . . . . . . . . 8,062 -
Interest on investment. . . . . . . . . (112) -
(Increase) decrease in assets
Accounts receivables. . . . . . . . . 682,601 (1,019,266)
Other receivables . . . . . . . . . . (46,250) 115,779
Inventory . . . . . . . . . . . . . . (1,804,769) (173,861)
Prepaid expenses. . . . . . . . . . . (7,532) (4,392)
Security deposits . . . . . . . . . . - (650)
Increase (decrease) in liabilities
Accounts payable. . . . . . . . . . . 698,456 579,072
Accrued expenses. . . . . . . . . . . (37,604) 45,496
Taxes payable . . . . . . . . . . . . (1,275) 713
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . 914,103 308,074
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of automobile. . . . . . 4,000 11,435
Purchases of property and equipment . . . . (4,074) (34,088)
Purchase of investment. . . . . . . . . . . (12,500) -
Sale of investment. . . . . . . . . . . . . - 20,000
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES . . . . (12,574) (2,653)
------------- ------------
</TABLE>
(continued)
See notes to financial statements
F-18
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE INVESTMENTS OF AMERICA, INC.
STATEMENTS OF CASH FLOWS
(continued)
Year Ended December 31
------------------------
<S> <C> <C>
1998 1997
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash overdraft. . . . . . . . . . . . . . . . (735,945) -
Loan payable - shareholder. . . . . . . . . . 80,000 -
Repayments on obligations under capital lease (2,360) -
Net proceeds from lines of credit . . . . . . 399,363 91,506
Stockholder distributions . . . . . . . . . . (624,847) (449,888)
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES . . . . . (883,789) (358,382)
---------- ----------
NET INCREASE (DECREASE) IN CASH . . . . . . . . 17,740 (52,961)
CASH - BEGINNING OF YEAR. . . . . . . . . . . . 24,545 77,506
---------- ----------
CASH - END OF YEAR. . . . . . . . . . . . . . . $ 42,285 $ 24,545
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for
Interest. . . . . . . . . . . . . . . . . $ 85,683 $ 44,794
Income taxes. . . . . . . . . . . . . . . $ 13,872 $ 2,080
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Fair value of assets acquired for debt. . . $ 14,449 $ -
</TABLE>
See notes to financial statements
F-19
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE INVESTMENTS OF AMERICA, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
Year Ended December 31
------------------------
<S> <C> <C>
1998 1997
---------- ------------
NET SALES. . . . . . . . . . . . . . . $ 19,535,978 $15,767,928
COST OF SALES. . . . . . . . . . . . . 16,146,584 13,363,844
------------- ------------
GROSS PROFIT . . . . . . . . . . . . . 3,389,394 2,404,084
------------- ------------
OPERATING EXPENSES
Selling. . . . . . . . . . . . . . . 936,026 912,070
General and administrative . . . . . 1,035,495 747,490
------------- ------------
TOTAL OPERATING EXPENSES . . . . . . . 1,971,521 1,659,560
------------- ------------
INCOME FROM OPERATIONS . . . . . . . . 1,417,873 744,524
------------- ------------
OTHER INCOME (LOSSES)
Interest . . . . . . . . . . . . . . 1,979 3,569
Gain on sale of property
and equipment. . . . . . . . . . . 775 804
Loss on investment . . . . . . . . . (8,062) -
------------- ------------
TOTAL OTHER INCOME (LOSSES). . . . . . (5,308) 4,373
------------- ------------
INCOME BEFORE INCOME TAXES . . . . . . 1,412,565 748,897
INCOME TAXES . . . . . . . . . . . . . 14,700 8,000
------------- ------------
NET INCOME . . . . . . . . . . . . . . 1,397,865 740,897
RETAINED EARNINGS - BEGINNING OF YEAR. 789,009 518,328
STOCKHOLDER DISTRIBUTIONS. . . . . . . (624,847) (470,216)
------------- ------------
RETAINED EARNINGS - END OF YEAR. . . . $ 1,562,027 $ 789,009
============= ============
</TABLE>
See notes to financial statements
F-20
<PAGE>
<TABLE>
<CAPTION>
TANGIBLE INVESTMENTS OF AMERICA, INC.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Year Ended December 31
-----------------------
<S> <C> <C>
1998 1997
---------- --------
SELLING EXPENSES
Advertising . . . . . . . . . . . . . . $ 115,317 $185,376
Commissions . . . . . . . . . . . . . . 650,239 485,911
Grading . . . . . . . . . . . . . . . . 170,470 240,783
---------- --------
TOTAL SELLING EXPENSES. . . . . . . . . . 936,026 912,070
---------- --------
GENERAL AND ADMINISTRATIVE EXPENSES
Auto. . . . . . . . . . . . . . . . . . 28,248 26,092
Bad debt. . . . . . . . . . . . . . . . 971 -
Bank charges. . . . . . . . . . . . . . 9,318 38
Business gifts. . . . . . . . . . . . . 2,523 2,426
Buyback fees. . . . . . . . . . . . . . - 1,316
Consulting. . . . . . . . . . . . . . . 20,182 3,044
Contributions . . . . . . . . . . . . . 4,293 2,685
Depreciation and amortization . . . . . 25,436 25,090
Dues and subscriptions. . . . . . . . . 8,909 9,973
Employee Benefits . . . . . . . . . . . 1,926 -
Entertainment . . . . . . . . . . . . . 26,557 23,217
Equipment rental. . . . . . . . . . . . 7,359 -
Insurance . . . . . . . . . . . . . . . 27,544 25,294
Interest. . . . . . . . . . . . . . . . 88,428 45,869
Legal and accounting. . . . . . . . . . 35,209 19,012
Miscellaneous . . . . . . . . . . . . . 897 -
Miscellaneous taxes and licenses. . . . 686 5,442
Office supplies and expense . . . . . . 30,510 61,722
Payroll taxes . . . . . . . . . . . . . 20,747 9,227
Penalties . . . . . . . . . . . . . . . 108 -
Postage and freight . . . . . . . . . . 60,727 51,394
Profit sharing plan . . . . . . . . . . 47,501 29,328
Rent. . . . . . . . . . . . . . . . . . 3,503 63,040
Repairs & maintenance . . . . . . . . . 10,092 -
Salary - office . . . . . . . . . . . . 141,321 91,403
Salary - officer. . . . . . . . . . . . 257,955 150,000
Security. . . . . . . . . . . . . . . . 9,155 6,233
Storage . . . . . . . . . . . . . . . . - 269
Telephone . . . . . . . . . . . . . . . 24,268 31,169
Trade shows . . . . . . . . . . . . . . 28,984 20,467
Travel. . . . . . . . . . . . . . . . . 44,490 37,851
Utilities . . . . . . . . . . . . . . . 7,648 5,889
---------- --------
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES $ 1,035,495 $747,490
========== ========
</TABLE>
F-21
<PAGE>
NOTE 1 Summary of Significan Accounting Policies
BUSINESS ACTIVITY
- ------------------
Tangible Investments of America, Inc. (the "Company") was incorporated May 3,
1984 under the laws of the Commonwealth of Pennsylvania. The principal business
activity is that of selling numismatic coins, antiques and artwork to dealers
and collectors.
USE OF ESTIMATES
- ------------------
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from estimates that were used.
CASH AND CASH EQUIVALENTS
- ----------------------------
The Company maintains cash at various financial institutions, which may exceed
federally insured amounts at times and which may exceed balance sheet amounts
due to outstanding checks.
For purposes of preparing the statement of cash flows, the Company considers all
highly liquid investments available for current use with an initial maturity of
three months or less to be cash and cash equivalents.
ACCOUNTS RECEIVABLE
- --------------------
The company grants credit to customers, substantially all of whom are numismatic
coin dealers. No allowance for doubtful accounts has been recorded.
INVENTORY
- ---------
Inventories consisting of coins, artwork and antiques are stated at the lower of
cost (specific identification) or market. Cost value as of December 31, 1998
and 1997 was $4,993,969 and $3,128,298, respectively.
F-22
<PAGE>
NOTE 1 Summary of Significan Accounting Policies (continued)
PROPERTY AND EQUIPMENT
- ------------------------
Property and equipment (including major renewals, replacements, and betterments)
are capitalized and stated at cost. Expenditures for ordinary maintenance and
repairs are charged to operations as incurred. Upon the sale or other
disposition of property, the cost and related accumulated depreciation or
amortization are eliminated from the accounts and any resulting gain or loss is
reflected in the results or operations. Depreciation is computed using both
straight-line and accelerated methods over the estimated useful lives of the
related assets.
Depreciation amounted to $23,768 and $23,422 in 1998 and 1997, respectively
CUSTOMER LIST
- --------------
The cost of the customer list purchased in 1996 is being amortized on the
straight-line method over 15 years. Amortization expense in 1998 and 1997 was
$1,668 and $1,668, respectively.
REVENUE RECOGNITION
- --------------------
Tangible Asset Galleries, Inc. (the "Company") generates revenue from wholesale
and retail sales of rare coins, precious metals bullion, fine art, antiques and
collectibles. The recognition of revenue varies for wholesale and retail
transactions and is, in large part, dependent on the timing and amount of
such consideration.
The Company sells merchandise (generally coins) to other wholesalers/dealers
within its industry on credit, generally for terms of 30 to 60 days, but in no
event greater than one year. The Company grants credit to new dealers based on
extensive credit evaluations, and for existing dealers based on established
business relationships and payment histories. The Company does not obtain
collateral with which to secure its accounts receivable. The Company maintains
reserves for potential credit losses based on an evaluation of specific
receivables and the Company's historical experience related to credit losses.
As of December 31, 1998, management does not believe that there was any
significant credit risk associated with its accounts receivable and,
accordingly, has not established reserves. Revenues with dealers are recognized
when the merchandise is shipped to the related dealer.
F-23
<PAGE>
NOTE 1 Summary of Significan Accounting Policies (continued)
REVENUE RECOGNITION(continued)
- --------------------
The Company also generates revenues from consignment sales. Consignment sales
are in cash and, under limited circumstances, on account. As of December 31,
1998, no consignment sales were included in accounts receivable. There are two
primary methods in which the Company recognizes revenues from consignment sales:
(1) percentage-of-sales and (2) fixed cost. Under the percentage-of-sales
method, the Company receives the merchandise from the consignor and mutually
agrees to sell or auction the underlying merchandise to a third party for a
predetermined floor price, period of time and percentage of the ultimate sales
price, which generally ranges from 5% to 15%. Upon sale of the merchandise to a
third party and cash tendered, the Company recognizes net revenues for its
allocable percentage of the ultimate sales price and remits the remaining cash
proceeds to the consignor. Under the fixed cost method, the Company receives
the merchandise from the consignor and mutually agrees to sell or auction the
underlying merchandise to a third party for a predetermined period of time,
without regard to the ultimate sales price. The Company and the consignor
mutually agree to a price that the Company will pay the consignor upon the
ultimate sale of the underlying merchandise; otherwise, a fixed cost. Upon sale
of the merchandise to a third party and cash tendered, the Company recognizes
revenues for the ultimate sales price and recognizes expense for the fixed cost,
which are remitted to the consignor. Under either method, in the event that the
Company is unsuccessful in selling the consigned merchandise, the Company is
under no obligation to purchase the consigned merchandise.
The Company has two separate return policies (money-back guarantees). Both
policies cover retail transactions only. The first policy relates solely to
rare coins. Customers may return rare coins purchased within 15 days of the
receipt of the rare coins for a full refund as long as the rare coins are
returned in exactly the same condition as they were delivered. In the case of
rare coin sales on account (for credit), customers may cancel the sale within 15
days of making a commitment to purchase the rare coins. The receipt of a
deposit and a signed purchase order evidences the commitment. The second policy
relates to fine art, antiques and collectibles only. These items may be
returned within 30 days of their receipt for a full refund as long as the items
are returned in exactly the same condition as they were delivered. In the case
of fine art, antiques and collectibles sales on account (for credit), customers
may cancel the sale within 30 days of making a commitment to purchase the items.
The receipt of a deposit and a signed purchase order evidences the commitment.
Historically, the Company's retail customers have not exercised their rights to
money-back guarantees and as such, the Company's management has not provided a
reserve for sales returns in the accompanying financial statements.
F-24
<PAGE>
NOTE 1 Summary of Significan Accounting Policies (continued)
ADVERTISING
- -----------
Advertising costs are expensed as incurred. Advertising expenses for 1998 and
1997 were $115,317 and $185,376, respectively.
INCOME TAXES
- -------------
The Company has elected to be taxed as an S corporation for Federal and state
purposes. Under these provisions, the Company does not pay Federal corporate
taxes on its income. Instead, the stockholders are liable for income taxes on
their respective share of the Company's taxable income and other distributable
items. The California tax treatment is substantially the same as Federal,
except for a 1.5% surtax (minimum of $800) imposed on the Company's taxable
income.
PROFIT SHARING PLAN
- ---------------------
The Company's profit sharing plan covers all employees who have met certain
service requirements. Contributions to the plan are at the discretion of the
board of directors each year, however, contributions can not exceed 15% of each
covered employee's salary. Contributions made to the plan for the years ended
1998 and 1997 were $47,501 and $29,328, respectively.
RECLASSIFICATIONS
- -----------------
Certain reclassifications have been made to the 1997 financial statements to
conform with the 1998 financial statement presentation. Such reclassification
had no effect on net income as previously reported.
F-25
<PAGE>
NOTE 2 Investment
INVESTMENT
- ----------
The Company's investment is comprised of a 5% ownership interest in Numismatic
Interactive Network, LLC, an internet-based network for numismatic wholesalers
to trade coins amongst themselves. The investment is carried at cost. Under the
cost method, the Company records income only to the extent of distributions
received. However, the investment is reduced by liquidation distributions (that
is, distributions that exceed the Company's share of the cumulative net income
of the venture subsequent to the date of the investment). The Company recognizes
losses for permanent declines in the value of the investment. During fiscal
1998, the Company recognized a loss totaling $8,062.
NOTE 3 Lines-of-Credit
The Company maintains a line-of-credit at a bank headquartered in California
which provides short-term borrowings with interest payable monthly as follows:
A $600,000 line of credit with interest at prime (prime was 7.75% as of December
31, 1998) plus 2.625%, collateralized by the contents of the building (inventory
and furniture and fixtures) plus the personal guarantee of the sole shareholder.
The outstanding balance as of December 31, 1998 was $600,000.
NOTE 4 Commitments
The Company conducts its California operations from facilities that are leased
under a five-year noncancelable operating lease expiring in June, 2001. There
is an option to renew the lease for an additional five years. Future minimum
rental payments required under the above lease as of December 31, 1998 are as
follows:
Year Ending December 31
-----------------------
1999 $ 60,000
2000 60,000
2001 30,000
--------
$150,000
========
F-26
<PAGE>
NOTE 4 Commitments (continued)
Rent expense for 1998 and 1997 was $63,503 and $63,040, respectively.
The Company leases three vehicles under noncancelable operating leases. Future
minimum lease payments required under the leases as of December 31, 1998 are as
follows:
Year Ending December 31
-----------------------
1999 $ 20,442
2000 13,504
2001 10,128
--------
$ 44,074
========
Lease expense for 1998 and 1997 was $24,488 and $13,067, respectively.
During 1998, the Company acquired equipment totaling $14,449 under a three-year
capital lease agreement. Amortization of the capital lease included in
depreciation amounted to $2,890 for the year ended December 31, 1998. Future
principal payments under this lease is as follows:
Year Ending December 31
-----------------------
1999 $ 5,657
2000 5,657
2001 2,722
-------
Total minimum lease payments $14,036
Amount representing interest 1,949
-------
Present value of future
minimum capital lease payments $12,087
=======
NOTE 5 Related Party Transactions
Shareholder loan payable represents a short-term, non-interest bearing advance
to the Company from its sole stockholder. There are no stated repayment terms;
however, the Company expects to repay the loan during 1999.
F-27
<PAGE>
NOTE 6 Subsequent Events
On March 15, 1999 the Company, pursuant to the unanimous consent of the Board of
Directors, declared a distribution of $1,400,000 to it's sole shareholder.
On March 31, 1999 the Directors of the Company, in consideration of funds
advanced by the sole shareholder to the Company in the amount of $1,400,000,
executed a convertible note in favor of Silvano DiGenova of the same amount.
Interest is payable quarterly at an annual rate of 9%. The note, including any
unpaid accrued interest thereon will become due and payable on March 31, 2004.
The note contains certain acceleration, extension and conversion provisions.
The conversion provision allows Mr. DiGenova the right to convert the principal
amount on this note, or any portion of the principal amount into shares of the
common stock of the Company at a conversion price for each share equal to $1.00.
It is management's intent, upon availability of cash flow, to repay $600,000 of
this note during 1999.
NOTE 7 Major Customers
One customer accounted for 12% of net sales for the year ended December 31, 1998
and 62% of accounts receivable as of December 31, 1998. Another customer
accounted for 12% of accounts receivable as of December 31, 1998.
One customer accounted for 16% of net sales for the year ended December 31, 1997
and 53% of accounts receivable as of December 31, 1997.
F-28
Austin Land & Resources, Inc.
(A Development Stage Company)
FINANCIAL STATEMENTS
December 31, 1998
December 31, 1997
December 31, 1996
F-29
<PAGE>
TABLE OF CONTENTS
PAGE #
INDEPENDENT AUDITORS REPORT 1
ASSETS 2
LIABILITIES AND STOCKHOLDERS' EQUITY 3
STATEMENT OF OPERATIONS 4
STATEMENT OF STOCKHOLDERS' EQUITY 5
STATEMENT OF CASH FLOWS 6
NOTES TO FINANCIAL STATEMENTS 7-11
F-30
<PAGE>
BARRY L. FRIEDMAN, RC.
Certified Public Accountant
1582 TULITA DRIVE OFFICE(702) 361-8414
LAS VEGAS, NEVADA 89123 FAX NO.(702) 896-0278
INDEPENDENT AUDITORS' REPORT
Board of Directors July 2, 1999
Austin Land & Resources, Inc.
Las Vegas, Nevada
I have audited the accompanying Balance Sheets of Austin Land & Resources,
Inc. (A Development Stage Company), as of December 31, 1998, December 31,
1997, and December 31, 1996, and the related statements of operations,
stockholders' equity and cash flows for the three years ended December 31,
1998, December 31, 1997, and December 31, 1996. These financial statements
are the responsibility of the Company's management. My responsibility is to
express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. I believe that my audit provides a
reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Austin Land & Resources,
Inc. (A Development Stage Company), as of December 31, 1998, December 31,
1997, and December 31, 1996, and the results of its operations and cash
flows for the three years ended December 31, 1998, December 31, 1997, and
December 31, 1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 45 to the
financial statements, the Company has suffered recurring losses from
operations and has no established source of revenue. This raises substantial
doubt about its ability to continue as a going concern. Management's plan in
regard to these matters is described in Note #5. These financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Barry L. F iedman
Certified Public Accountant
F-31
<PAGE>
Austin Land & Resources, Inc.
(A Resources Stage Company)
<TABLE>
<CAPTION>
BALANCE SHEET
ASSETS
<S> <C> <C> <C>
December December December
31, 1998 31, 1997 31, 1996
CURRENT ASSETS $ 0 $ 0 $ 0
TOTAL CURRENT ASSETS $ 0 $ 0 $ 0
OTHER ASSETS
Organization Costs (Net) $ 120 $ 192 $ 264
TOTAL OTHER ASSETS $ 120 $ 192 $ 264
TOTAL ASSETS $ 120 $ 192 $ 264
</TABLE>
See accompanying notes to financial statements & audit report
F-32
<PAGE>
Austin Land & Resources, Inc.
(A Development Stage Company)
<TABLE>
<CAPTION>
BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
December December December
31, 1998 31, 1997 31, 1996
CURRENT LIABILITIES
Officer's Advances (Note #5) $ 910 $ 85 $ 85
TOTAL CURRENT LIABILITIES $ 910 $ 85 $ 85
STOCKHOLDERS' EQUITY (Note #4)
Common stock
Par value $0.001
Authorized 50,000,000 shares
Issued and outstanding at
December 31, 1996 -
6,000,000 shares $ 6,000
December 31, 1997 -
6,000,000 shares $ 6,000
December 31, 1998 -
6,000,000 shares $ 6,000
Additional Paid-In Capital 0 0 0
Deficit accumulated during -6,790 -5,893 -5,821
the development stage
TOTAL STOCKHOLDERS' EQUITY $ -790 $ 107 $ 179
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 120 $ 192 $ 264
</TABLE>
See accompanying notes to financial statements & audit report
F-33
<PAGE>
AUSTIN LAND & RESOURCES, INC.
(A Development Stage Company)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
<S> <C> <C> <C> <C>
Year Year Year Aug. 30,1995
Ended Ended Ended (Inception)
Dec. 31, Dec. 31, Dec. 31, to Dec. 31,
1998 1997 1996 1998
INCOME
Revenue $ 0 $ 0 $ 0 $ 0
EXPENSES
General, Selling and
Administrative $ 825 $ 0 $ 85 $ 6,550
Amortization 72 72 72 240
TOTAL EXPENSES $ 897 $ 72 $ 157 $ 6,790
NET PROFIT/LOSS (-) $ -897 $ -72 $ -157 $ -6,790
Net Profit/Loss(-)
per weighted share
(Note 1) $ -.0001 $ NIL $ NIL $ -.0011
Weighted average
Number of common
shares outstanding 6,000,000 6,000,000 6,000,000 6,000,000
</TABLE>
See accompanying notes to financial statements & audit report
F-34
<PAGE>
AUSTIN LAND & RESOURCES, INC.
(A Development Stage Company)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Additional Accumu-
Common Stock paid-in lated
Shares Amount Capital Deficit
Balance,
December 31, 1995 6,000,000 $6,000 $ 0 $-5,664
Net loss year ended
December 31, 1996 _________ ______ _________ -157
Balance,
December 31, 1996 6,000,000 $6,000 $ 0 $-5,821
Net loss year ended
December 31, 1997 _________ ______ __________ -72
Balance,
December 31, 1997 6,000,000 $6,000 $ 0 $-5,893
Net loss year ended
December 31, 1998 _________ ______ __________ -897
Balance,
December 31, 1998 6,000,000 $6,000 $ 0 $-6,790
</TABLE>
See accompanying notes to financial statements & audit report
F-35
<PAGE>
Austin Land & Resources, Inc.
(A Development Stage Company)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
<S> <C> <C> <C> <C>
Year Year Year Aug. 30,1995
Ended Ended Ended (Inception)
Dec. 31, Dec. 31, Dec. 31, to Dec. 31,
1998 1997 1996 1998
CASH FLOWS FROM
OPERATING ACTIVITIES
Net Loss $ -897 $ -72 $ -157 $-6,790
Adjustment to
Reconcile net loss
To net cash provided
by operating
Activities
Amortization +72 +72 +72 +240
Changes in assets and
Liabilities
Organization Costs 0 0 0 -360
Increase in current
Liabilities
Advances Payable +825 0 +85 +910
NET CASH USED IN
OPERATING ACTIVITIES $ 0 $ 0 $ 0 $-6,000
CASH FLOWS FROM
INVESTING ACTIVITIES 0 0 0 0
CASH FLOWS FROM
FINANCING ACTIVITIES
Issuance of Common
Stock for Cash 0 0 0 +6,000
Net Increase (decrease) $ 0 $ 0 $ 0 $ 0
Cash,
Beginning of period 0 0 0 0
Cash, End of period $ 0 $ 0 $ 0 $ 0
</TABLE>
See accompanying notes to financial statements & audit report
F-36
<PAGE>
AUSTIN LAND & RESOURCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, December 31, 1997, and December 31, 1996
NOTE 1 - HISTORY AND ORGANIZATION OF THE COMPANY
The Company was organized August 30, 1995, under the laws of the State of
Nevada as Austin Land & Resources, Inc. The Company currently has no
operations and in accordance with SFAS #7, is considered a development company.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Method
The Company records income and expenses on the accrual method.
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 date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and equivalents
The Company maintains a cash balance in a noninterest -bearing bank that
currently does not exceed federally insured limits. For the purpose of the
statements of cash flows, all highly liquid investments with the maturity of
three months or less are considered to be cash equivalents. There are no
cash equivalents as of December 31, 1998.
F-37
<PAGE>
AUSTIN LAND & RESOURCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, December 31, 1997, and December 31, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
Income taxes are provided for using the liability method of accounting in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS
#109) "Accounting for Income Taxes". A deferred tax asset or liability is
recorded for all temporary difference between financial and tax reporting.
Deferred tax expense (benefit) results from the net change during the year
of deferred tax assets and liabilities.
Organization Costs
Costs incurred to organize the Company are being amortized on a
straight-line basis over a sixty-month period.
Loss Per Share
Net loss per share is provided in accordance with Statement of Financial
Accounting Standards No. 128 (SFAS #128) "Earnings Per Share". Basic loss
per share is computed by dividing losses available to common stockholders by
the weighted average number of common shares outstanding during the period.
Diluted loss per share reflects per share amounts that would have resulted
if dilative common stock equivalents had been converted to common stock. As
of December 31, 1998, the Company had no dilative common stock equivalents
such as stock options.
Year End
The Company has selected December 31st as its year-end.
F-38
<PAGE>
AUSTIN LAND & RESOURCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, December 31, 1997, and December 31, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Year 2000 Disclosure
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have time sensitive software may recognize a date using 110011 as the
year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruption of normal business activities. Since
the Company currently has no operating business and does not use any
computers, and since it has no customers, suppliers or other constituents,
there are no material Year 2000 concerns.
NOTE 3 - INCOME TAXES
There is no provision for income taxes for the period ended December 31,
1998, due to the net loss and no state income tax in Nevada, the state of
the Company's domicile and operations. The Company's total deferred tax
asset as of December 31, 1998 is as follows:
Net operation loss carry forward $ 6,790
Valuation allowance $ 6,790
Net deferred tax asset $ 0
The federal net operation loss carry forward will expire in various amounts
from 2015 to 2018.
This carry forward may be limited upon the consummation of a business
combination under IRC Section 381.
F-39
<PAGE>
AUSTIN LAND & RESOURCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, December 31, 1997, and December 31, 1996
NOTE 4 - STOCKHOLDERS' EQUITY
Common Stock
The authorized common stock of the corporation consists of 50,000,000 shares
with a par value of $0.001 per share.
Preferred Stock
The corporation has no preferred stock.
On September 1, 1995, the Company issued 6,000,000 shares of its $0.001 par
value common stock in consideration of $6,000 in cash.
NOTE 5 - GOING CONCERN
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. However, the Company does not have significant cash or other
material assets, nor does it have an established source of revenues
sufficient to cover its operating costs and to allow it to continue as a
going concern. It is the intent of the Company to seek a merger with an
existing, operating company. Until that time, the stockholders /officers and
or directors have committed to advancing the operating costs of the Company
interest free.
F-40
<PAGE>
AUSTIN LAND & RESOURCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, December 31, 1997, and December 31, 1996
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company neither owns nor leases any real or personal property. An
officer of the corporation provides office services without charge. Such
costs are immaterial to the financial statements and accordingly, have not
been reflected therein. The officers and directors of the Company are
involved in other business activities and may, in the future, become
involved in other business opportunities. If a specific business opportunity
becomes available, such persons may face a conflict in selecting between the
Company and their other business interests. The Company has not formulated a
policy for the resolution of such conflicts.
NOTE 7 - WARRANTS AND OPTIONS
There are no warrants or options outstanding to acquire any additional share
of common or preferred stock.
F-41
MICHELSON GROUP CORPORATE DEVELOPMENT AGREEMENT
This Agreement (the "Agreement") is entered into as of this 5th day of February,
1999, by and between The Michelson Group, Inc., a Nevada corporation
("Michelson"), with its principal place of business at 5000 Birch Street, Suite
9600, Newport Beach, CA 92660, and Tangible Investments Of America with its
principal place of business at 1550 S. Pacific Coast Highway, Suite 103, Laguna
Beach, CA 92651 (the "Company").
RECITALS
WHEREAS, Company intends to be a public company which is required to file
periodic and other reports under section 13 or 15(d) of the Securities Exchange
Act of 1934 and envisions that it will need the services of corporate
development activities of Michelson; and
WHEREAS, Company desires to engage Michelson to perform corporate
development services on behalf of Company; and
WHEREAS, Michelson has the ability and knowledge necessary for the
performance of such services; and
WHEREAS, Michelson and Company desire, pursuant to the terms of this
Agreement, to set forth the terms and conditions pursuant to which Michelson
will perform corporate development services on behalf of Company.
WHEREAS, as used herein, "Applicable Date" means February 12, 1999 if
Michelson does not terminate this Agreement as provided in Section 1.2.6.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
and other good and adequate consideration, the receipt of which is hereby
acknowledged, the parties hereto hereby agree as follows:
ARTICLE 1
SCOPE OF SERVICES
1.1 Michelson agrees to perform for the Company the corporate development
services describe as follows:
1.1.1 Referrals; Key Employees. Michelson shall advise the Company on the
selection of professionals. Company will name one designee of Michelson to its
Board of Directors and recommend said designee to its shareholders for election
as a director at future shareholder meetings of the Company. Michelson
recognizes that the shareholders may not cast their votes for such designee and
such failure shall not constitute a breach of this Agreement.
1
<PAGE>
1.1.2 Stock Option Plan. Michelson recognizes that having management own a
significant ownership position in the Company is a valuable tool for focusing
their attention on increasing shareholder value. Accordingly, Michelson
recommends that the Board of Directors put into effect a stock option plan to be
used for acquiring additional management as well as incentivizing current
management.
1.1.3 Capitalization. Michelson shall make all reasonable efforts to help
Company reach the business objectives to be mutually agreed upon at a later
date.
1.1.4 The Support System. Michelson will develop, implement and maintain
an ongoing stock market support system with the general objective of expanding
stockbroker awareness of the Company's activities, and hence to generate
commensurate interest in the Company's stock.
1.2 Company acknowledges as follows:
1.2.1 No Guarantees. Michelson makes no guarantees, representations or
warranties as to the particular results from Michelson corporate development
services, the response and timeliness of action by the stockholder and brokerage
community, including but not limited to guarantees, representations or
warranties as to future stock price of Company.
1.2.2 Review Responsibility. Company understands that the accuracy and
completeness of any document prepared by Michelson or its advisers is dependent
upon Company's alertness to assure that such document contains all material
facts which might be important and that all such documents must not contain any
misrepresentation of a material fact nor omit information necessary to make the
statements therein not misleading. To that end, Company agrees to review, and
confirm to Michelson in writing that you have reviewed, all materials for their
accuracy, and completeness prior to any use thereof. Company also acknowledges
that this responsibility continues in the event that the materials become
deficient in this regard.
1.2.3 Representations and Warranties. The Company represents and warrants
to Michelson that all information provided prior to the execution of this
Agreement, in writing or otherwise, is true and complete. In the event that
such information is determined to be inaccurate, incomplete or otherwise
misleading, this Agreement may be immediately terminated, at the sole discretion
of Michelson.
1.2.4 Issuance of Additional Securities/Indebtedness. Commencing with the
execution of this Agreement and ending two years from the date of the Agreement,
the Company and its principal shareholders will not issue any additional
securities (except Securities issued in connection with the currently proposed
private securities offerings and Securities issuable upon the exercise or
conversion of existing warrants, options or other convertible securities, or
those issuable upon presently existing employee stock option plans) without the
prior written consent of Michelson.
1.2.5 The contract is subject to Michelson completing its due diligence by
February 12, 1999. If Michelson is not satisfied for any reason, Michelson may
terminate this contract with no obligation to Michelson by February 12, 1999.
2
<PAGE>
ARTICLE II
COMPENSATION FOR SERVICES
2.1 In consideration for entering into this Agreement and performing the
services described immediately above, Company agrees to compensate Michelson as
follows:
2.1.1 Cash Compensation. Company agrees to pay to Michelson a monthly fee
of $6,500.00, to be paid on the 15th of each month, in advance, beginning upon
execution of this agreement. Michelson agrees to accrue its fees until Company
breaks escrow on a $1,000,000.00 bridge financing. Company agrees to bring
current all Michelson fees upon breaking of escrow and to pre-pay three months
forward fees when Company bridge financing reaches $750,000 in gross proceeds.
When Company completes its bridge financing, Company will escrow $50,000.00 with
Michelson to be spent on Investor Relations. Company will approve all expenses
per Section 2.1.5.
2.1.2 Stock Compensation. Commencing on the Applicable Date, Company agrees
to issue to Michelson warrants to purchase that number of shares of common stock
of the Company (the "Warrants") which would, upon exercise, result in Michelson
holding of 4.9% of the outstanding shares of the Company upon completion of the
proposed bridge financing and reverse merger. Such Warrants shall be
exercisable for a period of five years from the Applicable Date at an initial
price of $.01 per share. The Company shall execute and deliver a customary
Warrant Agreement evidencing the Warrants. Michelson acknowledges that the
Warrants and the shares issuable upon exercise of the Warrants (the "Shares")
will initially be "restricted securities" (as such term is define in Rule 144
promulgated under the Securities Act of 1933, as amended ("Rule 144"), that the
Warrants and Shares will include a restrictive legend, and that the Warrants and
Shares cannot be sold unless registered with the United States Securities and
Exchange Commission ("SEC") and qualified by appropriate state securities
regulators, or unless Michelson complies with an exemption from such
registration and qualification (including without limitation, compliance with
Rule 144).
2.1.3 In order to facilitate Company's growth plan, Michelson agrees to
exercise the warrants due Michelson under this contract in the following
schedule: one half of the warrants can be exercised by Michelson immediately,
an additional one fourth can be exercised when the Company breaks escrow on its
bridge financing; the remainder under this contract, including those listed
under paragraph 2.1.4, are due Michelson upon Company breaking escrow on a debt
or equity financing of $3 million or over for the Company.
Company shall issue the stock certificate for the Shares within five (5)
days after the exercise of any Warrants.
2.1.4 Antidilution. It is the intention of the parties hereto that upon
completion of the reverse merger and bridge financing, the number of warrants to
be held by Michelson shall equal 4.9% of the then issued and outstanding shares
of stock. This 4.9% is to be calculated on a fully diluted basis assuming that
the entire bridge financing is completed. The Company agrees that it shall
issue additional warrants to Michelson, if necessary, in order to assure that
Michelson receives this 4.9%. Michelson shall be diluted in the same manner
that all other shareholders of the Company are diluted, in all offerings
occurring subsequent to the completion proposed bridge financing.
2.1.5 Expenses. Company agrees to pay all incidental costs and expenses
associated with services provided by Michelson. Such expenses are separate from
cash compensation as set out above, and include but not limited to such
incidental costs and expenses as travel and lodging, copying charges, printing
charges, long distance telephone charges, facsimile charges, postage, special
mailings and other reasonable expenses. Such expense shall in every instance be
reasonable and verifiable with appropriate back-up documentation. All expenses
over $1,000.00 a month will be pre-approved by Company.
ARTICLE III
TERM OF THE AGREEMENT
3.1 This Agreement shall commence upon execution of this Agreement and
continue during the two-year period of time following the date of this
Agreement. Renewal shall be determined by a vote of the Board of Directors of
the Company. Notwithstanding the foregoing, the Company or Michelson, as the
case may be, may terminate this Agreement immediately upon written notice to
such party upon the occurrence of any of the following: (a) the other party
shall become insolvent or make an assignment for the benefit of Creditors; and
(b) the other party shall breach any of the material terms of this Agreement.
If this Agreement is terminated on or before the termination date of this
Agreement (as set forth above) for any reason other than a default by Michelson,
the entire cash fee shall immediately become due and payable, shall be deemed to
be earned as of such date, and no offset, refund or reduction of payments shall
be attributable to such termination. The provisions of Article II shall survive
the termination of this Agreement.
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ARTICLE IV
STATUS OF PARTIES
4.1 Nothing contained in this Agreement shall be construed to imply that
either Michelson, the Company, or any employee, agent or other authorized
representative of any such party, is a partner, joint venturer, agent officer or
employee of the other. Neither party hereto shall have any authority to bind
the other in any respect vis a vis any third party, it being intended that each
shall remain an independent contractor and responsible only for its own actions.
The Company and Michelson are independent contractors, each responsible for its
own actions, costs and expenses. Neither Michelson nor the Company shall have
any right to, and shall not, commit the other party to any agreement, contract,
or undertaking or waive or compromise any of such other party's rights against
customers or other parties. All compensation paid to Michelson shall constitute
earnings from self-employment income and the Company shall not withhold any
amounts therefrom as federal or state income tax withholding from wages or as
employee contributions under the Federal Insurance Contribution Act (Social
Security) or any similar federal or state law applicable to employers and
employees.
ARTICLE V
INDEMNIFICATION
5.1 Company acknowledges that Michelson must at all times rely upon the
accuracy and completeness of information and documents supplied to Michelson by
the Company's officers, directors, agents and employees. Consequently, Company
and the entities affiliated with Company agree to indemnify and hold harmless
Michelson, its officers, directors, employees and agents (collectively, the
"Indemnitees") against and from any and all losses, claims, damages or
liabilities, joint or several, which Indemnitees or any of them may become
subject, and to reimburse Indemnitees or any of them for any legal or other
expenses (including the cost of any investigation and preparation) incurred by
Indemnitees or any of them, arising out of or in connection with any inquiry,
litigation or other proceeding, whether or not resulting in any liability,
insofar as such losses, claims, damages, liabilities or expenses arise out of,
or are based upon, (i) any act taken or omitted to be taken by Indemnitee's
services hereunder, or (ii) any untrue statement or alleged untrue statement of
a material fact contained in any information (written or oral) furnished by you
to Indemnitees or the omission or alleged omission to state therein a material
fact necessary to make the statements therein not misleading.
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ARTICLE VI
CONFIDENTIALITY
6.1 Michelson agrees not at any time (during or after the term of this
Agreement) to disclose or use, except in pursuit of the business of the Company
(for purposes of this Article, "the Company" shall include the Company and any
affiliate of the Company), and Proprietary Information of the Company acquired
during the term of this Agreement. For Purposes of this Agreement the phrase
"Proprietary Information" means all information which is known or intended to be
known only to Michelson or employees of the Company any document, record or
other information of the Company or others in a confidential relationship with
the Company and relates to specific business matters such as patents, patent
applications, trade secrets, secret processes, proprietary know-how, information
of the Company's business, and identity of suppliers or customers or accounting
procedures of the Company or relates to other business of the Company.
Michelson agrees not to remove from the premises of the Company except in the
pursuit of business of the Company any document, record or other information of
the Company. Michelson recognizes that all such documents, records or other
information, whether developed by Michelson or by someone else for the Company
are the exclusive property of the Company, as the case may be.
ARTICLE VII
MISCELLANEOUS
7.1 WAIVER. No waiver of any breach of default of this Agreement by
Michelson shall be considered to be a waiver of any other breach or default of
this Agreement.
7.2 SEVERABILITY. If any portion of this Agreement is found by a court of
competent jurisdiction to be void or unenforceable, that portion hereof shall be
deemed to be reformed to the extent necessary to cause such portion to be
enforceable and the same shall not affect the remainder of this Agreement, which
shall be given full force and effect without regard to the invalid or
unenforceable portions.
7.3 ENTIRE AGREEMENT. This Agreement, which may be signed in duplicate or
counterparts, replaces and supersedes all previous Agreements between Michelson
and the Company, contains the entire understanding between the parties, and may
not be changed, altered, amended, or modified, except in writing, duly executed
by each of the parties.
7.4 ASSIGNMENT. This Agreement may not be assigned or transferred by either
party hereto without the prior written consent of the other.
7.5 GOVERNING LAW. This Agreement shall be governed by the laws of the
State of California.
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7.6 ATTORNEY'S FEES. Should any action be commenced between the parties to
this Agreement concerning the matters set forth in this Agreement or the right
and duties of either in relation thereto, the prevailing party in such action
shall be entitled, in addition to such other relief as may be granted, to a
reasonable sum as and for its Attorney's Fees and Costs.
7.7 ARBITRATION AND VENUE. Any controversy arising out of or relating to
this Agreement or any modification or extension thereof, including any claim for
damages and/or recision, shall be settled by arbitration in Orange County,
California in accordance with the Commercial Arbitration Rules of the American
Arbitration Association before one arbitrator. The arbitrator sitting in any
such controversy shall have no power to alter or modify any express provisions
of this Agreement or to render any award which by its terms effects any such
alteration, or modification. The parties consent to the jurisdiction of the
Superior Court of California, and of the United States District Court for the
Central District of California for all purposes in connection with such
arbitration including the entry of judgment on any award. The parties consent
that any process or notice of motion or other application to either of said
courts, and any paper in connection with arbitration, may be served by certified
mail or the equivalent, return receipt requested, or by personal service or in
such manner as may be permissible under the rules of the applicable court or
arbitration tribunal, provided a reasonable time for appearance is allowed. The
parties further agree that arbitration proceedings must be instituted within one
year after the claimed breach occurred, and that such failure to institute
arbitration proceedings within such period shall constitute an absolute bar or
the institution of any proceedings and a waiver of all claims. This section
shall survive the termination of this Agreement.
7.8 FACSIMILE SIGNATURE. Any signature on a facsimile copy of the Agreement
shall be binding and valid as if made on the original copy of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first written above.
MICHELSON GROUP, INC.
By: /s/ Bruce Berman
Bruce Berman, President
"COMPANY"
/s/ Silvano DiGenova
By: Silvano DiGenova
Its: President
THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE CONVERSION HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE
TRANSFERRED UNLESS (I) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR SUCH APPLICABLE SECURITIES LAWS, OR (II) IN THE OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY REGISTRATION UNDER THE SECURITIES
ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH
SUCH TRANSFER
TANGIBLE INVESTMENTS OF AMERICA, INC
CONVERTIBLE NOTE
$1,400,000 Newport Beach, California
March 31, 1999
FOR VALUE RECEIVED, the undersigned, Tangible Investments of America, Inc.,
its assigns, and successors (the "Company"), hereby promises to pay to the order
of Silvano DiGenova, or his assigns (the"Purchaser"), in lawful money of the
United States of America, and in immediately available funds, the principal sum
of ONE MILLION FOUR HUNDRED THOUSAND DOLLARS ($1,400,000). The principal hereof
and any unpaid accrued interest thereon shall be due and payable on or before
5:00 p.m., Pacific Standard Time, on March 31, 2004 (unless such payment date is
accelerated as provided in Section 5 hereof, extended as provided in Section 2
hereof, or unless this Note is converted as set forth in paragraph 1 hereof).
Payment of all amounts due hereunder shall be made at the address of the
Purchaser provided for in Section 6 hereof. The Company further promises to pay
interest at the rate of nine percent (9%) per annum on the outstanding principal
balance hereof, such interest to be payable quarterly in arrears on the 1st day
of each quarter, commencing June 30, 1999.
1. CONVERSION. The Purchaser of this Note is en-titled, at its option,
at any time and in whole or in part, until maturity hereof (as extended by
Purchaser) to convert the principal amount of this Note or any portion of the
principal amount hereof --into Shares of the Com-mon Stock of the Company at a
conversion price for each share of Common Stock equal to $1.00. Such conversion
shall be effectuated by surrendering the Note to be converted to the Escrow
Agent, with the form of Conversion Notice attached hereto as Exhibit A, executed
by the Purchaser of this Note evidencing such Purchaser's intention to convert
this Note -or a specified portion hereof (as above provided). The date on which
such Conversion Notice is given shall be deemed to be the date on which the
Purchaser has delivered this Note, with the Conversion Notice duly executed, to
the Company or, if earlier, the date set forth in such Conversion Notice if this
Note and such Conversion Notice is received by the Company within five business
days' after the date set forth in the Conversion Notice.
The Company agrees to take whatever steps are necessary to authorize and
reserve, free of preemptive rights and other similar contractual rights of
stockholders, a sufficient number of its authorized but unissued shares of its
Common Stock to satisfy the rights of conversion of the holder of this Note.
Any certificates representing Conversion Shares transferred to Purchaser
which are not registered for resale without restriction under the Securities Act
or applicable state securities laws shall be endorsed with the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED UNLESS (1)
THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR SUCH
APPLICABLE SECURITIES LAWS, OR (II) IN THE OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY REGISTRATION UNDER THE SECURITIES ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH
TRANSFER.
2. EXTENSION OF MATURITY DATE. Purchaser shall have the right, in its
sole discretion, to extend the maturity of this Note for up to five one-year
periods, each such extension exercisable only by the Purchaser by delivering to
the Company written notice of such extension at any time prior to the maturity
date then in effect.
3. PREPAYMENT. The Company may, at its option, at any time and from
time to time, prepay all or any part of the principal balance of this Note,
without penalty or premium, provided that concurrently with each such prepayment
the Company shall pay accrued interest on the principal so prepaid to the date
of such prepayment.
4. TRANSFERABILITY. This Note shall not be transferred, pledged,
hypothecated, or assigned by the Holder without the express written consent of
the Company.
5. DEFAULT. The occurrence of any one of the following events shall
constitute an Event of Default:
(a) The non-payment, when due, of any principal or interest
pursuant to this Note;
(b) The material breach of any representation or warranty in this
Note or in the Escrow Agreement. In the event the Purchaser becomes aware of a
breach of this Section 7(b), the Purchaser shall notify the Company in writing
of such breach and the Company shall have five business days after notice to
cure such breach;
(c) The breach of any covenant or undertaking, not otherwise
provided for in this Section 7;
(d) A default shall occur in the payment when due (subject to any
applicable grace period), whether by acceleration or otherwise, of any
indebtedness of the Company or an event of default or similar event shall occur
with respect to such indebtedness, if the effect of such default or event
(subject to any required notice and any applicable grace period) would be to
accelerate the maturity of any such indebtedness or to permit the holder or
holders of such indebtedness to cause such indebtedness to become due and
payable prior to its express maturity;
(e) The commencement by the Company of any voluntary proceeding
under any bankruptcy, reorganization, arrangement, insolvency, readjustment of
debt, receivership, dissolution, or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect; or the adjudication of the
Company as insolvent or bankrupt by a decree of a court of competent
jurisdiction; or the petition or application by the Company for , acquiescence
in, or consent by the Company to, the appointment of any receiver or trustee for
the Company or for all or a substantial part of the property of the Company; or
the assignment by the Company for the benefit of creditors; or the written
admission of the Company of its inability to pay its debts as they mature; or
(f) The commencement against the Company of any proceeding
relating to the Company under any bankruptcy, reorganization, arrangement,
insolvency, adjustment of debt, receivership, dissolution or liquidation law or
statute of any jurisdiction, whether now or hereafter in effect, provided,
however, that the commencement of such a proceeding shall not constitute an
Event of Default unless the Company consents to the same or admits in writing
the material allegations of same, or said proceeding shall remain undismissed
for 20 days; or the issuance of any order, judgment or decree for the
appointment of a receiver or trustee for the Company or for all or a substantial
part of the property of the Company, which order, judgment or decree remains
undismissed for 20 days; or a warrant of attachment, execution, or similar
process shall be issued against any substantial part of the property of the
Company.
Upon the occurrence of any Default or Event of Default, the Purchaser, may,
by written notice to the Company, declare all or any portion of the unpaid
principal amount due to Purchaser, together with all accrued interest thereon,
immediately due and payable, in which event it shall immediately be and become
due and payable, provided that upon the occurrence of an Event of Default as set
forth in paragraph (e) or paragraph (f) hereof, all or any portion of the unpaid
principal amount due to Purchaser, together with all accrued interest thereon,
shall immediately become due and payable without any such notice.
6. NOTICES. Notices to be given hereunder shall be in writing and
shall be deemed to have been sufficiently given if delivered personally or sent
by overnight courier or messenger or sent by registered or certified mail (air
mail if overseas), return receipt requested, or by telex, facsimile
transmission, telegram or similar means of communication. Notice shall be
deemed to have been received on the date and time of personal delivery, telex,
facsimile transmission, telegram or similar means of communication, or if sent
by overnight courier or messenger, shall be deemed to have been received on the
next delivery day after deposit with the courier or messenger, or if sent by
certified or registered mail, return receipt requested, shall be deemed to have
been received on the third business day after the date of mailing. Notices
shall be given to the following addresses:
If to the Company:
Tangible Investments of America, Inc.
1550 S. Pacific Coast Highway, Suite 101
Laguna Beach, CA 92651
Facsimile No.: 949-376-2663
With a copy to:
Law Office of M. Richard Cutler
610 Newport Center Drive, Suite 800
Newport Beach, CA 92660
Attn: M. Richard Cutler, Esq.
Facsimile No.: 949-719-1988
If to the Purchaser:
Silvano A. DiGenova
1550 S. Pacific Coast Highway, Suite 101
Laguna Beach, CA 92651
Facsimile No.: 949-376-2663
7. REPRESENTATIONS AND WARRANTIES. The Company hereby makes the
following representations and warranties to the Purchaser:
a. Organization, Good Standing and Power . The Company is a
corporation duly incorporated, validly exiting and in good standing under the
laws of the State of Pennsylvania and has the requisite corporate power to own,
lease and operate its properties and assets and to conduct its business as it is
now being conducted.
b. Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and perform this Note and to issue
and sell this Note, and the Conversion Shares in accordance with the terms
hereof. The execution, delivery and performance of this Note, by the Company
and the consummation by it of the Transactions contemplated hereby and thereby
have been duly and validly authorized by all necessary corporate action, and
that the Company hereby warrants that it will take whatever action is necessary
to authorize and reserve, free of preemptive rights and other similar
contractual rights of stockholders, a sufficient number of its authorized but
unissued shares of its Common Stock to satisfy the rights of conversion of the
holder of this note. This Note when executed and delivered, will constitute a
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditor's rights and remedies or by other
equitable principles of general application.
c. Issuance of Note. The Note issued hereunder and the Conversion
Shares to be issued upon conversion of the Note have been duly authorized by all
necessary corporate action and, when paid for or issued in accordance with the
terms hereof, will be validly issued and outstanding, fully paid and
non-assessable and entitled to the rights and preferences set forth herein.
d. Disclosure. Neither this Note nor any other document,
certificate or instrument furnished to the Purchaser by or on behalf of the
Company in connection with the transactions contemplated by this Note contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements made herein or therein, in the light
of the circumstances under which they were made herein or therein, not
misleading.
Purchaser hereby makes the following representations and warranties to the
Company:
i. Acquisition for Investment. Purchaser is purchasing the Note
solely for its own account for the purpose of investment and not with a view to
or for sale in connection with a distribution. Purchaser does not have a
present intention to sell the Note, or the Conversion Shares nor a present
arrangement (whether or not legally binding) or intention to effect any
distribution of the Note or the Conversion Shares to or through any person or
entity; provided however that by making the representations herein, such
Purchaser does not agree to hold the Note or the Conversion Shares for any
minimum or other specific term and reserves the right to dispose of the Note or
the Conversion Shares at any time in accordance with Federal securities laws
applicable to such disposition. Such Purchaser acknowledges that it is able to
bear the financial risks associated with an investment in the Note or Conversion
Shares and that it has been given full access to such records of the Company and
the subsidiaries and to the officers of the Company and the subsidiaries as it
has deemed necessary and appropriate to conduct its due diligence investigation.
ii. Accredited Purchasers. Such Purchaser is an "accredited
investor" as defined in Regulation D promulgated under the Securities Act.
8. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. The Company
consents to the jurisdiction of any court of the State of California and of any
federal court located in California.
9. GOVERNING LAW. THIS NOTE HAS BEEN DELIVERED IN NEWPORT BEACH,
CALIFORNIA AND SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND TO BE
PERFORMED ENTIRELY THEREIN, WITHOUT GIVING EFFECT TO THE RULES OR PRINCIPLES OF
CONFLICTS OF LAW.
10. ATTORNEYS FEES. In the event the Purchaser or any holder hereof
shall refer this Note to an attorney for collection, the Company agrees to pay
all the costs and expenses incurred in attempting or effecting collection
hereunder or enforcement of the terms of this Note, including reasonable
attorney's fees, whether or not suit is instituted.
11. CONFORMITY WITH LAW. It is the intention of the Company and of the
Purchaser to conform strictly to applicable usury and similar laws.
Accordingly, notwithstanding anything to the contrary in this Note, it is agreed
that the aggregate of all charges which constitute interest under applicable
usury and similar laws that are contracted for, chargeable or receivable under
or in respect of this Note, shall under no circumstances exceed the maximum
amount of interest permitted by such laws, and any excess, whether occasioned by
acceleration or maturity of this Note or otherwise, shall be canceled
automatically, and if theretofore paid, shall be either refunded to the Company
or credited on the principal amount of this Note.
IN WITNESS WHEREOF, the Company has signed and sealed this Note and
delivered it in Newport Beach, California as of March 31, 1999.
ATTEST: TANGIBLE INVESTMENTS OF AMERICA, INC.
By: /S/ Silvano A. DiGenova
Secretary Silvano A. DiGenova
President
Silvano A. DiGenova, Individually
[Corporate Seal]
/S/ Silvano A. DiGenova
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- GROSS
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
September 2 0 1999 , is made by and between LJR Lido Partners LP, A Delaware
Limited Partnership ("Lessor") and Tangible Asset Galleries, Inc, A Nevada
Corporation ("Lessee"), (collectively the "Parties," or individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 3444 Via Lido, Newport Beach, California located in the County of
Orange , State of California, and generally described as (describe briefly the
nature of the property and, if applicable, the "Project", if the property is
located within a Project) 8 , 580 square feet of ground floor space plus
mezzanine area. Lessee understands that there is no parking associated with
premises other than street parking or that available in an adjacent parking
garage at additional cost. ("Premises"). (See also Paragraph 2).
1.3 Term: 2 years and 0months ("Original Term") commencing October 1, 1999
("Commencement Date") and ending September 30 2001 ("Expiration Date"). (See
also Paragraph 3)
1.4 Early Possession: Execution of lease, receipt of insurance
certificate("Early Possession Date"). (See also Paragraphs 3.2 and 3.3)
1.5 Base Rent: $ $ 11,000 per month ("Base Rent") payable on the First day of
each month commencing October 1, 1999 (See also Paragraph 4)
[ ] If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted and/or for common area maintenance charges.
1.6 Base Rent Paid Upon Execution: $11,000 as Base Rent for the period
First month
1.7 Security Deposit: $ 11, 000 ("Security Deposit"). (See also
Paragraph 5)
1.8 Agreed Use: Gallery of retail art and antiques /auction. (See
also Paragraph 6)
1.9 Insuring Party: Lessor is the "Insuring Party". The Annual "Base
Premium" is $ None (See also Paragraph 8)
1.10 Real Estate Brokers: (See also Paragraph 15)
(a) Representation: The following real estate brokers (collectively, the
"Brokers") and brokerage relationships exist in this transaction (check
applicable boxes):
[X] James Ratkovich & Ikssociates, Inc. represents Lessor exclusively
("Lessor's Broker");
[X] Voit Commercial Brokerage represents Lessee exclusively ("Lessee's
Broker"); or
[ ] ___________ represents both Lessor and Lessee ("Dual Agency").
(b) Payment to Brokers: Upon execution and delivery of this Lease by both
Parties, Lessor shall pay to the Broker the fee agreed to in their separate
written agreement (or if there is no such agreement, the sum of 6.0 % of the
total Base Rent for the brokerage services rendered by said Broker).
1.11 Guarantor. The obligations of the Lessee under this Lease are to
be guaranteed by Silvano Digenova ("Guarantor"). (See also Paragraph 37)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 50 and Exhibits, all of which constitute
a part of this Lease.
2. Premises.
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2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may have
been used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 CONDITION. Lessor shall deliver the Premises broom clean and free
of debris on the Commencement Date or the Early Possession Date, whichever first
occurs ("Start Date"), and warrants that the existing electrical, plumbing, fire
sprinkler, fighting, heating, ventilating and air conditioning systems ("HVAC"),
loading doors, if any, and all other such elements of the building, in the
Premises, other than those constructed by Lessee, shall be in good operating
condition on said date and that the surface and structural elements of the roof,
bearing walls and foundation of any buildings on the Premises (the "BUILDING")
shall be free of material defects. If a non-compliance with said warranty exists
as of the Start Date, Lessor shall, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same at
Lessor's expense. lf, after the Start Date, Lessee does not give Lessor written
notice of any non-compliance with this warranty within (I) six (6) months as to
the HVAC systems or (ii) thirty (30) days as to the remaining systems and other
elements of the Building, correction of such non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense, except for the roof,
foundations, and bearing walls which are handled as provided In Paragraph 7.
2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises
comply with all applicable laws, covenants or restrictions of record, building
codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") In effect on the
Start Date. Said warranty does not apply to the use to which Lessee will put the
Premises or to any Alterations or Utility Installations (as defined in Paragraph
7.3(a)) made or to be made by Lessee. NOTE: Lessee Is responsible for
determining whether or not the zoning is appropriate for Lessees 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 six (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 (as opposed to being In existence at the Start Date, which Is addressed
in Paragraph 6.2(e) below) so as to require during the term of this Lease the
construction of an addition to or an alteration of the Building, the remediation
of any Hazardous Substance, or the reinforcement or other physical modification
of the Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the
cost of such work as follows:
(a) Subject to Paragraph 2.3(c) below, If such Capital Expenditures are required
as a result of the specific and unique use of the Premises by Lessee as compared
with uses by tenants in general, Lessee shall be fully responsible for the cost
thereof, provided, however, that if such Capital Expenditure is required during
the last two (2) years of this Lease and the cost thereof exceeds six (6)
months' Base Rent, Lessee may instead terminate this Lease unless Lessor
notifies Lessee, In writing, within ten (10) days after receipt of Lessees
termination notice that Lessor has elected to pay the difference between the
actual cost thereof and the amount equal to six (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 ninety (90) days thereafter. Such
termination date shall, however, in no event be earlier than the last day that
Lessee could legally utilize the Premises without commencing such Capital
Expenditure.
(b) If such Capital Expenditure is not the result of the specific and
unique use of the Premises by Lessee (such as, governmentally mandated seismic
modifications), then Lessor and Lessee shall allocate the obligation to pay for
such costs pursuant to the provisions of Paragraph 7.1 (c); provided, however,
that If such Capital Expenditure Is required during the last two years of this
Lease or if Lessor reasonably determines that it is not economically feasible to
pay its share thereof, Lessor shall have the option to terminate this Lease upon
ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor.
in writing, within ten (10) days after receipt of Lessor's termination notice
that Lessee will pay for such Capital Expenditure. If Lessor does not elect to
terminate, and fails to tender its share of any such Capital Expenditure, Lessee
may advance such funds and deduct same, with Interest, from Rent until Lessor's
share of such costs have been fully paid. If Lessee is unable to finance
Lessor's share, or if the balance of the Rent due and payable for the remainder
of this Lease is riot sufficient to fully reimburse Lessee on an offset basis,
Lessee shall have the right to terminate this Lease upon thirty (30) days
written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital Expenditures
are intended to apply only to non-voluntary, unexpected, and new Applicable
Requirements. If the Capital Expenditures are instead triggered by Lessee as a
result of an actual or proposed change in use, change in Intensity of use, or
modification to the Premises then, and in that event, Lessee shall be fully
responsible for the cost thereof, and Lessee shall not have any right to
terminate this Lease.
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2.4 ACKNOWLEDGMENTS. Lessee acknowledges that: (a) it has been advised
by Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements), and their suitability for Lessee's intended use, (b) Lessee has
made such Investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to its occupancy of the
Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Lease. In addition, Lessor acknowledges that: (a)
Broker has made no representations, promises or warranties concerning Lessees
ability to honor the Lease or suitability to occupy the Premises, and (b) it is
Lessors sole responsibility to investigate the financial capability and/or
suitability of all proposed tenants. response
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this Lease
shall, however, be in effect during such period. Any such early possession shall
not affect the Expiration Date.
3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is riot delivered within sixty (60)
days after the Commencement: Date, Lessee may, at its option, by notice in
writing within ten (10) days after the end of such sixty (60) day period, cancel
this Lease, In which event the Parties shall be discharged from all obligations
hereunder. If such written notice Is not received by Lessor within said ten (10)
day period, Lessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Lessee 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 I 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
four (4) months after the Commencement Date, this Lease shall
terminate unless other agreements are reached between Lessor and Lessee, 1 in
writing.
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its obligation
to provide evidence of Insurance (Paragraph 8.5). Pending delivery of such
evidence, Lessee shall be required to perform all of its obligations under this
Lease from and after the Start Date, including the payment of Rent,
notwithstanding Lessor's election to withhold possession pending receipt of such
evidence of Insurance. Further, If Lessee is required to perform any other
conditions prior to or concurrent with the Start Date, the Start Date shall
occur but Lessor may elect to withhold possession until such conditions are
satisfied.
4. RENT.
4.1. RENT DEFINED. All monetary obligations of Lessee to Lessor under
the terms of this Lease (except for the Security Deposit) are deemed to be rent
(-Rent-).
4.2 PAYMENT. Lessee shall cause payment of Rent to be received by
Lessor In lawful money of the United States, without offset or deduction (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 (1)
full calendar month shall be prorated based upon the actual number of days of
said month. Payment of Rent shall be made to Lessor at its address stated herein
or to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver of Lessor's rights to the balance of such Rent, regardless of
Lessors endorsement of any check so stating.
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5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit as security for Lessees faithful performance of its
obligations under this LEASE. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. If the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from 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 Lessors reasonable
judgment, significantly reduced, Lessee shall deposit such additional monies
with Lessor as shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on said change In financial condition.
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within fourteen (14) days after the expiration or termination
of this Lease, If Lessor elects to apply the Security Deposit only to unpaid
Rent, and otherwise within thirty (30) days after the Premises have been vacated
pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the
Security Deposit not used or applied by Lessor. No part of the Security Deposit
shall be considered to be held in trust, to bear interest or to be prepayment
for any monies to be paid by Lessee under this Lease.
6. Use.
6.1 USE. Lessee shall use and occupy the Premises only for the Agreed
Use, or any other legal use which is reasonably comparable thereto, and for no
other purpose. Lessee shall not use or permit the use of the Premises in a
manner that is unlawful, creates damage, waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to neighboring 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, or is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used
in this Lease shall mean any product, substance, or waste whose presence, use,
manufacture, disposal, transportation, or release, either by itself or in
combination with other materials expected to be on the Premises, is either: (1)
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 t hereof.
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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(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, e xpenses, penalties and attorneys! and consultants' fees arising out of
or Involving any Hazardous Substance brought onto the Premises by or for Lessee,
or any third party (provided, however, that Lessee shall have no liability under
this Lease with respect to underground migration of any Hazardous Substance
under the Premises from adjacent properties). Lessees 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. Lessors obligations, as
and when required by the Applicable Requirements, shall include, but not be
limited to, the cost of investigation, removal, remediation, restoration and/or
abatement, and shall survive the expiration or termination of this Lease.
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the responsibility
and pay for any investigations or remediation measures required by governmental
entities having jurisdiction with respect to the existence of Hazardous
Substances on the Premises prior to the Start Date. unless such remediation,
measure Is required as a result of Lessee's use (including alterations) of the
Premises, In which event Lessee &"oil be responsible for such payment. Less"
shall cooperate fully In any such activities at the request of Lessor, including
allowing Lessor and Lessors agents to have reasonable access to the Premises at
reasonable times in order to carry out Lassoes investigative and remedial
responsibilities.
(g) Lessor Termination Option. If a Hazardous Substance Condition occurs
during the term or this Lease. unless Lessee Is legally responsible therefor (in
which case Lessee shag make the Investigation and remediation thereof required
by the Applicable Requirements and #6 Lease shall continue in fun force and
effect, but subject to Lessor's rights under Paragraph 6.2(d) arid 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
Lessors expense, In which event this Lease shall continue in fun force and
effect, or (1) if the estimated cost to remediate such condition exceeds twelve
(12) times the then monthly Base Rent or $100,000, whichever Is greater, give
written notice to Lessee, within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such Hazardous Substance Condition, of Lassoes
desire to terminate this Lease as of the date sixty (60) days following the date
of such notice. In the event Lessor elects to give a termination notice, Lessee
may, within ten (10) days thereafter, give written notice to Lessor of Lessees
commitment to pay the amount by which the cost of the remediation of such
Hazardous Substance Condition exceeds an amount equal to twelve (12) times the
then monthly Base Rent or $100,000, whichever Is greater. Lessee shag provide
Lessor with said funds or satisfactory assurance thereof within thirty (30) days
following such commitment In such event, this Lease shag continue In full force
arid effect, and Lessor shag proceed to make such remediation as soon as
reasonably possible after the required funds are available. 9 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 shag. 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 we now In effect or become effective after the Start Date. Lessee
shag, within ten (10) days after receipt of Lessors written request, provide
Lessor with copies of all permits and other documents. and other Information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall Immediately upon receipt. notify Lessor In writing (with
copies of any documents Involved) of any threatened or actual claim, notice.
citation, warning, complaint or report pertaining to or involving the failure of
Lessee or the Premises to comply with any Applicable Requirements.
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6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's 'Lender" (as defined
In Paragraph 30 be" and consultants shall have the fight 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 shag be
paid by Lessor, unless a violation of Applicable Requirements, or a
contamination is found to exist or be imminent, or the Inspection is requested
or ordered by a governmental authority. In such case, Lessee shall upon request
reimburse Lessor for the cost of such Inspections. so long as such inspection Is
reasonably related to the violation or contamination.
7. Maintenance; Repairs, Utility Installations; Trade Fixtures and
Alterations.
7.1 LESSEE'S OBLIGATIONS.
(a) In General. Subject to the provisions of Paragraph 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 6.3 (Lessees
Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage
and Destruction). and 14 (Condemnation), Lessee shag, at Lessee's sole expense,
keep the Premises, Utility Installations, and Alterations In good order.
condition and repair (whether or not the portion of the Premises requiring
repairs, or the means of repairing the same, are reasonably or readily
accessible to Lessee, and whether or not the need for such repairs occurs as a
result of 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.
heating. electrical. lighting facilities, vessels, fire protection system,
fixtures, walls (interior and exterior), ceilings, floors, windows, doors,
skylights, landscaping, driveways, WES fences, signs, sidewalks and parkways
located in, on. or adjacent to the Premises. Lessee Is also responsible for
keeping the roof and roof drainage clean and free of debris. Lessor shag keep
the surface and structural elements of the roof, foundations, and bearing walls
in good repair (see Paragraph 72). Lessee, In keeping the Premises In good
order, condition and repair. shag exercise and perform good maintenance
practices. Lessee's obligations shag Include restorations, replacements or
renewals when necessary to keep the Premises and all Improvements thereon or a
part thereof In good order, condition and state of repair. Lessee shag, during
the term of this Lease. keep the exterior appearance of the Building in a
first-class condition (including, e.g., graffiti removal) consistent with the
exterior appearance of other similar facilities of comparable age and size In
the vicinity, including, when necessary, the exterior repainting of the
building. HVAC System repairs to be at Lessor's expense.
(B) SERVICE CONTRACTS. Lessee shag. at Lessees sole expense, procure and
maintain contacts, with copies to Lessor. In customary form and substance for,
and with contractors specializing and experienced In the maintenance of the
following equipment and improvements ("Basic Elements"), if any, if and When
installed an the Premises: (iii) fire extinguishing systems, Including fire
alarm and/or smoke detection. (vi) clarifiers, and (viii) any other equipment,
if reasonably required by Lessor.
(C) REPLACEMENT. Subject to Lessee's indemnification of Lessor as set forth
in Paragraph 8.7 below. and without relieving Lessee of lability resulting from
Lessee's failure to exercise and perform good maintenance practices, if the
Basic Elements described In Paragraph 7 1 (b) cannot be repaired other than at a
Cost which is In excess of 50% or the cost of replacing such Basic Elements.
then such Basic Elements shall be replaced by Lessor. and the cost thereof shall
be prorated between the Parties and Lessee shall only be obligated to pay, each
month during the remainder of the term of this Lease. on the date on which Base
Rent Is due. an amount equal to the product of multiplying the cost of such
replacement by a fraction, the numerator of which Is one, and the denominator of
which Is the number of months of the useful fife of such replacement as such
useful life is specified pursuant to Federal Income tax regulations or
guidelines for depreciation whfion thereof (including Interest on the
unamortized balance as Is then commercialty reasonable In the judgment of
Lessor's accountants), with Lessee reserving the right to prepay Its obligation
at any time
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition). 7-3 (Compliance with Covenants. Restrictions and Building Code). 9
(Damage or Destruction) and 14 (Condemnation), it Is Intended by the Parties
hereto that Lessor have no obligation, In any manner whatsoever. to repair and
maintain the Premises, or the equipment therein, all of which obligations are
Intended to be that of the Lessee. except for the surface and structural
elements of the Md. foundations and bearing walls, the repair of which shall be
the responsibility of Lessor upon receipt of written notice that such a repair
is necessary. it Is the Intention of the Parties that the terms of this Lem
govern the respective obligations of the Parties as to maintenance and repair of
the Premises, and they expressly waive the benefit of any statute now or
hereafter in effect to the extent it Is Inconsistent with the terms of this
Lease.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
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(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" refers
to all floor and window coverings, air Ines. power panels, electrical
distribution. security and fire protection systems and signs, communication
systems, lighting fixtures. HVAC equipment plumbing. and fencing In or on the
Premises. The term "Trade Fixtures" shall mean Lessees machinery and equipment
that can be removed without doing material damage to the Premises. The term
"ALTERATIONS@ shall mean any modification of the improvements, other than
Utility Installations or Trade Fixtures, whether by addition or deletion.
"LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or
Utility Installations to the Premises without Lessor's prior written consent.
Lessee may, however, make non-structural Utility Installations to the interior
of the Premises (excluding the roof) without such consent but upon notice to
Lessor, as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during this Lease as extended does not exceed $50,000 in
the aggregate or $10,000 in any one year.
(b) CONSENT. Any Alterations or Utility Installations that Lessee shall
desire to make and which require the consent of the Lessor shall be presented to
Lessor in written form with detailed plans. Consent shall be deemed conditioned
upon Lessee's: (I) acquiring all applicable governmental permits, (ii)
furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (III) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility. If Lessee shall contest the validity of any such
lien, claim or demand, then Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof. If Lessor shall require, Lessee shall furnish a surety bond In an
amount equal to one and one-half times the amount of such contested lien, claim
or demand, indemnifying Lessor against liability for the same. If Lessor elects
to participate in any such action, Lessee shall pay Lessor's attorneys' fees and
costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require removal or elect
ownership as hereinafter provided, all Alterations and Utility Installations
made by Lessee shall be the property of Lessee, but considered a part of the
Premises. Lessor may, at any time, elect in writing to be the owner of all or
any specified part of the Lessee Owned Alterations and Utility Installations.
Unless otherwise Instructed per Paragraph 7.4(b) hereof, all Lessee Owned
Alterations and Utility Installations shall, at the expiration or termination of
this Lease, become the property of Lessor and be surrendered by Lessee with the
Premises.
(b) REMOVAL. By delivery to Lessee of written notice from Lessor not
earlier than ninety (90) and riot later than thirty (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. * (I) Any tenant improvements reasonably approved by Lessor shall not
be required to be removed by Lessee at the expiration of the Lease.
(C) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the
Expiration Date or any earlier termination date, with all of the Improvements,
parts and surfaces thereof broom clean and free of debris, and in good operating
order, condition and state of repair, ordinary wear and tear excepted. "Ordinary
wear and tear" shall not Include any damage or deterioration that would have
been prevented by good maintenance practice. Lessee shall repair any damage
occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee
Owned Alterations and/or Utility Installations, furnishings, and equipment as
well as the removal of any storage tank installed by or for Lessee, and the
removal, replacement, or remediation of any soil, material or groundwater
contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and
shall be removed by Lessee. The failure by Lessee to timely vacate the Premises
pursuant to this Paragraph 7.4(c) without the express written consent of Lessor
shall constitute a holdover under the provisions of Paragraph 26 below.
8. Insurance; Indemnity.
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8.1 PAYMENT OF PREMIUM INCREASES
(a) Lessee shall pay to Lessor any insurance cost increase ("Insurance Cost
Increase") occurring during the term of this Lease. "Insurance Cost Increase' Is
defined as any increase in the actual cost of the insurance required under
Paragraphs 8.2(b), 8.3(a) and 8.3(b) ("Required Insurance"), over and above the
Base Premium as hereinafter defined calculated on an annual basis. "Insurance
Cost Increase" shall include but not be limited to Increases resulting from the
nature of Lessee's occupancy, any act or omission of Lessee, requirements of the
holder of mortgage or deed of trust covering the Premises, increased valuation
of the Premises and/or a premium rate increase. The Parties are encouraged to
fill in the Base Premium in Paragraph 1.9 with a reasonable premium for the
Required Insurance based on the Agreed Use of the Premises. If the Parties fall
to, Insert a dollar amount In Paragraph 1.9, then the Base Premium shall be the
lowest annual premium reasonably obtainable for the Required Insurance as of the
commencement of the Original Term for the Agreed Use of the Premises. In no
event, however, shall Lessee be responsible for any portion of the increase in
the premium cost attributable to liability insurance carried by Lessor under
Paragraph 8.1 (b) In excess of $2,000,000 per occurrence.
(b) Lessee shall pay any such Insurance Cost Increase to Lessor within
thirty (30) days after receipt by Lessee of a copy of the premium statement or
other reasonable evidence of the amount due. If the insurance policies
maintained hereunder cover other property besides the Premises, Lessor shall
also deliver to, Lessee a statement of the amount of such Insurance Cost
Increase attributable only to the Premises showing In reasonable detail the
manner in which such amount was computed. Premiums for policy periods commencing
prior to, or extending beyond the term of this Lease, shall be prorated to
correspond to the term of this Lease.
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 against
claims for bodily injury, personal injury and property damage based upon or
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an occurrence basis
providing single limit coverage in an amount not less than $2,000,000 per
occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS of PREMISES
ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT"
FOR damage caused by heat, smoke or fumes from a hostile fire. The Policy shall
not contain any intra-insured exclusions as between Insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an -insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
Insurance carried by Lessee shall be primary to and not contributory with any
similar insurance carried by Lessor, whose insurance shall be considered excess
Insurance only.
(b) CARRIED BY LESSOR. Lessor shall maintain liability insurance as
described In Paragraph 8.2(a), in addition to, and not In lieu of, the insurance
required to be maintained by Lessee. Lessee shall not be named as an additional
insured therein.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor, with loss payable to Lessor,
any groundlessor, and to any Lender(s) insuring loss or damage to the Premises.
The amount of such insurance shall be equal to the full replacement costof the
Premises, as the same shall exist from time to time, or the amount required by
any Lenders, but in no event more than the commercially reasonable and available
insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations, Trade Fixtures, and Lessees personal
property shall be Insured by Lessee under Paragraph 8.4 rather than by Lessor.
If the coverage is available and commercially appropriate, such policy or
policies shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by a Lender or
Included in the Base Premium), 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.
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(b) Rental Value. The Insuring Party shall obtain and keep in force a
policy or policies in the name of Lessor, with loss payable to Lessor and any
Lender, Insuring the loss of the full Rent for one (1) year. Said insurance
shall provide that in the event the Lease is terminated by reason of an Insured
loss, the period of Indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide for
one full year's loss of Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurance clause,
and the amount of coverage shall be adjusted annually to reflect the projected
Rent otherwise payable by Lessee, for the next twelve (12) month period.
(c) Adjacent Premises. If the Premises are part of a larger building, or of
a group of buildings owned by Lessor which are adjacent to the Premises, the
Lessee shall pay for any increase In the premiums for the property insurance of
such building or buildings if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance coverage on
all of Lessees personal property, Trade Fixtures, and Lessee Owned Alterations
and Utility Installations. Such insurance shall be full replacement cost
coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds
from any such insurance shall be used by Lessee for the replacement of personal
property, Trade Fixtures and Lessee Owned Alterations and Utility Installations.
Lessee shall provide Lessor with written evidence that such insurance is in
force.
(b) BUSINESS INTERRUPTION. 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 "Bees
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall riot 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 thirty (30) days prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may ORDER SUCH
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by ft. 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 riot 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 Lessors gross negligence or willful misconduct,
Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor
and its agents, Lessors 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 Lessees 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.
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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, Lessees employees, contractors, invitees, customers, or any other person
In or about the Premises, whether such damage or injury Is caused by or results
from fire, steam, electricity, gas, water or rain, or from the, breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the sold Injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessors 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, Utility
Installations and Trade Fixtures, which can reasonably be repaired in six (6)
months or less from the date of the damage or destruction. Lessor shall notify
Lessee in writing within thirty (30) days from the date of the damage or
destruction as to whether -or not the damage is Partial or Total.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the
Premises, other than Lessee Owned Alterations and Utility Installations and
Trade Fixtures, which cannot reasonably be repaired in six (6) months or less
from the date of the damage or destruction. Lessor shall notify Lessee in
writing within thirty (30) days from the date of the damage or destruction as to
whether or not the damage is Partial or Total.
(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) AReplacement 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, 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 Lessors 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 Lessors
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required Insurance was not in
force or the Insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds as and when
required to complete said repairs. In the event, however, such shortage was due
to the fact that, by reason of the unique nature of the improvements, full
replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (10) day period, the party responsible for making the repairs
shall complete them as soon as reasonably possible and this Lease shall remain
in full force and effect. If such funds or assurance are not received, Lessor
may nevertheless elect by written notice to Lessee within ten (10) days
thereafter to: (1) make such restoration and repair as is commercially
reasonable with Lessor paying any shortage in proceeds, in which case this Lease
shall remain in full force and effect; or (ii) have this Lease terminate thirty
(30) days thereafter. Lessee shall not be entitled to reimbursement of any funds
contributed by Lessee to repair any such damage or destruction. Premises Partial
Damage due to flood or earthquake shall be subject to Paragraph 9.3,
notwithstanding that there may be some insurance coverage, but the net proceeds
of any such insurance shall be made available for the repairs if made by either
Party.
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9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either (I) repair such damage as soon as reasonably possible at
Lessor's expense, In which evert this Lease shall continue in full force and
effect, or (ii) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee shall
have the right within ten (10) days after receipt of the termination notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage without reimbursement from Lessor. Lessee shall provide Lessor with
said funds or satisfactory assurance thereof within thirty (30) days after
making such commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate sixty (60) days
following such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months
of this Lease there is damage for which the cost to repair exceeds one (1)
month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (1)
the date which is TEN DAYS AFTER Lessee's receipt of Lessors written notice
purporting to terminate this Lease, or (I!) 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 Lessors commercially reasonable expense,
repair such damage as soon as reasonably possible and this Lease shall continue
in full force and effect. If Lessee falls 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. Ali other
obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall
have no liability for any such damage, destruction, remediation, repair or
restoration EXCEPT AS provided herein.
(b) Remedies. If Lessor shall be obligated to repair or restore the
Premises and does not commence, in a substantial and meaningful way, such repair
or restoration within ninety (90) days after such obligation shall accrue,
Lessee may, at any time prior to the commencement of such repair or restoration,
give written notice to Lessor and to any Lenders of which Lessee has actual
notice, of Lessee's election to terminate this Lease on a date not less than
sixty (60) days following the giving of such notice. If Lessee gives such notice
and such repair or restoration is not commenced within thirty (30) days
thereafter, this Lease shall terminate as of the date specified In said notice.
If the repair or restoration is commenced within said thirty (30) days, this
Lease shall continue in full force and effect. "COMMENCE" shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant
to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by Lessee to
Lessor. Lessor shall, in addition, return to Lessee so much of Lessee!s Security
Deposit as has not been, or is not then required to be, used by Lessor.
9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall Include any form of assessment; real estate, general,
special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal Income or estate taxes); improvement bond; and/or license
fee Imposed upon or levied against any legal or equitable interest of Lessor In
the Premises, Lessors right to other Income therefrom, and/or Lessors business
of leasing, by any authority having the direct or indirect power to tax and
where the funds are generated with reference to the Building address and where
the proceeds so generated are to be applied by the city, county or other local
taxing authority of a jurisdiction within which the Premises are located. The
term "REAL PROPERTY
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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 riot limited to, a change in the ownership of the
Premises.
10.2
(a) PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes applicable
to the Premises provided, however, that Lessee shall pay to Lessor the amount,
if any, by which Real Property Taxes applicable to the Premises increase over
the fiscal tax year during which the Commencement Date occurs ("TAX INCREASE").
Subject to Paragraph 10.2(b), payment of any such Tax Increase shall be made by
Lessee to Lessor within thirty (30) days after receipt of Lessor's written
statement setting forth the amount due and the computation thereof. If any such
taxes shall cover any period of time prior to or after the expiration or
termination of this Lease, Lessee's share of such taxes shall be prorated to
cover only that portion of the tax bill applicable to the period that this Lease
is in effect.
(b) Advance Payment. In the event Lessee incurs a late charge on any Rent
payment, Lessor may, at Lessors option, estimate the current Real Property
Taxes, and require that the Tax Increase be paid in advance to Lessor by Lessee,
either: (I) In a lump sum amount equal to the amount due, at least twenty (20)
days prior to the applicable delinquency date; or (ii) monthly in advance with
the payment of the Base Rent. If Lessor elects to require payment monthly in
advance, the monthly payment shall be an amount equal to the amount of the
estimated installment of the Tax Increase divided by the number of months
remaining before the month in which said installment becomes delinquent. When
the actual amount of the applicable Tax Increase Is known, the amount of such
equal monthly advance payments shall be adjusted as required to provide the
funds needed to pay the applicable Tax Increase. If the amount collected by
Lessor is insufficient to pay the Tax Increase when due, Lessee shall pay
Lessor, upon demand, such additional sums as are necessary to pay such
obligations. All monies paid to Lessor under this Paragraph may be Intermingled
with other monies of Lessor and shall not bear interest. In the event of a
Breach by Lessee In the performance of its obligations under this Lease, then
any balance of funds paid to Lessor under the provisions of this Paragraph may,
at the option of Lessor, be treated as an additional Security Deposit.
(c) ADDITIONAL IMPROVEMENTS. Notwithstanding anything to the contrary in
this Paragraph 10.2, Lessee shall pay to Lessor upon demand therefor the
entirety of any increase in Real Property Taxes assessed by reason of
Alterations or Utility Installations placed upon the Premises by Lessee or at
Lessee!s request.
10.3 Joint Assessment. If the Premises are not separately assessed, Lessees
liability shall be an equitable proportion of the Tax Increase for all of the
land and improvements included within the tax parcel assessed, such proportion
to be conclusively determined by Lessor from the respective valuations assigned
In the assessor's work sheets or such other information as may be reasonably
available.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency, all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee!s said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessees property within ten (10) days after
receipt of a written statement.
11. Utilities. Lessee shall pay for all water, gas, heat, light,
power, telephone, trash disposal and other utilities and services supplied to
the Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign, transfer,
mortgage or encumber (collectively, "assign or assignment") or sublet all or any
part of Lessee!s Interest in this Lease or in the Premises without Lessor's
prior written consent.
(b) A change in the control of Lessee shall constitute an assignment
requiring consent. The transfer, on a cumulative basis, of twenty-rive percent
(25%) or more of the voting control of Lessee shall constitute a change in
control for this purpose.
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(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
twenty-five percent (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 Lessors 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 CH) upon thirty (30) days written notice,
increase the monthly Base Rent to one hundred ten percent (110%) of the Base
Rent then In effect. Further, In the event of such Breach and rental adjustment,
(1) the purchase price of any option to purchase the Premises held by Lessee
shall be subject to similar adjustment to one hundred ten percent (110%) of the
price previously in effect, and (11) all fixed and non-fixed rental adjustments
scheduled during the remainder of the Lease term shall be Increased to one
hundred ten percent (I 10%) 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, any assignment or subletting shall not:
(I) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease; (11) release Lessee of
any obligations hereunder; or (III) after 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
Lessors right to exercise its remedies for Lessees Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not constitute a
consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may proceed
directly against Lessee, any Guarantors or anyone else responsible for the
performance of Lessee's obligations under this Lease, including any assignee or
sublessee, without first exhausting Lessors remedies against any other person or
entity responsible therefore to Lessor, or any security held by Lessor.
(e) Each request for consent to an assignment or subletting shall be In
writing, accompanied by information relevant to Lessors 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 $1,000 or
ten percent (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.
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Lessee agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by reason of
accepting such assignment or entering into such sublease, be deemed to HAVE
ASSUMED AND AGREED TO CONFORM AND comply with each and every term, covenant,
condition and obligation herein to be observed or performed by Lessee during the
term of said assignment or sublease, other than such obligations as are contrary
to or inconsistent with provisions of an assignment or sublease to which Lessor
has specifically consented to in writing.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included In all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessees 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 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 no 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 Lessors prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to
comply with or perform any of the terms, covenants, conditions or rules under
this Lease. A "BREACH" is defined as the occurrence of one or more of the
following Defaults, and the failure of Lessee to cure such Default within an,
applicable grace period:
(a) The abandonment of the Premises; or the vacating of the Premises
without providing a commercially reasonable level of security, and/or Security
Deposit 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 three (3) business days
following written notice to Lessee.
(c) The failure by Lessee to provide (I) reasonable written evidence of
compliance with Applicable Requirements, (ii) the service contracts, (III) the
rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42 (easements),
or (viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.
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(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof.
other than those described in subparagraphs 13.1 (a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (1) the making of any
general arrangement or assignment for the benefit of creditors; (ii) becoming a
"DEBTOR" AS defined in 11 U.S.C. ' 101 or any successor statute thereto (unless,
in the case of a petition filed against Lessee, the same is dismissed within
sixty (60) days); (III) the appointment of a trustee or receiver to take
possession of substantially all of Lessees assets located at the Premises or of
Lessee's Interest in this Lease, where possession is not restored to Lessee
within thirty (30) days; or (iv) the attachment, execution or other judicial
seizure of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
thirty (30) days; provided, however, in the event that any provision of this
subparagraph 13.1 (e) is contrary to any applicable law, such provision shall be
of no force or effect, and not affect the validity of the remaining provisions.
(f) The discovery that any financial statement of Lessee or of any
Guarantor given to Lessor was materially false.
(g) If the performance of Lessees obligations under this Lease Is
guaranteed: (1) 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 Guarantors becoming insolvent or the subject of a
bankruptcy Ming; (iv) a Guarantors refusal to honor the guaranty-, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory basis, and
Lessee's failure, within sixty (60) days following written notice of any such
event, to provide written alternative assurance or security, which, when coupled
with the then existing resources of Lessee, equals or exceeds the combined
financial resources of Lessee and the Guarantors that existed at the time of
execution of this Lease.
13.2 REMEDIES. If-Lessee fails to perform any of its affirmative duties or
obligations, within ten (10) days after written notice (or in case of an
emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, Including, but not limited to, the obtaining of
reasonably required bonds, Insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession 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; (11) 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 Lessees failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, Including, but not limited to, the cost of
recovering possession of the Premises, expenses of reletting, Including
necessary renovation and alteration of the Premises, reasonable attorney's fees,
and that portion of any leasing commission paid by Lessor in connection with
this Lease applicable to the unexpired term of this Lease. The worth at the time
of award of the amount referred to In provision (III) of the immediately
preceding sentence shall be computed by discounting such amount at the discount
rate of the Federal Reserve Bank of the District within which the Premises are
located at the time of award plus one percent (1%). Efforts by Lessor to
mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessors
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 a 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.
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(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 Lessees right to
possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or other
charges, or for the giving or paying by Lessor to or for Lessee of any cash or
other bonus, Inducement or consideration for Lessee!s entering Into this Lease,
all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS,"
shall be deemed conditioned upon Lessee's full and faithful performance of all
of the terms, covenants and conditions of this Lease. Upon Breach of this Lease
by Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other charge,
bonus, inducement or consideration theretofore abated, given or paid by Lessor
under such an inducement Provision shall be immediately due and payable by
Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee.
The acceptance by Lessor of rent or the cure of the Breach which initiated the
operation of this paragraph shall not be deemed a waiver by Lessor of the
provisions of this paragraph unless specifically so stated in writing by Lessor
at the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
of Rent will cause Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are riot 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 five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to ten percent (10%) of each such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such late
payment. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessees Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 INTEREST. Any monetary payment due Lessor hereunder, other than late
charges, not received by Lessor, when due as to scheduled payments (such as Base
Rent) or within thirty (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 thirty-first (31 st) 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 four percent (4%), but shall not exceed the maximum rate
allowed by law. Interest is payable in addition to the potential late charge
provided for in Paragraph 13.4.
13.6 BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph, a reasonable time
shall in no event be less than thirty (30) days after receipt by Lessor, and any
Lender whose name and address shall have been furnished Lessee in writing for
such purpose, of written notice specifying wherein such obligation of Lessor has
not been performed; provided, however, that if the nature of Lessor's obligation
is such that more than thirty (30) days are reasonably required for its
performance, then Lessor shall not be In breach if performance is commenced
within such thirty (30) day period and thereafter diligently pursued to
completion.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that neither
Lessor nor Lender cures said breach within thirty (30) days after receipt of
said written notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at LESSEES
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.
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14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "CONDEMNATION"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building portion of the
premises, or more than twenty-five percent (25%) of the land area portion of the
premises not occupied by any building, is taken by Condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or In the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain In full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in proportion
to the reduction In utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such award shall be -made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease Is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which Is
payable therefor. In the event that this Lease is riot terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. BROKERS' FEE.
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 any rights to the Premises or other premises owned by Lessor and
located within the same Project, if any, within which the Premises is located;
(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 said 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 Lessors obligation
hereunder. Each Broker shall be a third party beneficiary of the provisions of
Paragraphs 11.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts
due as and for commissions pertaining to this Lease when due, then such amounts
shall accrue Interest. In addition, if Lessor fails to pay any amounts to
Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and
Lessee of such failure and if Lessor fails to pay such amounts within ten (10)
days after said notice, Lessee shall pay said monies to its Broker and offset
such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a
third party beneficiary of any commission agreement entered Into by and/or
between Lessor and Lessors Broker.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee and
Lessor each represent and warrant to the other that it has had no dealings with
any person, firm, broker or finder (other than the Brokers, if any) In
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finders 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, and/or attorneys' fees reasonably incurred with respect thereto.
16. ESTOPPEL CERTIFICATES.
(a) Each Party (as "Responding Party") shall within ten (10) days after
written notice from the other Party (the "REQUESTING PARTY") execute.
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "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
Party.
(b) If the Responding Party shall fail to execute or deliver the Estoppel
Certificate within such ten 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, (I!)
there are no uncured defaults in the Requesting Party's performance; and (111)
if Lessor is the Requesting Party, not more than one month's rent has been paid
In advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Partys 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 three (3) years. All such financial statements
shall be received by Lessor and such lender or purchaser in confidence and shall
be used only for the purposes herein set forth.
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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 Lessors 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 Lessors Interest In this Lease shall remain liable and responsible with
regard to the potential duties and liabilities of Lessor pertaining to Hazardous
Substances as outlined In Paragraph 6 above.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any
other provision hereof.
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 o 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 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 Brokers 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
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
Partys address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date Is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantee next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the Postal Service or courier. Notices transmitted by
facsimile transmission or similar means shall be deemed delivered upon telephone
confirmation of receipt, provided a copy is also delivered via delivery or mail.
If notice Is received on a Saturday Sunday or Legal holiday, it shall be deemed
received on the next business day.
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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. Lessors
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessors 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 monies or damages due
Lessor, notwithstanding any qualifying statements or conditions made by Lessee
in connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
Immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
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 ft.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties,
their personal representatives, successors and assigns and be governed by the
laws of the State In which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be Initiated in the county in which
the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lessors 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. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, -and
that in the event of such foreclosure, such new owner shall not: (I) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership; (I!) be subject to any offsets or defenses
which Lessee might have against any prior lessor; or (III) be bound by
prepayment of more than one (1) month's rent.
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30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessees subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not In Breach hereof and attorns to the record owner of the
Premises. Further, within sixty (60) days after the execution of this Lease,
Lessor shall use Its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which is secured
by the Premises. In the event that Lessor Is unable to provide the
Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at
Lessee's option, directly contact Lessors 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 to enforce the terms hereof 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
riot such action or proceeding is pursued to decision or judgment. The term,
"PREVAILING PARTY" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys! fees award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorneys! fees reasonably Incurred. In addition, Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in the preparation and
service of notices of Default and consultations in connection therewith, whether
or not a legal action is subsequently commenced in connection with such Default
or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's es
agents shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises as Lessor may deem necessary.
All such activities shall be without abatement of rent or liability to Lessee.
Lessor may at any time place on the Premises any ordinary "For Sale" signs and
Lessor may during the last six (6) months of the term hereof place on the
Premises any ordinary "FOR LEASE" signs. Lessee may at any time place on or
about the Premises any ordinary "FOR SUBLEASE" sign.
34. Signs. Except for ordinary "For Sublease signs, Lessee shall not place
any sign upon the Premises without Lessors 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 ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser Interest, shall constitute Lessors election to have such event constitute
the termination of such Interest.
36. CONSENTS. Except as otherwise provided herein, wherever In this Lease
the consent of a Party is required to an act by or for the other Party, such
consent shall not be unreasonably withheld or delayed. Lessors actual reasonable
costs and expenses (including but not limited to architects , attorneys',
engineers' and other consultants' fees) incurred in the consideration of, or
response to, a request by Lessee for any Lessor consent, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and
supporting documentation therefor. Lessor's consent to any act, assignment or
subletting shall not constitute an acknowledgment that no Default or Breach by
Lessee of this Lease exists, nor shall such consent be deemed a waiver of any
then existing Default or Breach, except as may be otherwise specifically stated
in writing by Lessor at the time of such consent. The failure to specify herein
any particular condition to Lessor's consent shall not preclude the imposition
by Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given. In the event that either Party disagrees with any determination made by
the other hereunder and reasonably requests the reasons for such determination,
the determining party shall furnish its reasons In writing and in reasonable
detail within ten (10) business days following such request.
37. GUARANTOR.
37.1 EXECUTION. The Guarantors, If any, shall each execute a guaranty In the
form most recently published by the American Industrial Real Estate Association,
and each such Guarantor shall have the same obligations as Lessee under this
Lease.
37.2 DEFAULT. It shall constitute a Default of the Lessee if any Guarantor
fails or refuses, upon request to provide: (a) evidence of the execution of the
guaranty, including the authority of the party signing on Guarantor's behalf to
obligate Guarantor, and in the case of a corporate Guarantor, a certified copy
of a resolution of its board of directors authorizing the making of such
guaranty, (b) current financial statements, (c) a Tenancy Statement, or (d)
written confirmation that the guaranty Is still in effect.
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38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and
performance of all of the covenants, conditions and provisions on Lessees 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.
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. Each 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: (1) 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); (Ili) during the time Lessee
is in Breach of this Lease; or (iv) in the event that Lessee has been given
three (3) or more notices of separate Default, whether or not the Defaults are
cured, during the twelve (12) month period immediately preceding the exercise of
the Option.
(b) The period of time within which an Option may be exercised shall not be
extended or enlarged by reason of Lessee's inability to exercise an Option
because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or effect,
notwithstanding Lessees due and timely exercise of the Option, if, after such
exercise and prior to the commencement of the extended term, (I) Lessee falls to
pay Rent for a period of thirty (30) days after such Rent becomes due (without
any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee
three (3) or more notices of separate Default during any twelve (12) month
period, whether or not the Defaults are cured, or (Ili) if Lessee commits a
Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations Mich Lessor may make from time to time for the management,
safety, and care of said properties, including the care and cleanliness of the
grounds and Including the parking, loading and unloading of vehicles, and that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises Lessee, its
agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to Itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably Interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof. the Party against whom the obligation to pay the money Is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay.
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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 duty authorized
to execute and deliver this Lease on its behalf. Each Party shall, within thirty
(30) days after request, deliver to the other party satisfactory evidence of
such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. Offer. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only In writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessees obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender In connection with the obtaining of normal financing or
refinancing of the Premises.
48. MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the
Mediation and/or the Arbitration of all disputes between the Parties and/or
Brokers arising out of this Lease X IS IS NOT attached to this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT!
S. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE
PREMISES. SAID INVESTIGATION SHOULD! INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE
PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL
INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY
OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING:IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE, REVISED TOCOMPLY WITHTHE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
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The Parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Pasadena, California
on: September 20, 1999
by Lessor: LJR Lido Partners LP
By: /s/ unknown, 10/11/99
Name Printed: LJR Lido Partners
Title: General Partner
Address: 1224 East Green Street, Pasadena, CA 91106
Telephone: 626-795-5087
Facsimile: 626-795-6504
Federal ID No. 75-2761339
Executed at: Newport Beach, California
on:
by Lessee: Tangible Asset Galleries, Inc.
By: /s/ Kenneth C. Walczy
Title: CFO
Address: 1550 South Coast Highway, Laguna Beach, California
Telephone: (949) 376-2660
Facsimile: (949) 376-2663
Federal ID No. 88-0396772
NOTE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the most
current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower
Street, Suite 600, Los Angeles, California 90017. (213) 687-8777. Fax No. (213)
687-86
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ARBITRATION AGREEMENT
Standard Lease Addendum
Dated September 20, 1999
By and Between (Lessor) LJR Lido Partners LP
(Lessee) Tangible Asset Galleries, Inc.
Address of Premises 3444 Via Lido, Newport Beach, CA
Paragraph 49
A. ARBITRATION OF DISPUTES:
Except as provided in Paragraph B below, the Parties agree to resolve any and
all claims, disputes or disagreements arising under this Lease, including, but
not limited to any matter relating to Lessor's failure to approve an assignment,
sublease or other transfer of Lessees interest in the Lease under Paragraph 12
of this Lease, any other defaults by Lessor, or any defaults by Lessee by and
through arbitration as provided below and irrevocably waive any and all rights
to the contrary. The Parties agree to at all times conduct themselves in strict,
full, complete and timely accordance with the terms hereof and that any attempt
to circumvent the terms of this Arbitration Agreement shall be absolutely null
and void and of no force or effect whatsoever.
B. DISPUTES EXCLUDED FROM ARBITRATION:
The following claims, disputes or disagreements under this Lease are expressly
excluded from the arbitration procedures set forth herein: 1. Disputes for which
a different resolution determination is specifically set forth in this Lease, 2.
All claims by either party which (a) seek anything other than enforcement or
determination of rights under this Lease, or (b) are primarily founded upon
matters of fraud, willful misconduct, bad faith or any other allegations of
tortious action, and seek the award of punitive or exemplary damages, 3. Claims
relating to (a) Lessor's exercise of any unlawful detainer rights pursuant to
applicable law or (b) rights or remedies used by Lessor to gain possession of
the Premises or terminate Lessees right of possession to the Premises, all of
which disputes shall be resolved by suit filed in the applicable court of
jurisdiction, the decision of which court shall be subject to appeal pursuant to
applicable law and 4. All claims arising under Paragraph 39 of this Lease, which
disputes shall be resolved by the specific dispute resolution procedure provided
in Paragraph 39 to the extent that such disputes concern solely the
determination of rent.
C. APPOINTMENT OF AN ARBITRATOR:
All disputes subject to this Arbitration Agreement, shall be determined by
binding arbitration before: X a retired judge of the applicable court of
jurisdiction (e.g., the Superior Court of the State of California) affiliated
with Judicial Arbitration & Mediation Services, Inc. ("JAMS"), the American
Arbitration Association ("AAA") under Its commercial arbitration rules, or as
may be otherwise mutually agreed by Lessor and Lessee (the "Arbitrator"). Such
arbitration shall be Initiated by the Parties, or either of them, within ten
(10) days after either party sends written notice (the "Arbitration Notice") of
a demand to arbitrate by registered or certified mail to the other party and to
the Arbitrator. The Arbitration Notice shall contain a description of the
subject matter of the arbitration, the dispute with respect thereto, the amount
Involved, if any, and the remedy or determination sought. If the Parties have
agreed to use JAMS they may agree on a retired judge from the JAMS panel. If
they are unable to agree within ten days, JAMS will provide a list of three
available judges and each party may strike one. The remaining judge (or If there
are two, the one selected by JAMS) will serve as the Arbitrator. If the Parties
have elected to utilize AAA or some other organization, the Arbitrator shall be
selected in accordance with said organizations rules. In the event the
Arbitrator is not selected as provided for above for any reason, the party
initiating arbitration shall apply to the appropriate Court for the appointment
of a qualified retired judge to act as the Arbitrator.
D. ARBITRATION PROCEDURE:
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I . PRE-HEARING ACTIONS. The Arbitrator shall schedule a pre-hearing conference
to resolve procedural matters, arrange for the exchange of Information, obtain
stipulations, and narrow the Issues. The Parties will submit proposed discovery
schedules to the Arbitrator at the pre-hearing conference. The scope AND
DURATION of discovery will be within the sole discretion of the Arbitrator. The
Arbitrator shall have the discretion to order a pre-hearing exchange of
information by the Parties, including, without limitation, production of
requested documents, exchange of summaries of testimony of proposed witnesses,
and EXAMINATION BY DEPOSITION of parties and third-party witnesses. This
discretion shall be exercised in favor of discovery reasonable under the
circumstances. The Arbitrator shall issue subpoenas and subpoenas duces tecum as
provided for in the applicable statutory or case law (e.g., in California Code
of Civil Procedure Section 1282.6).
2. THE DECISION. The arbitration shall be conducted in the city or county within
which the Premises are located at a reasonably convenient site. Any Party may be
represented by counsel or other authorized representative. In rendering a
decision(s), the Arbitrator shall determine the rights and obligations ofthe
Parties according to the substantive laws and the terms and provisions of this
Lease. The Arbitrator's decision shall be based on the evidence Introduced at
the hearing, Including all logical and reasonable inferences therefrom. The
Arbitrator may make any determination and/or grant any remedy or relief that is
just and equitable. The decision must be based on, and accompanied by, a written
statement of decision explaining the factual and legal basis for the decision as
to each of the principal controverted issues. The decision shall be conclusive
and binding, and it may thereafter be confirmed as a judgment by the court of
applicable jurisdiction, subject only to challenge on the grounds set forth in
the applicable statutory or case law (e.g., in California Code of Civil
Procedure Section 1286.2). The validity and enforceability of the Arbitrator's
decision is to be determined exclusively by the court of appropriate
jurisdiction pursuant to the provisions of this Lease. The Arbitrator may award
costs, including without limitation, Arbitrators fees and costs, attorneys'
fees, and expert and witness costs, to the prevailing party, if any, as
determined by the Arbitrator in his discretion.
Whenever a matter which has been submitted to arbitration involves a dispute as
to whether or riot a particular act or omission (other than a failure to pay
money) constitutes a Default, the time to commence or cease such action shall be
tolled from the date that the Notice of Arbitration is served through and until
the date the Arbitrator renders his or her decision. Provided, however, that
this provision shall NOT apply In the event that the Arbitrator determines that
the Arbitration Notice was prepared In bad faith.
Whenever a dispute arises between the Parties concerning whether or not the
failure to make a payment of money constitutes a default, the service of an
Arbitration Notice shall NOT toll the time period in which to pay the money. The
Party allegedly obligated to pay the money may, however, elect to pay the money
" under protest by accompanying said payment with a written statement setting
forth the reasons for such protest. If thereafter, the Arbitrator determines
that the Party who received said money was not entitled to such payment, said
money shall be promptly returned to the Party who paid such money under protest
together with Interest thereon as defined In Paragraph 13.5. If a Party makes a
payment "under protest" but no Notice of Arbitration is filed within thirty
days, then such protest shall be deemed waived. (See also Paragraph 43)
NOTICE: These forms are often modified to meet changing requirements of law and
Industry needs. Always write or call us 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, Telephone No.: (213) 687-8777. Fax
No.: (213) 687-8616.
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RELOCATION AGREEMENT
STANDARD LEASE ADDENDUM
Dated: September 20, 1999
By and Between
(Lessor) LJR Lido Partners LP
(Lessee) Tangible Asset Galleries, Inc.
Address of Premises 3444 Via Lido, Newport Beach, California
Paragraph 50.
Relocation
At its sole discretion and election and with reasonable notice to Lessee, Lessor
reserves the right to relocate Lessee to comparable space within the planned and
renovated Lido Marina Village project at Lessor's cost. Lessee agrees to
reasonably cooperate with Lessor with respect to such plans and logistics and to
execute such related documentation to effect same. This relocation condition is
subject to Lessor's (or affiliated entity of Lessor's principals) acquisition
and ownership of the Lido Marina Village property.
