SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Fiscal Year Ended
December 31, 1998.
Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the transition
period from _____ to _____.
Commission File Number 0-21662
STRATEGIA CORPORATION
(Exact name of registrant as specified in
its charter)
Kentucky 61-1064606
(State or other jurisdiction of (I.R.S. Identification No.)
Employer incorporation or organization)
6040 Dutchmans Lane, Suite 400
Louisville, Kentucky 40205-3271
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:
(502)426-3434
Securities registered pursuant to Section 12(b) of the Act:
Common Stock
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. Yes __X__ No _____.
Check if there is no disclosure of delinquent filers
in response to Item 405 of Regulation S-B contained in this
form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ ]
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of December 31, 1998:
Common stock -- $3,500,758.
The number of shares of the registrant's common stock
outstanding as of
March 25, 1999 -- 4,667,677 shares.
REFERENCE
Portions of the Corporation's Definitive Proxy Statement
is incorporated by
reference into Part III of this Form 10-KSB.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Preliminary Note Regarding Forward-Looking Statements
The information set forth in "Item 1. Description of Business" and in
"Item 6. Management's Discussion and Analysis of Operations and Financial
Condition" of this report includes "forward-looking statements." For this
purpose, the words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements. There are a
number of factors that could cause the Company's actual results to differ
materially from those indicated by the forward-looking statements, including,
without limitation, those set forth under "Certain Factors That May Affect
Future Results" and in other sections of "Item 1. Description of Business" and
in "Item 6. - Management's Discussion and Analysis."
GENERAL
Strategia Corporation ("Strategia") and its subsidiaries(together
referred to as the "Company") provides a variety of information technology
services including Year 2000 consulting, disaster recovery, and outsourcing
services, both in the United States and in Europe. Since 1984 the Company
has specialized in assisting business organizations and government agencies
prepare for and avert the consequences of unknown, unplanned interruption in
data processing of large-scale computer systems. The Company has provided
disaster recovery services to more than 200 large and medium-sized
organizations in diverse industries. During 1997, the Company developed
resources and began to provide services to business organizations, government
agencies and non-profit organizations to assist clients in preparing for and
implementing the conversion of their computers and other systems to allow
those systems to function without interruption on and after January 1, 2000.
The problem these systems may have processing the change in century is often
referred to as the "Year 2000" problem. During 1998 the Company provided
Year 2000 services to approximately 75 different organizations in the United
States and France.
The Company has provided alternate site processing in North America since
1984 to users of large-scale Bull (formerly Honeywell) computers and to
users of IBM computers since 1993. Similar services have been provided in
Europe since 1995, through a wholly-owned subsidiary, Twinsys Dataguard S.A.,
for users of Bull computer systems; and for UNIX-based computer systems since
1996. Clients are entitled to use the Company's data centers in Louisville,
Kentucky and Paris, France if the client's data center is rendered inoperable
as a result of natural disaster, fire, sabotage or other emergency. The
Company also provides contingency planning consulting services that assess a
client's vulnerability to an unplanned interruption of data processing and
assist the client in preparing a contingency plan to allow critical business
functions to resume as promptly as possible.
Year 2000 Services involve assisting clients in various aspects of
assessing the magnitude of and resolving its Year 2000 problem. This service
represents a natural extension of the Company's historical contingency
planning and disaster recovery services. The Company believes the added
information technology skills, expertise and familiarity with client systems
that it expects to develop through Year 2000 Services will strengthen its
capability to provide a broader range of information technology services in
the future.
INDUSTRY BACKGROUND
YEAR 2000 SERVICES
THE YEAR 2000 PROBLEM. For several decades programmers typically encoded
years into computer programs using a two-digit format (e.g., "96" for
"1996") rather than a complete four-digit format. The use of a two-digit date
format makes it impossible to distinguish between dates in different
centuries. Computer programs asked to process a date after the year 1999 may
interpret the date as 100 years earlier than the intended date (e.g. 1905 for
2005), may go to an arbitrary default date such as 1980, may fail to process
the date or may fail altogether. Even if the particular program will
accommodate a 21st century date, it may be unable to communicate that date to
other programs with which it must interact.
The extensive reliance of business, government, and other organizations
upon computer-based information systems make it essential for these
organizations to assess and resolve their Year 2000 problem. Many
organizations are being required to analyze and modify their current systems.
In addition to problems arising in its own systems, an organization may be
indirectly affected by the date-dependent computer programs and databases used
by other organizations.
The Year 2000 problem, however, is not limited to mainframe computers.
Mid-range and personal computers are also susceptible. In addition, there are
many medical, industrial and infrastructure devices which have embedded chip
technology that utilize dates for ensuring proper maintenance and other
purposes. These devices may also fail when the date changes centuries. The
effect of failure of these devices could range from inconveniences to
disastrous.
DISASTER RECOVERY SERVICES
Disaster recovery services are intended to reduce a business or government
organization's vulnerability to unanticipated interruptions of critical
information processing functions. The day-to-day operations of most business,
government and other organizations require immediate and continuous access to
their information processing system. In many cases, the failure of such
systems or critical aspects thereof, even for short periods of time, can
affect vital organizational functions, with potentially critical losses to the
organization and its clients or constituents. Such dependence on the computer
system makes organizations vulnerable to catastrophic losses if their
centralized information processing operations are significantly interrupted as
a result of natural disasters, fire, sabotage, strike, long-term power outage,
explosion, or other unanticipated event. Disaster Recovery services include
alternate site processing and contingency planning consulting services.
OUTSOURCING
Business organizations are transferring information processing functions
to outside vendors with increasing frequency as a result of strategic,
financial, operational, and technological factors. The shift in recent years
towards client/server based computer applications, the dispersion of
processing into networks, rapidly advancing and changing technology, and the
tendencies of businesses to "mix and match" new hardware and software
applications from a variety of sources have increased the complexity of the
information systems of most organizations. Many organizations have found it
cost-effective to use outside vendors to manage information technology issues
such as compatibility of applications, customizing applications for
specialized uses (reengineering), monitoring advances in technology, and
managing technological obsolescence. As a greater portion of information
processing resources are being directed toward specialized technologies and
applications for particular revenue generating activities, information
managers are focusing on reducing the costs of operating older "legacy"
mainframe systems that often remain in use for recordkeeping and other
traditional business functions. By outsourcing, an organization may be able
to devote more resources to business development and other strategic functions
rather than more routine functions and to take advantage of the efficiencies
in personnel, systems maintenance, and software licensing costs offered by a
vendor who operates legacy systems for multiple clients.
COMPANY SERVICES
YEAR 2000 SERVICES
The Company's Year 2000 services include identification and analysis
of the magnitude of a client's potential Year 2000 problem, project management
services in connection with coordinating the client's Year 2000 resolution
program, conversion of computer software date fields, and testing the
performance of the converted software. The Company also provides consulting
services in connection with Year 2000 embedded chip and personal computer
technologies. The Company offers these services either separately or together
for organizations that prefer a turnkey solution for their entire Year 2000
project. Each is described in more detail below.
IMPACT AND ALTERNATIVES ANALYSIS. The impact and alternatives analysis
is intended to give senior management a clearer understanding of the
organization's operational and financial risks in order to make informed
decisions about resolving the Year 2000 problem. The impact and alternatives
assessment initially identifies critical planning issues such as lead times,
technology and personnel requirements, and estimated costs. The Company's
consultants then work with the organization's technical personnel to analyze
the organization's operating systems, utilities, third party products, and
network environments in order to identify exposures and assess alternatives.
The analysis addresses the Year 2000 issues and risks specific to the
organization, including the importance of certain business applications,
related liabilities, and costs and benefits of various Year 2000 compliance
alternatives.
MAGNITUDE ASSESSMENT. The Company conducts a detailed analysis of an
organization's computer software application portfolio, data, and application
interfaces in order to permit selection of the optimal conversion strategy for
the organization. The process involves preliminary identification of date
fields, data, and program source codes requiring modification; examination of
interdependencies of applications, platforms and standards; evaluation of
potential problems arising from inconsistent data definitions and field naming
conventions, the use of multiple synonyms and hard coded date values; and the
development of appropriate conversion techniques.
CODE CONVERSION. The Company may assist the organization in developing a
comprehensive conversion plan. The plan prioritizes the conversion sequence,
defines the conversion approach, and directs critical elements of the
conversion such as unit testing, bridging converted applications to
non-converted applications, and managing changes. Programs and data are then
systematically converted, according to the plan. Following the conversion,
the converted code should be validated. The Company may contract to provide
some or all of these services depending on each customer's needs. For example,
the organization may elect to perform its own code conversion, but may request
independent validation and verification of the process.
EMBEDDED CHIP AND PERSONAL COMPUTERS. The Company provides consulting
services assisting its clients to identify Year 2000 issues with embedded
chips and personal computers and to develop remediation and testing plans to
address the issues.
COMPLIANCE TESTING. Industry analysts as well as federal banking and
securities regulatory agencies have publicly emphasized the importance of
adequate testing of Year 2000 conversions because of the need to have
compliant systems operating no later than January 1, 2000. The number and
complexity of interrelated applications typically involved in a business or
government organization's information system, as well as the critical nature
of a substantial number of these applications to the conduct of the business
or government function, increase the importance of thorough testing before the
organization relies on converted applications. In order to provide an
alternative to the inefficient piecemeal approach, the Company invested in
testing resources that would allow organizations to test their entire converted
system at one time, thus reducing the length and complexity of both the
conversion and testing processes. In 1997, the Company opened a Year 2000 code
renovation and compliance testing center in Shelbyville, Kentucky. In spite of
the apparent need for extensive testing, the Company has experienced virtually
no demand for testing utilizing the Shelbyville facility. Its primary testing
services have revolved around assisting clients to develop their own testing
models.
DISASTER RECOVERY SERVICES
Alternate site processing subscribers are entitled, in the event of a
disaster, to immediate use of the Company's IBM, Bull or UNIX-based computer
systems together with all required peripheral, communications, and support
equipment. Use of certain peripheral and support systems and office space is
included in the basic service level, and additional peripheral equipment is
available at higher levels of service at additional cost. If a disaster occurs,
the client may process at the hot site for specified periods. Pricing levels of
client contracts depend on the amount of capacity on the large-scale Bull, IBM,
and UNIX computers to be made available to the customer and the particular
configuration of the peripheral and communications equipment needed.
Subscribers are also entitled to a certain amount of testing time at the
Company's hot sites where the Company's technical personnel work with the
client's information services staff to ensure the compatability of the
organization's applications with the back-up system under various disaster
scenarios.
The Company provides contingency planning consulting services to users of
IBM, Bull, and other computer systems. Contingency planning includes an
assessment of the vulnerability of the client's business operations to
unanticipated interruptions of critical data processing functions, including
recommendations to minimize both the probability of occurrence and the cost of
those potential data processing disruptions and the loss or destruction of
critical records. The Company will also assist in designing a recovery plan
to structure procedures for restoration of all organizational functions as
well as information processing capabilities, for replacement of needed
supplies and equipment, and for the division of staff responsibilities.
OUTSOURCING
The Company provides data center outsourcing to users of Bull and IBM
computer systems in North America from its Louisville, Kentucky data center.
Depending on client preferences, the Company can operate a client's older
"legacy" computer systems on a permanent basis or during a transition to a new
computing platform, provide temporary capacity during seasonal peak load
periods, or assume other information management functions that organizations
may elect to outsource. Systems re-engineering, for example, converts
applications developed internally for a legacy system for use in more versatile
"open systems." Although the Company intends to continue to pursue
opportunities in this area, its current revenues from outsourcing are not
significant.
SALES AND MARKETING
The Company currently maintains marketing personnel in both the United
States and Europe. In the U.S. the Company has adopted a unified marketing
structure in which each marketing representative sells all of the Company's
services. These representatives are backed by various technical specialists.
This approach supports cross selling opportunities and account control. In
Europe, marketing is divided between Year 2000 services and disaster recovery
services.
The Company's marketing strategy is to increase recognition of Strategia
Corporation as a provider of Year 2000 services as well as a wide range of
information technology services. Whenever possible, the Company intends to
capitalize on relationships with past and present customers and vendors. This
includes a continuing focus on both (i) its historic base of clients and (ii)
industries such as health care, government, education, utilities and
manufacturing where it has developed significant Year 2000 business. The
Company plans to capitalize on its familiarity with the computing environment
of these industries and the relationships it has in order to develop
additional Year 2000 services business during 1999 and a broader range of
post-Year 2000 services. The Company also intends to cultivate partnership
relationships in order to develop new business.
Over the last eighteen to twenty-four months, the Company's U.S. sales
and marketing efforts have focused almost exclusively on Year 2000 services,
which accounted for 86% of U.S. revenues in 1998. During 1999, the Company
will not only focus on selling Year 2000 services, but will also focus on
developing new information technology service offerings. There is, however,
no assurance that the Company will successfully transition its U.S. business
from primarily being a Year 2000 problem services provider to being a provider
of other information technology services. Furthermore, the demand for Year
2000 services throughout the entire year of 1999 is unknown at this time.
CLIENTS
During 1998, France Telecom and its affiliated divisions, together
accounted for $1.7 million, or 20%, of the Company's consolidated disaster
recovery backup services revenue. Most of the Company's contracts with its
alternate site processing clients are for multi-year terms. The loss of any
of the Company's major clients could materially and adversely affect its
business, operating results and financial condition.
The Company generated Year 2000 service revenues in 1998 from
approximately 40 different clients in the U.S. and 35 different clients in
Europe. These services are not of a repetitive nature and can not
be expected to recur in 1999 from the same customers.
COMPETITION
The markets for the Company's information technology services are highly
competitive. The primary competitive factors are the skills, expertise, and
experience of the provider's personnel, the ability of such personnel to
provide effective solutions to information processing problems, the
availability of facilities and equipment in certain circumstances, and price.
The Company believes that its emphasis on customer service, its experience in
data center operations, its ability to offer end-to-end solutions, and its
reputation for offering quality Year 2000 and contingency planning consulting
services may distinguish Strategia from its competitors.
The demand for information technology services has increased in recent
years due to new technologies, due to competitive pressures that exist for all
businesses in the global economy to operate more effectively and efficiently,
and due to the need to solve the Year 2000 problem.
Many of the Company's competitors are more established, benefit from
greater name recognition, and have substantially greater financial, technical
and marketing resources than the Company. There are no significant
proprietary or other barriers to entry into the consulting business other than
the need for technical expertise. As a result, there can be no assurance that
competitors will not develop methodologies that gain more market acceptance
than the Company's methodologies. Entry into disaster recovery and data center
outsourcing services, however, may involve the acquisition of substantial
amounts of computer hardware and software. On the other hand, the increase in
the popularity of network systems has reduced the demand for main-frame
computer systems from mid-size users, the Company's historical customer base.
INTELLECTUAL PROPERTY
The Company's intellectual property primarily consists of the
methodologies developed for use in its Year 2000 services, computer disaster
recovery, and contingency planning businesses. The Company does not have any
patents and relies upon a combination of trade secret, copyright and trademark
laws, and contractual restrictions to establish and protect its ownership of
its proprietary methodologies. The Company generally enters into non-disclosure
and confidentiality agreements with its employees and clients. Despite these
precautions, it may be possible for an unauthorized third party to replicate
the Company's methodologies or to obtain and use information that the Company
regards as proprietary.
PERSONNEL
As of December 31, 1998, the Company had 66 full-time employees in its
U.S. operations. The Company had 52 full-time employees in its European
operations in Paris, France.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made
in this Annual Report and presented by management from time to time.
CONTRACTION OF HISTORICAL BUSINESS BASE. For more than a decade, the
Company had been the leading provider of disaster recovery backup services to
users of Bull computer systems in North America. However, the Company's
revenues from this historical business have declined significantly in recent
years as the number of large Bull data centers in North America has decreased
from approximately 700 in 1986 to less than 100 in 1998. In addition, since
1994 an affiliate of Groupe Bull has been offering computer backup services in
North America. The Company's revenues in the United States from disaster
recovery services for Bull computers were approximately $830 thousand in 1998,
are expected to decline to approximately $500 thousand in 1999, and may decline
even more dramatically in 2000.
The Company has sought to expand the range of information technology
services it can offer to customers in recent years, as the market for its
historical disaster recovery business has contracted. The Company has offered
disaster recovery backup services for certain IBM computer systems since 1993
in the U.S., and began in February 1995 to offer Bull backup services in
France, where the number of data centers using Bull computers is much larger
than in North America. However, it is anticipated that the number of Bull
based computer data centers in France will decline over the coming years.
In 1997, the Company expanded into providing Year 2000 services. In 1998,
Year 2000 services accounted for 86% of revenues in the U.S. and 58% of total
revenues. Demand for Year 2000 services, however, is expected to diminish
significantly after 1999, and may diminish before that.
The development of new information technology service offerings is in an
early stage and there can be no assurance that the Company will be able to
develop a portfolio of information technology services that will allow it to
be competitive in the IT services business. The inability to maintain its
Year 2000 services business during 1999 or to develop other information
technology services required by clients after 1999 would materially and
adversely affect the Company's business, operating results and financial
condition.
RECENT LOSS AND ACCUMULATED DEFICIT. The Company incurred a consolidated
loss of $2.4 million for the year ended December 31, 1998, following a $3.1
million loss in 1997. The Company has expended significant amounts of cash to
support marketing and other activities related to the establishment of its Year
2000 services business. The chief source of cash during the last two years has
been net proceeds of approximately $8.6 million from a public stock offering
completed during the first quarter of 1997. Revenues from Year 2000 services
and disaster recovery computer services are the only material sources currently
available to meet the Company's operating and capital requirements. Because
of the various business risks described elsewhere in this discussion of
factors that may affect future results, there can be no assurance that the
Company will be consistently profitable.
VARIATION IN RESULTS. The Company has experienced and expects to
experience fluctuations in its quarterly results. A variety of factors
influence the level of the Company's revenues in a particular quarter,
including the number, requirements, and nature of Year 2000 projects, changes
during the course of projects that may impact the timing and current scope of
work in progress, general economic conditions that may influence decisions by
clients and potential clients to invest in or replace their computer
systems, decisions by management to rely on in-house information technology
personnel for some or all of a client's or a potential client's information
systems projects, the ability of certain clients to terminate their
engagements without penalty, competition for engagements, and other factors,
many of which are beyond the Company's control. A significant portion of the
Company's current cost structure does not vary in relation to the Company's
level of revenues. If revenues for a particular quarter do not meet
expectations, operating results will be adversely affected. Gross margins
will vary based upon a number of factors, including employee utilization
rates, as well as the type and number of consulting engagements performed by
the Company during a particular period. Because the Company bids a majority
of its Year 2000 projects on a fixed-fee basis, there is a risk on any project
that the amount bid will not provide the anticipated level of profit.
AVAILABILITY OF TECHNICAL PERSONNEL. The information technology services
business requires the availability of knowledgeable, skilled technical
personnel. The Company competes with major computer, communications,
consulting and software companies, as well as information technology
departments of major corporations, in seeking to attract qualified personnel.
There can be no assurance that the Company will be able to attract and retain
appropriate personnel.
COMPETITION. As described elsewhere, the markets for Year 2000 services
and the Company's other information technology services are highly
competitive. A large number of companies engaged in the information
technology services business are more established, benefit from greater name
recognition and have substantially greater financial, technical and marketing
resources than the Company. Moreover, there are no significant proprietary
or other barriers to entry in the information technology consulting services
industry. There can be no assurance that the Company will be able to compete
successfully against its competitors or that the competitive pressures faced
by the Company will not affect its financial performance. (See "Item 1.
Description of Business-Competition.")
RAPID TECHNOLOGICAL CHANGE. The information technology services industry
is characterized by evolving technology and changing methodologies. The
Company's future success will depend on its ability to innovate, to
update its proprietary methodologies, and to develop niches in providing
information technology business services.
CONCENTRATION OF CLIENTS. The Company's ten largest disaster recovery
backup services clients in 1998 accounted for approximately 38% of consolidated
disaster recovery revenues. Most of the Company's contracts with its alternate
site processing clients are for multi-year terms. The loss of any of the major
clients of the Company could materially and adversely affect the Company's
business, operating results and financial condition. Although some Year 2000
service contracts are significant in size, these services are not of a
repetitive nature. New clients for new services must continually be
developed. (See "Item 1. Description of Business-Clients.")
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's corporate offices are located at 6040 Dutchmans Lane, Suite
400, Louisville, Kentucky. These offices consist of approximately 16,000
square feet and are leased for an initial term of six years, ending January 8,
2004. The Company's U.S. computer center is located at 10301 Linn Station
Road, Louisville, Kentucky, in a two-story, 27,900 sq. ft. building on
approximately two acres, which the Company owns subject to a mortgage. The
Company also leases a 28,000 square foot data center in Shelbyville, Kentucky
that was expected to be dedicated to Year 2000 code renovation and compliance
testing. The initial term of the lease is five years ending March 31, 2002.
Due to the lack of Year 2000 code renovation and compliance testing business,
commercial real estate brokers have been engaged to dispose of this facility.
The offices of Twinsys, including its 1,000 square meter computer center, and
Strategia Europe are located in leased space in commercial office buildings in
Paris, France. The current term of the data center lease expires December 31,
1999. The additional office space required to accommodate the growth in the
consulting services business has a lease that expires in 2002.
The equipment at the Company's Louisville, Kentucky facility is both
owned and leased. The data center contains an IBM 3090-600 class system, and
three large-scale Bull systems consisting of a DPS 9000/542, a DPS 8000/83, and
a DPS 90/94. The DPS 8000/83 and DPS 90/94 are not Year 2000 compliant. The
DPS 9000/542 system, as currently configured, is not Year 2000 compliant
Although the CPU itself is Year 2000 compliant. The Shelbyville, Kentucky,
facility is also equipped with an IBM 3090-600 class system.
Substantially all of the equipment at the Paris, France facility is
leased. The data center contains ten large-scale and mid-range Bull computer
systems as well as a number of smaller UNIX-based systems. Although two older
systems may not be Year 2000 compliant, all critical systems are believed to
be Year 2000 compliant.
The Company's payments due under its capital leases for its computer
equipment, and its current operating leases for equipment and facilities are
set forth in Note 6 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party in certain routine legal proceedings incidental
to its business. Management believes, after discussion with legal counsel,
that the ultimate resolution of these proceedings will not have a material
adverse impact on its financial status.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Strategia's Common Stock has traded on the American Stock Exchange since
August 6, 1997. Prior to that date the Common Stock traded on the over-the-
counter market. The Company believes it has approximately 700 beneficial
owners of the Company's Common Stock. The following table sets forth the
quarterly range of high and low closing sale prices per share reported on the
American Stock Exchange during 1998 and from August 6, 1997 through December
31, 1997, and the ranges of high and low bid quotations per share from January
1, 1997 through August 5, 1997, according to National Quotation Bureau, Inc.
<TABLE>
<CAPTION>
1998 1997
Quarter High Low High Low
<S> <C> <C> <C> <C>
First $9.13 $7.00 $8.63 $6.50
Second 9.63 4.88 15.75 7.50
Third 5.75 2.19 15.38 12.75
Fourth 2.13 .63 13.75 7.63
</TABLE>
The bid and asked quotations prior to August 6, 1997 reflect interdealer
quotations without retail mark-up, mark-down, or commissions and do not
necessarily represent actual transactions. On March 25, 1999, the closing sale
price reported for the Common Stock was $.75 per share.
Since its inception in 1984, the Company has not paid any dividends on
its Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Preliminary Note Regarding Forward Looking Information
The information set forth below in "Management's Discussion and Analysis" as
well as other sections of this report includes forward-looking statements. For
this purpose, the words "believes," "anticipates," "plans," "expects," and
similar expressions are intended to identify forward-looking statements.
Factors that could cause the Company's actual results to differ materially
from those indicated by the forward-looking statements include the uncertain
market for Year 2000 services, the availability of technical
personnel, the Company's relationship with automated tool vendors, the
Company's plan to expand the services it offers, the limited time in which a
market for Year 2000 services is expected to exist, events that affect the
timing of the Company's recognition of service revenues, the Company's financial
resources, and competitive factors. These and other factors are set forth
below in " Management's Discussion and Analysis" and described in greater detail
elsewhere in the Company's annual report under the heading "Certain Factors That
May Affect Future Results."
Results of Operations
The Company generated revenues of $21.6 million for the year ended December 31,
1998 versus revenues of $11.0 million for 1997. The Company incurred a net
loss of $2.4 million for the year ended December 31, 1998, compared to a net
loss of $3.1 million in 1997.
The significant increase in 1998 revenues is attributable principally to an
increase in Year 2000 services revenues, in both the United States and France,
as compared to the prior year. Year 2000 services revenues in the United
States were approximately 48% of the Company's consolidated service revenues
for the year ended December 31, 1998. In the 1997 year, the comparable
percentage was approximately 13%. The majority of the United States Year 2000
services revenues in 1998 were generated from consulting and project management
services, with a much smaller percentage from Year 2000 code renovation and
compliance testing services.
The Company's French subsidiaries accounted for approximately 45% of the
Company's consolidated service revenue for the year ended December 31, 1998,
compared to approximately 63% for the full year 1997. This decrease in
relative contribution is primarily due to the increase in North American Year
2000 services revenue as described above. The 1998 pretax loss in France was
primarily due to Strategia Europe.
Revenues and pretax loss are shown below by geographical component:
<TABLE>
Year ended
December 31,
1998 1997
<S> <C> <C>
Service revenues:
United States $11,941,536 $ 4,050,591
Foreign 9,680,036 6,971,381
---------- ----------
$21,621,572 $11,021,972
---------- ----------
Pretax loss:
United States $(1,759,790) $(2,844,117)
Foreign (521,625) (208,520)
---------- ----------
$(2,281,415) $(3,052,637)
---------- ----------
</TABLE>
The consolidated operating loss for the year ended December 31, 1998,
decreased to $2.1 million from a $2.9 million loss in 1997. The significant
operating losses in 1998 and 1997 were primarily due to losses generated by
the Year 2000 services operations in both the United States and France. The
Company's costs increased significantly in 1998 over the prior year as costs
were incurred in both the technical service areas and in the selling and
administrative areas in anticipation of the demand for Year 2000 services in
both the United States and Europe. Selling, general and administrative
expenses increased to $7.8 million (36% of revenues) for the year ended
December 31, 1998, as compared to $5.1 million (46% of revenues) in 1997.
Selling, general and admnistrative costs included a 1998 third quarter bad
debt provision of $200 thousand.
In the fourth quarter of 1998, the Company reduced its U.S. workforce by
approximately one-third. Only a small part of the benefit of this cost
reduction has impacted 1998's financial results. The Company also reviewed
its assets at the end of the fourth quarter under the Impairment of Value
concept required by Financial Accounting Standards Board Statement No. 121.
This was done in light of the lack of anticipated business in the (COBOL)
renovation and compliance testing areas. The Company recorded a $440 thousand
non-cash charge to reflect a write-off of certain assets.
Other income, net was less favorable in the year ended December 31, 1998,
versus the comparable period in 1997. This was primarily due to less interest
income being earned on short-term investments in 1998 due to the increased
investment in working capital and costs incurred to develop the Year 2000
services business. Interest expense in 1998 and 1997 principally related to
capital leases and a mortgage on the U.S. data center.
The provision for income taxes principally related to French income taxes
resulting from the income of Twinsys and its majority-owned subsidiary that
can not be offset by operating losses elsewhere.
The Company incurred a $3.1 million loss in 1997, which generally reflected the
early stage of development of the Year 2000 services business. The Company
expended significant amounts in the United States and Europe during 1997 to
establish its presence in the growing Year 2000 services market and to be in a
position to bid for contracts. The Company added technical, marketing and
support staff and otherwise devoted substantial financial resources to build
infrastructure to support growth in the volume of business expected to develop
in the coming two years. The Company began generating revenue under Year 2000
service contracts in 1997. However, both the number of contracts and amount of
work performed under those contracts were limited. Although some of the
contracts generated positive gross margins in 1997, the amount of profit was
insufficient to overcome either the losses on two of the Company's initial Year
2000 services contracts or its increased level of cost of services and selling,
general and administrative expenses.
The Company reported revenue of $11.0 million for the year ended December 31,
1997. The European business accounted for approximately 63% of consolidated
service revenue in 1997. European revenues, consisting mainly of backup and
related disaster recovery service revenue in 1997, did not change
significantly. Revenue in the United States increased by approximately 59%
for the year due to the additional revenue generated on Year 2000 services
contracts, which in 1997 became the largest component of United States
revenues. Bull backup service revenue continued to decrease in the United
States.
The Company's costs of services for 1997 were $8.8 million and selling,
general and administrative expenses were $5.1 million in 1997. The Company
made significant expenditures during 1997 to develop the infrastructure
required to support Year 2000 services. Following the completion of a
public stock offering in March 1997, the Company incurred increases in
professional fees and other expenses related to investor relations services,
initial listing on the American Stock Exchange, and similar post-offering
matters.
Financial Condition, Liquidity and Capital Resources
The Company has an accumulated deficit of $8.5 million, having incurred
$5.5 million in losses during the last two years. Those losses were primarily
due to the cost of establishing and maintaining an infrastructure to market
and deliver Year 2000 services. The market did not develop as anticipated and
in December 1998 the Company implemented a restructuring plan that included a
U.S. workforce reduction of approximately 30% from the level at the beginning
of the 1998 fourth quarter. The Company is also investigating other steps
that can be taken to reduce costs in order to more properly align costs with
its current level of business. The ability of the Company to continue as a
going concern is dependent on management's ability to successfully achieve
consistently profitable operations.
The Company had a net decrease in cash of $3.1 million in 1998, primarily
a result of a net loss of $2.4 million and an increase in other current assets.
The Company has no present plans to make significant capital
expenditures during 1999. The Company has no lines-of-credit or other
confirmed sources for capital at this time.
At December 31, 1998, the Company had working capital totaling $1.5 million.
Accounts receivable and unbilled revenues have increased a combined $2.6
million since December 31, 1997. The increase was attributable to the 1998
increase in revenues and the larger number of Year 2000 services engagements
in progress at December 31, 1998.
Net property and equipment of $6.1 million declined from $7.5 million at
December 31, 1997. This was due primarily to the depreciation
expense exceeding assets purchased and leases capitalized for accounting
purposes. It also included approximately $180 thousand reduction in value as
a result of the $440 thousand Impairment of Assets write-down.
Year 2000 Services generated 86% of U.S. revenues and 58% of consolidated
revenues in 1998. There is no assurance that the Company can replace this
volume of business with new service offerings in the year 2000 when the demand
for Year 2000 service offerings is expected to decline significantly. If the
Company can not successfully transition its U.S. business to other information
technology services, the financial condition of the Company would be
significantly adversely impacted.
In March 1997, the Company completed a public stock offering that raised
$8,592,982, net of offering expenses. Offering proceeds were used to repay
an $800,000 stockholder loan and as a significant source of funds for the
Company's investment in additional personnel, equipment and facilities in the
United States and France in anticipation of the increased demand for Year 2000
services during the next two years. In 1997 the Company established and
equipped its Year 2000 testing facility in the United States and
financed the operations of a new subsidiary in France to provide Year 2000
and Eurocurrency conversion services.
Year 2000 Compliance Status
The Company is an information technology services company with the majority of
its current revenues being derived by providing Year 2000 consulting and
project management services. The Company also provides disaster recovery
backup services, with the majority of these revenues being generated in
France. The Company has made a review of all of its critical systems,
including revenue generating computers, both in the United States and France.
It believes all critical equipment and systems to be Year 2000 compliant,
with the exception of the Bull mainframe computer systems utilized for disaster
recovery backup services in the U.S. Although the Company has leased a Bull
9000 mainframe computer, which is Year 2000 compliant in and of itself,
additional equipment must be acquired in order to make this system Year 2000
compliant. The Company has not yet decided as to whether or not it will make
this investment. Revenues from Bull Disaster Recovery services in the U.S.
totaled $830 thousand in 1998 and are expected to decline to approximately
$500 thousand in 1999. All other critical systems are believed to be Year
2000 compliant.
ITEM 7. FINANCIAL STATEMENTS.
STRATEGIA CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31 December 31
Assets 1998 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 761,650 $ 3,866,763
Accounts receivable, net 3,207,375 1,509,055
Unbilled revenues 1,386,810 460,254
Income tax receivable - 145,603
Other current assets 491,706 148,869
------------- -------------
Total current assets 5,847,541 6,130,544
------------- -------------
Property and equipment at cost 21,593,384 19,559,572
Less accumulated depreciation
and amortization 15,500,460 12,066,617
------------- -------------
6,092,924 7,492,955
------------- -------------
Other assets 381,418 767,521
------------- -------------
$ 12,321,883 $ 14,391,020
------------- -------------
------------- -------------
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of
long-term debt $ 50,726 $ 45,465
Current installments of obligations
under capital leases 505,931 1,101,996
Deferred revenue 395,438 375,085
Accounts payable 1,663,736 938,749
Accrued expenses and other current
liabilities 1,690,166 1,354,632
Accrued income taxes 42,767 -
------------- -------------
Total current liabilities 4,348,764 3,815,927
Long-term debt, excluding current
installments 882,407 933,133
Obligations under capital leases,
excluding current installments 272,253 565,495
Customers' deposits 18,242 37,810
Deferred revenue 1,010,547 948,750
Deferred income taxes 352,825 435,499
Minority interests 71,201 30,654
------------- -------------
Total liabilities 6,956,239 6,767,268
------------- -------------
Stockholders' equity:
Common stock without par value.
Authorized 15,000,000 shares;
issued and outstanding
4,667,677 shares 13,883,965 13,866,001
Accumulated deficit (8,509,606) (6,095,924)
Accumulated other comprehensive
loss (8,715) (146,325)
------------- ------------
Total stockholders' equity 5,365,644 7,623,752
------------- ------------
Commitments and contingencies
$ 12,321,883 $ 14,391,020
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Operations
<CAPTION> Years ended December 31
1998 1997
<S> <C> <C>
Service revenues $21,621,572 $11,021,972
---------- ----------
Operating expenses:
Cost of services 15,454,209 8,846,674
Selling, general and
administrative expenses 7,820,497 5,123,272
Impairment of asset writedown 440,100 -
---------- ----------
23,714,806 13,969,946
---------- ----------
Operating loss (2,093,234) (2,947,974)
Other (income) expense:
Interest expense 257,431 452,264
Other (income), net (69,250) (347,601)
---------- ----------
188,181 104,663
---------- ----------
Loss before income taxes (2,281,415) (3,052,637)
Provision for income taxes 132,267 79,259
---------- ----------
Net loss $(2,413,682) $(3,131,896)
---------- ----------
---------- ----------
Net loss per share of common
stock
Basic $ (.52) $ (.75)
Diluted $ (.52) $ (.75)
Weighted average number of common
shares outstanding 4,667,677 4,220,271
</TABLE>
See accompanying notes to consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
<S> <C> <C>
Net loss $(2,413,682) $(3,131,896)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 137,610 (124,767)
----------- -----------
Comprehensive loss $(2,276,072) $(3,256,663)
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
</TABLE>
STRATEGIA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Series AA Preferred Common Stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
January 1, 1997 64,546 $ 645,460 3,038,885 $4,386,834
Issuance of common stock,
net of offering costs - - 1,358,000 8,592,982
Payment of dividends - - - -
Conversion of Series AA
Preferred to Common Stock (64,546) (645,460) 258,184 645,460
Stock options issued
for services - - - 124,317
Other - - 12,608 116,408
Net loss - - - -
Foreign currency translation - - - -
--------- --------- -------- -------
December 31, 1997 - - 4,667,677 13,866,001
Stock options issued
for services - - - 17,964
Net loss - - - -
Foreign currency translation - - - -
-------- --------- -------- -------
December 31, 1998 - $ - 4,667,677 $13,883,965
--------- --------- -------- -------
--------- --------- -------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
Accumulated
Other
Accumulated Comprehensive
Deficit Income (Loss) Total
<S> <C> <C> <C>
January 1, 1997 $(2,938,423) $ (21,558) $ 2,072,313
Issuance of common stock,
net of offering costs - - 8,592,982
Payment of dividends (25,605) - (25,605)
Conversion of Series AA
Preferred to Common Stock - - -
Stock options issued
for services - - 124,317
Other - - 116,408
Net loss (3,131,896) - (3,131,896)
Foreign currency
translation - (124,767) (124,767)
--------- ---------- ---------
December 31, 1997 (6,095,924) (146,325) 7,623,752
Stock options issued
for services - - 17,964
Net loss (2,413,682) - (2,413,682)
Foreign currency
translation - 137,610 137,610
--------- ---------- ---------
December 31, 1998 $(8,509,606) $ (8,715) $ 5,365,644
--------- ------------ ----------
--------- ------------ ----------
</TABLE>
STRATEGIA CORPORATION AND SUBSIDIARIES
<TABLE>
Statements of Cash Flows
<CAPTION>
Years ended December 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,413,682) $(3,131,896)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 3,225,553 2,775,219
Deferred income taxes (110,590) 114,959
Other noncash items 461,508 124,752
Changes in operating assets and
liabilities:
Accounts receivable (1,698,320) (541,925)
Unbilled revenues (926,556) (459,150)
Other current assets (342,837) (90,115)
Accounts payable 724,987 271,454
Accrued expenses and other
current liabilities 123,533 549,564
Accrued income taxes/income tax
receivable 188,370 (145,603)
(Increase)decrease in other assets 284,452 (20,818)
Increase in deferred revenue 82,150 349,929
Decrease in customers' deposits (19,568) (13,251)
---------- ---------
Net cash used in
operating activities (421,000) (216,881)
---------- ---------
Cash flows from investing activities:
Acquisition of property and
equipment (1,734,335) (1,282,125)
---------- ---------
Net cash used in investing
activities (1,734,335) (1,282,125)
---------- ---------
Cash flows from financing activities:
Net proceeds from issuance of
common stock - 8,592,982
Proceeds from bank line
of credit - 100,000
Principal payment of note payable
to stockholder - (800,000)
Principal payments on
long-term debt and obligations
under capital leases (1,024,371) (2,848,408)
Payment of dividends on
preferred stock - (25,605)
--------- ---------
Net cash provided by (used in)
financing activities (1,024,371) 5,018,969
--------- ---------
Effect of exchange rate changes
on cash 74,593 8,364
--------- ---------
Net increase (decrease) in cash
and cash equivalents (3,105,113) 3,528,327
Cash and cash equivalents at
beginning of year 3,866,763 338,436
--------- ----------
Cash and cash equivalents at
end of year $ 761,650 $3,866,763
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
STRATEGIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) DESCRIPTION OF BUSINESS
Strategia Corporation ("Strategia") and its subsidiaries
(together referred to herein as "the Company") provide a variety of
information technology services to businesses, governments and other
organizations.
In the United States, Strategia primarily provides Year 2000 services and
disaster recovery services. During the year ended December 31, 1998, 86% of
the $11.9 million revenues generated in the U.S. were Year 2000 services
revenues. These services assist clients in resolving their Year 2000 computer
and other date related problems.
In France, the Company provides its services through three companies.
Twinsys Dataguard S.A. ("Twinsys"), a wholly-owned subsidiary of Strategia,
provides disaster recovery and contingency planning services to users of Bull
computers. Twin-X S.A. ("Twin-X"), a 60% owned subsidiary of Twinsys,
provides similar services to users of UNIX-based computer systems. Strategia
Europe S.A.S. ("Strategia Europe"), a wholly-owned subsidiary of Strategia,
provides Year 2000 services in France.
The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern. The Company has incurred $5.5
million in losses during the last two years, primarily due to establishing an
infrastructure to support Year 2000 services revenues of $15 to $20 million in
the U.S. alone. The market did not develop as anticipated and in December 1998
the Company implemented a restructuring plan that resulted in a U.S. workforce
reduction of approximately 30%. No restructuring provision was required to be
accrued as a result of this action. The Company is also investigating other
steps that can be taken to reduce costs and more properly align costs with its
current level of business. The ability of the Company to continue as a going
concern is dependent on management's ability to successfully achieve
consistently profitable operating results.
Year 2000 services generated 58% of consolidated revenues during 1998.
There is no assurance that the Company can replace this volume of business
with new service offerings in the year 2000 when it is expected that Year
2000 services will decline significantly.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Strategia and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements
in conformity with generally accepted accounting principles requires Company
management to make estimates and assumptions that affect the amounts reported
in these financial statements and accompanying notes. Significant estimates
made in the preparation of these financial statements include, among others,
accounting for Year 2000 and other fixed-price consulting engagements
on a percentage-of-completion method of accounting, including the related
provisions made for contract losses. Actual results could materially differ
from those estimates.
REVENUE RECOGNITION AND EXPENSE
Disaster recovery backup service contract terms are generally for
more than one year and require the payment of monthly subscription fees.
Service revenue from these contracts is recognized on a straight-line method
over the life of the contract. Long-term deferred revenue includes cash
received in excess of the amortized revenue recorded for such contracts.
Revenue for fixed-price Year 2000 engagements is recognized on the
percentage-of-completion method. Actual costs incurred to date, as a
percentage of estimated total contract costs, is used to determine the
percentage-of-completion, since management considers expended costs to be the
best available measure of progress on these contracts. Contract costs include
all direct costs and those indirect costs related to contract performance.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Revenue from non-fixed-price
contracts is recognized as services are provided and costs incurred. Selling,
general and administrative costs are charged to expense as incurred.
Unbilled revenues represents revenues recognized in excess of amounts
billed. Correspondingly, deferred revenue represents billings in excess of
revenues recognized.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and
consist of the following at December 31, 1998 and 1997:
<TABLE>
1998 1997
<S> <C> <C>
Land $ 260,800 $ 260,800
Building and improvements 3,423,757 3,160,279
Equipment and other 17,908,827 16,138,493
---------- ----------
$21,593,384 $19,559,572
---------- ----------
---------- ----------
</TABLE>
Depreciation of building, improvements and equipment is computed on
the straight-line method over the estimated useful life of the asset.
Leasehold improvements and equipment under capital leases are amortized on the
straight-line method over the terms of the related leases or over the estimated
useful life of the asset.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign operations have
been translated into U.S. dollars in accordance with Financial Accounting
Standards Board Statement No. 52, FOREIGN CURRENCY TRANSLATION. All balance
sheet accounts have been translated using the exchange rates in effect at the
balance sheet date. Amounts in the statements of operations have been
translated using the average exchange rate for the year. The gains and losses
resulting from the changes in exchange rates during the year have been
reported separately in Accumulated Other Comprehensive Income (Loss) and as a
component of stockholders' equity.
INCOME (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE. Statement No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all periods
have been presented, and where appropriate, restated to conform to the
Statement No. 128 requirements.
For 1998 and 1997, basic and diluted loss per share is based on net
loss, less preferred dividends, divided by the weighted average number of common
shares outstanding during each period. In computing diluted loss per share,
the exercise of options and warrants is not assumed as such would reduce the
loss per share in both years.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with a maturity of
less than three months when purchased. The Company had cash in banks at
December 31, 1998, in excess of FDIC insurance in the amount of $417 thousand.
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments
approximate their fair values as of December 31, 1998 and 1997.
PRIOR YEAR DATA
Certain prior year data has been reclassified to conform to the
1998 presentation.
(3) COMMON STOCK OFFERING
In March 1997, the Company completed a public offering of its Common
Stock that raised $8,592,982 net of offering expenses of $913,018. The
Company sold 1,358,000 shares of Common Stock for $7.00 per share.
In September and October 1996, the Company raised $1,250,001 in a
private placement of 500,000 Units of Common Stock and warrants to purchase
Common Stock. Each Unit consists of one share of Common Stock and a warrant
to purchase one share of Common Stock for $3.75 per share. All warrants
related to these units were outstanding at December 31, 1998 and 1997 and are
exercisable through September 2001.
(4) LONG-TERM DEBT AND CREDIT AGREEMENTS
At December 31, 1998 and 1997 the Company had a mortgage note payable of
$933,133 ($50,726 payable in 1999, $56,596 in 2000, $63,145 in 2001, $70,452 in
2002 and $78,605 in 2003) and $978,598. The mortgage note is payable in equal
monthly installments through May 1, 2009; however, the lender has the option to
accelerate payment on the entire outstanding balance of the note at five year
intervals throughout the note term. Although the next potential note
acceleration date is May 1, 1999, the lender is required to give notice of its
intent to accelerate the note three months prior to the acceleration date. No
notice was received by the Company prior to February 1, 1999. The current
interest rate is fixed at 11%. This note is secured by land, building and
improvements with a total net book value of $2,224,000 at December 31, 1998.
(5) NOTE PAYABLE TO STOCKHOLDER
During 1997, the Company paid off an $800,000 note payable to a
stockholder and related accrued interest of $190,381. Interest expense
includes approximately $18,000 in 1997 related to this note.
In consideration for this opportunity to borrow funds, the Company issued
15,000 shares of common stock to the stockholder in connection with the
initial note agreement. Additional share increments of common stock were
issued with each annual renewal (8,000 shares in 1997). The value of the
shares issued was approximately $56,000 in 1997 and is recorded as interest
expense.
(6) LEASES
The Company is obligated under various equipment capital leases that
expire over the next three years. Property and equipment include the
following amounts under capital leases at December 31, 1998:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Equipment $ 2,343,595 $ 6,286,362
Less accumulated amortization 1,766,300 4,727,149
---------- ---------
$ 577,295 $ 1,559,213
---------- ---------
---------- ---------
</TABLE>
The Company acquired approximately $252,000 and $1,023,900 of equipment
in exchange for capital lease obligations during 1998 and 1997, respectively.
The Company also has certain noncancellable operating leases, primarily
for facilities and computer hardware and software, that expire over the next
five years and provide for purchase or renewal options in most instances.
Future minimum lease payments under capital leases and noncancellable
operating leases, and the present value of future minimum capital lease
payments as of December 31, 1998 are:
<TABLE>
<CAPTION>
Capital Operating
leases leases
<S> <C> <C>
Years ending December 31:
1999 $ 558,077 $1,568,776
2000 261,761 934,109
2001 22,760 507,695
2002 378 347,035
2003 - 308,656
--------- ---------
Total minimum lease payments 842,976 $3,666,271
---------
---------
Less amount representing
interest (at rates
ranging from 8.0% to
10.47%) 64,792
---------
Present value of net
minimum capital
lease payments 778,184
Less current installments 505,931
---------
Obligations under capital
leases, excluding
current installments $ 272,253
---------
---------
</TABLE>
Total rental expense, including maintenance charges, for operating leases in
1998 and 1997 was $2,608,990 and $2,417,401, respectively.
(7) IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
requires that an impairment loss be recorded when the fair value is less than
the carrying value on the books of the Company. Due primarily to the Company's
anticipated lack of business in the renovation and compliance testing areas,
the Company's U. S. business recorded a $440 thousand charge to reflect the
write-off of certain assets. These assets included a license fee paid for the
use of software to renovate COBOL software code, leasehold improvements and
equipment at the Shelbyville, Kentucky data center, and intangible assets.
There are no expected future cash flows from these assets.
(8) INCOME TAXES
For financial reporting purposes, loss before income taxes includes the
following components:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Pretax loss:
United States $ (1,759,790) $ (2,844,117)
Foreign (521,625) (208,520)
----------- ------------
$ (2,281,415) $ (3,052,637)
----------- ------------
----------- ------------
</TABLE>
The provision for income tax expense (benefit)is primarily attributable
to earnings from foreign operations. The components of the provision for
income taxes follows:
<TABLE>
1998 1997
<S> <C> <C>
Current $ 214,941 $ (35,700)
Deferred (82,674) 114,959
----------- -----------
$ 132,267 $ 79,259
----------- -----------
----------- -----------
</TABLE>
A reconciliation of the income tax expense for the years ended December
31, 1998 and 1997 with the federal statutory rate is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Tax benefit at U.S.
statutory rate of 34% $ (775,680) $ (1,037,897)
Tax effect of operating losses in the U.S.
generating no current tax benefit 598,329 967,000
Tax effect of operating losses in Europe
generating no current income tax benefit 288,200 135,531
Higher effective income tax rate of
foreign operations 13,039 14,581
Other 8,379 44
--------- -----------
$ 132,267 $ 79,259
---------- -----------
---------- -----------
</TABLE>
Undistributed earnings of the Company's foreign subsidiary amounted to
approximately $1.4 million at December 31, 1998. Those earnings are
considered to be indefinitely reinvested and, accordingly, no provision for
U.S. federal income taxes has been provided thereon. Upon distribution of
those earnings in the form of dividends or otherwise, the Company would be
subject to both U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to France. Determination of the amount
of unrecognized deferred U.S. income tax liability is not practicable because
of the complexities associated with its hypothetical calculation.
At December 31, 1998, the Company had U.S. net tax operating loss
carryforwards of approximately $8.1 million for federal income tax reporting
purposes. These carryforwards expire as follows: $467,000 in 2000; $658,000
in 2001; $508,000 in 2002; $115,000 in 2004; $26,000 in 2005; $51,000 in 2006;
$435,000 in 2007; $649,000 in 2008; $431,000 in 2010, $619,000 in 2011;
$2,495,000 in 2012; and $1,620,000 in 2013.
At December 31, 1998, Strategia Europe had foreign net tax operating loss
carryforwards of approximately $1.3 million which will expire in 2003.
Significant components of the Company's net deferred tax liability at
December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 337,600 $ 480,000
Other 15,225 19,499
--------- ----------
Total deferred tax liabilities 352,825 499,499
--------- ----------
Deferred tax assets:
Net operating loss carry forwards (3,793,000) (2,733,000)
Valuation allowance 3,793,000 2,669,000
--------- ----------
Net deferred tax asset - (64,000)
---------- ----------
Net deferred tax liability $ 352,825 $ 435,499
---------- ----------
---------- ----------
</TABLE>
(9) STOCK OPTION AND GRANT PLANS
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). In accordance
with SFAS 123, the Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related Interpretations, in accounting for its stock based compensation
because, as discussed below, the alternative fair value accounting principle
provided for under SFAS 123 requires the use of option valuation models
that were not developed for use in valuing stock options. Under APB 25, when
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense
is recognized.
The Strategia 1988 Stock Option Plan (as amended by stockholders in 1989
and 1997) allows for options to be granted to key employees of the Company to
purchase no more than the greater of 900,000 shares or 15% of the common stock
outstanding from time to time, at a price not less than 75% of the fair
market value at the time the grant is approved. Options totaling 111,500
shares and 349,000 shares of common stock were granted to employees in 1998
and 1997, respectively, which generally vest over a three year term. It also
provides automatic grants of stock options to the Company's directors who are
not employees. Beginning in the second quarter of 1997, options to purchase
1,000 shares of common stock are granted quarterly to each nonemployee
director. In addition, each nonemployee director who was not a director on
May 15, 1989 will automatically be granted an option for 2,500 shares of common
stock on May 15 following his subsequent election. Options for nonemployee
directors are granted at the fair market value of the common stock on the
grant date and vest on the first anniversary of the grant date.
All options granted under the plan are exercisable over a 10-year period
from the grant date. No options under the plan have been exercised as of
December 31, 1998.
The Strategia 1990 Stock Grant Plan authorizes the Company's Stock Option
Committee to grant up to 125,000 shares of common stock to key employees as
restricted or performance stock awards. In 1990, grants of 4,075 shares
of common stock were issued under this plan. No shares have been granted
subsequent to 1990.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to December 31, 1994 under SFAS 123. The fair value for these
options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions: risk-free
interest rate of 5.0% prior to 1998 and 5.44% for 1998; no dividend yields;
volatility factor of the expected market price of the Company's common stock
of .80 in 1998 and .815 in 1997; and weighted-average life of the option of
nine years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Pro forma net loss $(3,712,516) $(3,623,124)
Pro forma loss per share
Basic and Diluted $(.80) $(.85)
</TABLE>
A summary of the Company's stock option activity and related information
for years ended December 31 follows:
<TABLE>
<CAPTION>
1998 1997
Weighted Weighted
Average Average
Options Price Options Price
<S> <C> <C> <C> <C>
Outstanding -
beginning of year 599,135 $ 8.88 247,634 $ 5.41
Granted 119,500 $ 7.16 355,000 $ 11.24
Canceled (191,167) $ 9.62 (3,499) $ 1.84
------- -------
Outstanding -
end of year 527,468 $ 8.22 599,135 $ 8.88
------- -------
------- -------
Exercisable -
end of year 276,741 $ 6.90 149,504 $ 4.46
------- -------
------- -------
Weighted average fair
value of options granted
during the year $ 5.69 $ 9.26
</TABLE>
The number, weighted-average exercise price and weighted-average
remaining contractual life of options outstanding, and the number and
weighted-average exercise price of options exercisable as of December 31,
1998 follow:
<TABLE>
<CAPTION>
Range of Number of Weighted-Average Weighted Average
Exercise Prices Options Exercise Price Remaining Life
<S> <C> <C> <C> <C>
Outstanding
options: $1.00-4.99 85,840 $1.97 5.2
5.00-9.99 306,628 7.57 8.3
10.00-14.99 100,000 13.00 8.6
15.00-15.63 35,000 15.63 8.4
-------
Total 527,468 8.22 7.8
-------
-------
Exercisable
options: $1.00-4.99 73,840 $1.85 4.5
5.00-9.99 156,234 7.27 7.9
10.00-14.99 35,000 13.01 8.6
15.00-15.63 11,667 15.63 8.4
-------
Total 276,741 6.90 7.1
-------
-------
</TABLE>
(10) PREFERRED STOCK
On May 30, 1996, the Company's Board of Directors authorized the issuance
of Series AA Convertible Preferred Stock (Series AA Preferred). On June 30,
1996, all holders of Series A Convertible Preferred Stock (Series A Preferred)
exchanged their shares (34,167 shares) for the same number of Series AA
Preferred shares. All dividends in arrears ($69,520) due to the original
holders of Series A Preferred and notes payable ($191,176) and accrued interest
payable ($43,062) to certain stockholders were also converted to Series AA
Preferred. The Series AA Preferred is convertible into four shares of common
stock at an effective price of $2.50 per share of common stock for five years
after issuance through June 30, 2001.
At its option, the Company called all of the outstanding shares of Series
AA Convertible Preferred Stock (Series AA Preferred) for redemption on June 30,
1997. Holders of all Series AA Preferred elected to convert their shares to
common stock. A total of 258,184 shares of common stock were issued to them as
of June 30, 1997.
The holders of Series AA Preferred also received a five-year detachable
warrant to purchase one share of common stock for each share of Series AA
Preferred purchased. On December 31, 1997, warrants to purchase 2,788 shares
of common stock were exercised at a price of $2.50. At December 31, 1998 and
1997, warrants to purchase 61,758 shares of common stock remained outstanding
at an exercise price of $2.50.
Shares of common stock reserved with respect to all of the above options
and warrants were 1,089,226 at December 31, 1998.
(11) SEGMENT INFORMATION
The Company is engaged in one industry segment consisting of providing
information technology services to users in North America and Europe.
Service revenue, operating income and identifiable assets for the years
ended December 31, 1998 and 1997 pertaining to the two geographic areas in
which the Company operates are presented below.
<TABLE>
<CAPTION>
1998 1997
Service revenue
<S> <C> <C>
United States $ 11,941,536 $ 4,050,591
Europe 9,680,036 6,971,381
----------- -----------
$ 21,621,572 $ 11,021,972
----------- -----------
----------- -----------
Operating loss
United States $ (1,747,952) $ (2,818,800)
Europe (345,282) (129,174)
----------- -----------
$ (2,093,234) $ (2,947,974)
----------- -----------
----------- -----------
Identifiable total assets
United States $ 6,189,705 $ 9,079,509
Europe 6,132,178 5,311,511
----------- -----------
$ 12,321,883 $ 14,391,020
----------- -----------
----------- -----------
</TABLE>
The net assets of the Company's European operations at December 31, 1998
and 1997 amounted to approximately $2,142,000 and $927,000, respectively.
One customer, comprising a group of affiliated companies, accounted for
approximately 8% and 23% of consolidated service revenue in 1998 and 1997,
respectively.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
Total interest payments were approximately $257,000 in 1998 and
$471,000 in 1997. Total cash payments made for income taxes during 1998 and
1997 were approximately $115,000 and $165,000, respectively.
(13) YEAR 2000 COMPLIANCE STATUS
The Company is an information technology services company with the
majority of its current revenues being derived by providing Year 2000
consulting and project management services. The Company also provides disaster
recovery backup services, with the majority of these revenues being generated
in France. The Company has made a review of all of its critical systems,
including revenue generating computers, both in the United States and France.
It believes all critical equipment and systems to be Year 2000 compliant, with
the exception of the Bull mainframe computer systems utilized for disaster
recovery backup services in the U.S. Although the Company has leased a Bull
9000 mainframe computer, which is Year 2000 compliant in and of itself,
additional equipment must be acquired in order to make this system Year 2000
compliant. The Company has not yet decided as to whether or not it will make
this investment. Revenues from Bull Disaster Recovery services in the U.S.
totaled $830 thousand in 1998 and are expected to decline to approximately
$500 thousand in 1999. All other critical systems are believed to be Year 2000
compliant.
STRATEGIA CORPORATION AND SUBSIDIARIES
Report of Independent Auditors
The Board of Directors and Stockholders
Strategia Corporation
We have audited the accompanying consolidated balance sheet of Strategia
Corporation and Subsidiaries as of December 31, 1998 and the related
consolidated statements of operations, comprehensive loss, stockholders'
equity and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Strategia Corporation and Subsidiaries at December 31, 1998, and the
consolidated results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered
recurring losses from operations with an accumulated deficit of approximately
$8.5 million, that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ CARPENTER MOUNTJOY & BRESSLER, PSC
Louisville, Kentucky
March 31, 1999
Report of Independent Auditors
The Board of Directors and Stockholders
Strategia Corporation
We have audited the accompanying consolidated balance sheet of Strategia
Corporation and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, comprehensive loss, stockholders'
equity, and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Strategia Corporation and subsidiaries at December 31, 1997, and the
consolidated results of their operations and their cash flows for the
year then ended, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Louisville, Kentucky
March 26, 1998
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As previously reported, on October 8, 1998, the Company engaged Carpenter,
Mountjoy & Bressler, PSC to audit the Registrant's consolidated financial
statements for the fiscal year ending December 31, 1998, to replace Ernst &
Young LLP, who resigned as the Company auditors on April 23, 1998.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information under the caption "Board of Directors" in the Company's
definitive proxy statement for its 1999 annual meeting of shareholders (the
"1999 Proxy Statement") and under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" of the 1999 Proxy Statement are incorporated
herein by reference.
Item 10. Executive Compensation.
The information under the caption "Executive Compensation" of the 1999
Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information under the caption "Principal Shareholders" of the 1999 Proxy
Statement is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information under the caption "Transactions With Management" of the 1999
Proxy Statement is incorporated herein by reference.
Item 13. Exhibits, List, and Reports on Form 8-K.
(a) List of Exhibits Filed.
(3.1) Amended and Restated Articles of Incorporation are
incorporated by reference to Exhibits 3.1 and 4.1 to
the Company's 10-QSB for the quarter ended June
30, 1996.
(3.2) Bylaws are incorporated by reference to Exhibit 3.2
to the Company's 1995 10-KSB.
(4.1) Amended and Restated Articles of Incorporation are
incorporated by reference to Exhibits 3.1 and 4.1 to
the Company's 10-QSB for the quarter ended June 30,
1996.
(10.1) 1988 Stock Option Plan as amended and restated as of
November 13, 1997 is incorporated by reference to
Appendix A of the Company's Definitive Proxy Statement
filed November 20, 1997.
(10.2) 1990 Stock Grant Plan is incorporated by reference to
Exhibit 10.8 to the 1994 10-KSB.
(10.3) Agreement of Assignment of Mortgage Note dated
August 1, 1991, between Future Federal Savings Bank,
Brown, Noltemeyer Co., Charles A. Brown, Jr.,
Norman V. Noltemeyer, and Dataguard Recovery Services,
Inc. are incorporated by reference to Exhibit 10.7 to
the Company's 1995 10-KSB.
(10.4) Mortgage Note dated April 3, 1984, from Brown,
Noltemeyer Co. to Future Federal Savings Bank, as
amended are incorporated by reference to Exhibit 10.8
to the Company's 1995 10-KSB.
(10.5) Term Lease Master Agreement with IBM Credit Corporation
dated October 15, 1995 is incorporated by reference to
Exhibit 10.14 to the November 1996 10-KSB/A.
(10.6) Revised Term Lease Supplement with IBM Credit
Corporation dated August 21, 1996 is incorporated by
reference to Exhibit 10.3 to the November 1996
10-QSB/A.
(10.7) Computer Lease Agreement dated July 12, 1995 between
Twinsys Dataguard SA and CEPME is incorporated by
reference to Exhibit 10.5 to the November 1996
10-KSB/A.
(10.8) Computer Lease Agreement dated March 7, 1996 between
Twinsys Dataguard SA and Bull SA is incorporated by
reference to Exhibit 10.4 to the November 1996
10-QSB/A.
(10.9) Form of Stock Purchase Warrant Agreement between the
Company and certain investors (including John P.
Snyder and EPI Corporation) is incorporated by
reference to Exhibit 10.5 to the November 1996
10-QSB/A.
(10.10) Lease dated March 3, 1997 between Southeastern Group,
Inc. and Strategia Corporation is incorporated by
Reference to Exhibit 10.16 to the Company's 1996 10-KSB.
(10.11) Agreement between James P. Buren and Strategia
Corporation dated as of October 24, 1997 is incorporated
by reference to Exhibit 10.11 to the Company's 1997
10-KSB.
(10.12) Lease dated September 24, 1997 between Paragon Centre
Associates, LLC and Strategia Corporation.
(10.13) Agreement Addendum dated September 30, 1998, between
James P. Buren and Strategia Corporation.
(11) For a statement regarding the computations of per
share earnings (loss), see Note 2 of the Notes to
the Consolidated Financial Statements.
(21) Subsidiaries.
(23.1) Consent of Carpenter, Mountjoy and Bressler, PSC.
(23.2) Consent of Ernst and Young LLC.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
STRATEGIA CORPORATION
Date: March 31, 1999
By /s/ Richard W. Smith
Richard W. Smith, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Richard W. Smith
Richard W. Smith President and Director March 31, 1999
(Principal Executive Officer)
/s/ Paul E. Phillips, Jr.
Paul E. Phillips, Jr. Vice President and March 31, 1999
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ John P. Snyder
John P. Snyder Secretary and Director March 31, 1999
/s/ John A. Brenzel
John A. Brenzel Director March 31, 1999
</TABLE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C> <C>
(3.1) Amended and Restated Articles of Incorporation are
incorporated by reference to Exhibits 3.1 and 4.1 to
the Company's 10-QSB for the quarter ended June 30,
1996.
(3.2) Bylaws are incorporated by reference to Exhibit 3.2
to the Company's 1995 10-KSB.
(4.1) Amended and Restated Articles of Incorporation are
incorporated by reference to Exhibits 3.1 and 4.1 to
the Company's 10-QSB for the quarter ended June 30,
1996.
(10.1) 1988 Stock Option Plan as amended and restated as of December 13,
1997, is incorporated by reference to Appendix A to the Company's
Definitive Proxy Statement filed November 20, 1997.
(10.2) 1990 Stock Grant Plan is incorporated by reference to
Exhibit 10.8 to the 1994 10-KSB.
(10.3) Agreement of Assignment of Mortgage Note dated
August 1, 1991, between Future Federal Savings Bank,
Brown, Noltemeyer Co., Charles A. Brown, Jr.,
Norman V. Noltemeyer, and Dataguard Recovery Services,
Inc. are incorporated by reference to Exhibit 10.7 to
the Company's 1995 10-KSB.
(10.4) Mortgage Note dated April 3, 1984, from Brown,
Noltemeyer Co. to Future Federal Savings Bank, as
amended are incorporated by reference to Exhibit 10.8
to the Company's 1995 10-KSB.
(10.5) Term Lease Master Agreement with IBM Credit Corporation
dated October 15, 1995 is incorporated by reference to
Exhibit 10.14 to the November 1996 10-KSB/A.
(10.6) Revised Term Lease Supplement with IBM Credit
Corporation dated August 21, 1996 is incorporated by
reference to Exhibit 10.3 to the November 1996
10-QSB/A.
(10.7) Computer Lease Agreement dated July 12, 1995 between
Twinsys Dataguard SA and CEPME is incorporated by
reference to Exhibit 10.5 to the November 1996
10-KSB/A.
(10.8) Computer Lease Agreement dated March 7, 1996 between
Twinsys Dataguard SA and Bull SA is incorporated by
reference to Exhibit 10.4 to the November 1996
10-QSB/A.
(10.9) Form of Stock Purchase Warrant Agreement between the
Company and certain investors (including John P.
Snyder and EPI Corporation) is incorporated by
reference to Exhibit 10.5 to the November 1996
10-QSB/A.
(10.10) Lease dated March 3, 1997 between Southeastern Group,
Inc. and Strategia Corporation incorporated by reference
To Exhibit 10.16 to the Company's 1996 10-KSB
(10.11) Agreement between James P. Buren and Strategia Corporation
dated as of October 4, 1997 is incorporated by reference to
Exhibit 10.11 to the Company's 1997 10-KSB.
(10.12) Lease dated September 24, 1997 between Paragon Centre
Associates, LLC and Strategia Corporation.
(10.13) Agreement Addendum dated September 30, 1998, between
James P. Buren and Strategia Corporation.
(11) For a statement regarding the computations of per
share earnings (loss), see Note 2 of the Notes to
the Consolidated Financial Statements.
(21) Subsidiaries.
(23.1) Consent of Carpenter, Mountjoy and Bressler, PSC.
(23.2) Consent of Ernst and Young LLC.
(27) Financial Data Schedule.
</TABLE>
Exhibit 10.12
LEASE AGREEMENT
TWO PARAGON CENTRE
LEASE AGREEMENT
BY AND BETWEEN
PARAGON CENTRE ASSOCIATES, LLC, AS LANDLORD
AND
STRATEGIA CORPORATION, AS TENANT
September 24, 1997
TABLE OF CONTENTS
Page
ARTICLE I 1
ARTICLE II 1
Section 2.1 Premises 1
Section 2.2 Term 2
Section 2.3 Use 2
ARTICLE III 3
Section 3.1 Rental Payments 3
Section 3.2 Additional Rent 3
Section 3.3 Security Deposit and Prepaid Rent 5
ARTICLE IV 6
Section 4.1 Services 6
Section 4.2 Keys and Locks 7
Section 4.3 Graphics and Building Directory 8
ARTICLE V 8
Section 5.1 Occupancy of Premises 8
Section 5.2 Entry for Repairs and Inspection 8
Section 5.3 Hazardous Materials 8
ARTICLE VI 9
Section 6.1 Leasehold Improvements 9
Section 6.2 Repairs by Landlord 10
Section 6.3 Repairs by Tenant 11
Section 6.4 Liens 11
Section 6.5 Indemnification 11
ARTICLE VII 11
Section 7.1 Condemnation 11
Section 7.2 Force Majeure 12
Section 7.3 Fire or Other Casualty 12
Section 7.4 Insurance 13
Section 7.5 Waiver of Subrogation Rights 14
ARTICLE VIII 14
Section 8.1 Default by Tenant 14
Section 8.2 Landlord's Remedies 15
Section 8.3 Duty to Relet or Mitigate 16
Section 8.4 Reentry 17
Section 8.5 Rights of Landlord in Bankruptcy 17
Section 8.6 Waiver of Certain Rights 17
Section 8.7 NonWaiver 17
Section 8.8 Holding Over 17
Section 8.9 Abandonment of Personal Property 18
Section 8.10 Default by Landlord 18
ARTICLE IX 18
Section 9.1 Transfers 18
Section 9.2 Assignment by Landlord 19
Section 9.3 Limitation of Landlord's Liability 19
ARTICLE X 19
Section 10.1 Subordination 19
Section 10.2 Estoppel Certificate or Three-Party Agreement 20
Section 10.3 Notices 20
ARTICLE XI 21
Section 11.1 Right to Relocate Tenant 21
Section 11.2 Rights and Remedies Cumulative 21
Section 11.3 Legal Interpretation 21
Section 11.4 Authority 21
Section 11.5 No Brokers 22
Section 11.6 Consents by Landlord 22
Section 11.7 Joint and Several Liability 22
Section 11.8 Independent Covenants 22
Section 11.9 Attorneys' Fees and Other Expenses 22
Section 11.10 Recording 22
Section 11.11 Disclaimer; Waiver of Jury Trial 23
Section 11.12 No Access to Roof 23
Section 11.13 Parking 23
Section 11.14 No Accord or Satisfaction 23
Section 11.15 Acceptance 24
Section 11.16 Waiver of Counterclaim 24
Section 11.17 Time Is of the Essence 24
Section 11.18 Counterparts 24
Section 11.19 Special Stipulations 24
EXHIBITS
Exhibit A - Land
Exhibit B - Floor Plan(s) of Premises
Exhibit C - Special Stipulations
Exhibit D - Commencement Date Agreement
Exhibit E - Work Letter Agreement
Exhibit E-1 - Description of Improvements
Exhibit F - Building Rules and Regulations
LEASE AGREEMENT
THIS LEASE AGREEMENT (this "Lease") is made and entered into as of the
24th day of September, 1997, by and between PARAGON CENTRE ASSOCIATES, LLC
("Landlord"), whose address is c/o Insignia Commercial Group, Inc., 9100
Shelbyville Road, Suite 130, Louisville, Kentucky 40222 and STRATEGIA
CORPORATION, a Kentucky corporation ("Tenant"), whose address is 10301 Linn
Station Road, Louisville, Kentucky, 40223. Subject to all of the terms,
provisions, covenants and conditions of this Lease, and in consideration of
the mutual covenants, obligations and agreements contained in this Lease, and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, Landlord and Tenant agree as follows:
ARTICLE I
BASIC LEASE PROVISIONS
Landlord, for and in consideration of the rents and all other charges and
payments hereunder and of the covenants, agreements, terms, provisions and
conditions to be kept and performed hereunder by Tenant, demises and leases to
Tenant, and Tenant hereby hires and takes from Landlord, the premises
described below, subject to all matters hereinafter set forth and upon and
subject to the covenants, agreements, terms, provisions and conditions of
this Lease for the term hereinafter stated. For purposes of this Lease, the
following terms shall have the meanings ascribed to them below:
Base Year shall mean calendar year 1998.
Building shall mean the structure containing approximately 62,882 square feet
of Rentable Area situated upon the Land (hereinafter defined) commonly known
as Two Paragon Centre located at 6040 Dutchmans Lane, Louisville, Jefferson
County, Kentucky 40205, as the same currently exists or as it may from time
to time hereafter be expanded or modified.
Commencement Date shall mean the earlier of (i) substantial completion of the
Premises, in accordance with the terms and conditions of Exhibit E attached
hereto, and adjustments provided therein and (ii) occupancy of the Premises
by Tenant for business purposes.
Land shall mean that certain tract of land situated in Jefferson County,
Kentucky, and more particularly described on Exhibit A attached hereto and
hereby made a part hereof.
Lease Year shall mean each consecutive twelve (12) month period during the
Term commencing with the Commencement Date.
Prepaid Rent shall mean the amount of $22,031.62 for the first month of the
Term to be applied pursuant to Section 3.1.
Project shall mean the Building, together with the Land, the parking area
serving the Building, all other improvements situated on the Land or directly
benefiting the Building, and all additional facilities or improvements
directly benefiting the Building that may be constructed in subsequent years.
Term shall mean 72 months.
ARTICLE II.
Section 2.1 Premises The Premises demised by this Lease are deemed
to be 16,023 square feet of Rentable Area (as hereinafter defined) known or
to be known as Suite 400, on Floor 4 of the Building, together with the
nonexclusive use of the common areas of the Project (collectively, the
"Premises"). The Premises are outlined on Exhibit B attached hereto and
hereby made a part hereof. All square footage (the "Rentable Area") utilized
in this Lease has been, or will be as to future space, made by measuring the
gross area within the inside surface of the outer glass of the exterior walls
of the Premises, to the mid point of any walls separating portions of the
Premises from those of adjacent tenants and to the Common Areas or Service
Areas side of walls separating the Premises from Common Areas and Services
Areas, subject to the following: (a) Rentable Area shall not include any
Service Area; (b) Rentable Area shall include a pro rata portion of the
Common Areas in the Building, such proration based upon the ratio of the
Rentable Area within the Premises to the total Rentable Area in the Building,
both determined without regard to the Common Areas; and (c) Rentable Area
shall include and columns and/or projection(s) which protrude into the
Premises and/or the Common Areas. For purposes of the foregoing, "Service
Areas" shall mean those areas of the Building within the outside walls used
for elevator mechanical rooms, building stairs, fire towers, elevator shafts,
flue, vents, stacks, pipe shafts and vertical ducts (but shall not include
any such areas for the use of any particular tenant); and "Common Areas"
shall mean those areas of the Building devoted to corridors, elevator foyers,
atria, restrooms, mechanical rooms, janitorial closets, electrical and
telephone closets, vending areas and other facilities provided for the common
use or benefit of tenants generally and/or the public. For all other
purposes of this Lease except the foregoing calculation of Rentable Area, the
term "Common Areas" shall also mean all other areas and facilities, including
lobbies, parking facilities, sidewalks, landscapings, driveways, restrooms
and similar improvements, serving the Building and/or the Project. Unless
otherwise specifically designated, all references to square footage or square
feet in this Lease are to Rentable Area.
Section 2.2 Term. The Term of this Lease shall begin on the
Commencement Date and shall continue in full force and effect for the Term of
this Lease unless extended or sooner terminated in accordance with the
provisions of this Lease. After the occurrence of the Commencement Date,
Tenant and Landlord shall execute a certificate in the form attached hereto
as Exhibit D stipulating and agreeing to the Commencement Date. If the
Commencement Date should be changed for any reason, including a change
pursuant to the terms of Exhibit E hereto, Landlord shall not be liable or
responsible for any claims, damages or liabilities in connection therewith or
by reason thereof. If Landlord is unable to deliver possession of the
Premises to Tenant as of the Commencement Date for any reason other than
pursuant to the terms of Exhibit E hereto, including without limitation the
holding over of any tenant or occupant of the Premises, then the term
Commencement Date shall mean such subsequent date upon which Landlord is able
to deliver possession of the Premises to Tenant, and such failure to deliver
possession of the Premises on the earlier date shall not constitute a default
by Landlord hereunder or render Landlord liable for any loss or damage that
may be incurred as a result of such failure; provided, however, if the
Commencement Date is on or after the earlier of (i) forty-five days after the
Premises are completely vacated by the existing tenant or (ii) January 1,
1998 for any reason within the reasonable control of Landlord, Tenant shall
have the right to terminate this Lease.
Section 2.3 Use. The Premises are to be used only for general
office purposes and for no other business or purpose without the prior
written consent of Landlord. No act shall be done in or about the Premises
that is unlawful or that will increase the existing rate of insurance on the
Building. In the event of a breach of this covenant, Tenant shall
immediately cease the performance of such unlawful act or such act that is
increasing or has increased the existing rate of insurance and shall pay to
Landlord any and all increases in insurance premiums resulting from such
breach. Tenant shall not commit or allow to be committed any waste upon the
Premises, or any public or private nuisance or other act or thing which
disturbs the quiet enjoyment of any other tenant in the Building. If any of
Tenant's office machines or equipment disturb any other tenant in the
Building, then Tenant shall provide adequate insulation, or take such other
action as may be necessary to eliminate the noise or disturbance at its sole
cost and expense. Tenant shall not, without Landlord's prior consent,
install any equipment, machine, device, tank or vessel which is subject to
any federal, state or local permitting requirement. Tenant, at its expense,
shall comply with all laws, statutes, ordinances and governmental rules,
regulations or requirements governing the installation, operation and removal
of my such equipment, machine, device, tank or vessel. Tenant, at its
expense, shall comply with all laws, statutes, ordinances, governmental
rules, regulations or requirements, relating to its particular or specific
use, operation or occupancy of the Premises and shall observe such reasonable
rules and regulations as may be adopted and made available to Tenant by
Landlord from time to time for the safety, care and cleanliness of the
Premises or the Building and for the preservation of good order therein,
provided Landlord uniformly enforces such rules and regulations against all
tenants of the Project. The current rules and regulations for the Building
are attached hereto as Exhibit F.
ARTICLE III.
Section 3.1 Rental Payments. (a) Base Rent. Commencing on the
Commencement Date and continuing thereafter throughout the Term, Tenant shall
pay the Base Rent described in this paragraph, which is due and payable each
Lease Year during the Term hereof in twelve (12) equal installments on the
first (1st) day of each calendar month during the Term, and Tenant shall make
such installments to Landlord at Landlord's address specified in this Lease
(or such other address as may be designated by Landlord from time to time)
monthly in advance. Base Rent during the Term shall be as follows:
Lease Base Rent Per Base Rent Base Rent
Year Rentable Square Foot Annually Monthly
1 $16.50 $264,379.50 $22,031.62
2 $17.00 $272,391.00 $22,699.25
3-5 $18.00 $288,414.00 $24,034.50
6 $18.50 $296,425.30 $24.702.13
So long as Tenant is not then in default under this Lease, in the event
Tenant has paid Landlord any Prepaid Rent such Prepaid Rent shall be applied
to the first (1st) monthly installment of Base Rent due hereunder.
(b) Partial Month. If the Commencement Date is other than the
first (1st) day of a calendar month or if this Lease expires or terminates on
a day other than the last day of a calendar month, then the installments of
Base Rent for such month or months shall be prorated based upon multiplying
the applicable Base Rent by a fraction, the numerator of which shall be the
number of days of the Term occurring during said commencement or termination
month, as the case may be, and the denominator of which shall be the number of
days in such month.
(c) Payment; Late Charge; Past Due Rate. The Base Rent, the
Additional Rent (hereinafter defined), any Prepaid Rent and any and all other
payments which Tenant is obligated to make to Landlord under this Lease shall
constitute and are sometimes hereinafter collectively referred to as "Rent".
Tenant shall pay all Rent and other sums of money as shall become due from
and payable by Tenant to Landlord in lawful money of the United States of
America at the times and in the manner provided in this Lease, without
demand, deduction, abatement, setoff, counterclaim or prior notice. Tenant
hereby acknowledges that late payment to Landlord of Rent or other sums due
hereunder will cause Landlord to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. If any
Rent or other sum due from Tenant is not received on or before five (5) days
after its due date, then Tenant shall pay to Landlord immediately upon
Landlord's demand therefor a late charge in an amount equal to five percent
(5%) of such overdue amount, plus any attorneys' fees and costs incurred by
Landlord by reason of Tenant's failure to pay Rent and other charges when due
hereunder. Additionally, all Rent under this Lease shall bear interest from
the date, which is five (5) days after it is due until paid at the lesser of
eighteen percent (18%) per annum or the maximum nonusurious rate of interest
then permitted by the applicable laws of the state in which the Building is
located or the United States of America, whichever shall permit the higher
nonusurious rate, such interest being in addition to and cumulative of any
other rights and remedies which Landlord may have with regard to the failure
of Tenant to make any such payments under this Lease.
Section 3.2 Additional Rent. (a) Definitions:
(i) "Base Operating Expenses" means Operating Expenses
(hereinafter defined) for the Base Year.
(ii) "Operating Expenses" means all expenses, costs and
disbursements of every kind and nature relating to or incurred or paid in
connection with the ownership and operation of the Project, computed on an
accrual basis in accordance with generally accepted accounting principles
consistently applied, including but not limited to the following:
(A) wages and salaries of all persons engaged in the
operation, maintenance, security or access control of the Project, including
all taxes, insurance and benefits relating thereto;
(B) the cost of all supplies, tools, equipment and
materials used in the operation and maintenance of the Project, including
rental fees for the same, if such items are not purchased and amortized
pursuant to this Section 3.2 below;
(C) the cost of all utilities for the Project,
including but not limited to the cost of water and power, heating, lighting,
air conditioning and ventilating (excluding those costs billed to specific
tenants) of the Building and Project;
(D) the cost of all maintenance and service agreements
for the Project and the equipment therein, including but not limited to alarm
service, security service, access control, landscaping, window cleaning, pest
control, elevator maintenance and janitorial service;
(E) the cost of repairs and general maintenance,
excluding (y) repairs and general maintenance paid by proceeds of insurance,
by Tenant or by other third parties, and (z) alterations attributable solely
to tenants of the Building;
(F) amortization (together with reasonable financing
charges) of the cost of capital investment items which are installed for the
purpose of reducing operating expenses, promoting safety, complying with
governmental requirements or maintaining the quality of the Building;
(G) the cost of all insurance relating to the Project,
including, but not limited to, the cost of property insurance, casualty,
rental loss and liability insurance applicable to the Project and Landlord's
personal property used in connection therewith and the cost of deductibles
paid on claims made by Landlord;
(H) all property management fees for the Project; and
(I) All taxes, assessments and governmental charges,
whether or not directly paid by Landlord, whether federal, state, county or
municipal and whether they are imposed by taxing districts or authorities
currently taxing the Project or by others subsequently created or otherwise,
and any other taxes and assessments, assessed against or attributable to the
Project or its operation, excluding, however, federal and state taxes on
income, death taxes, franchise taxes and any taxes imposed or measured on or
by the income of Landlord from the operation of the Project or imposed in
connection with any change of ownership of the Project together with the
reasonable cost (including attorneys, consultants and appraisers) of any
negotiation, contest or appeal pursued by Landlord in an effort to reduce any
such tax, assessment or charge, and all of Landlord's administrative costs in
relation to the foregoing ("Real Estate Taxes"); provided, however, that if
at any time during the Term the present method of taxation or assessment
shall be so changed that the whole or any part of the taxes, assessments,
levies, impositions or charges now levied, assessed or imposed on real estate
and the improvements thereof shall be changed and as a substitute therefor, or
in lieu of or in addition thereto, taxes, assessments, levies, impositions or
charges shall be levied, assessed or imposed wholly or partially as a capital
levy or otherwise on the rents received from the Project or the rents
reserved herein or any part thereof, then such substitute or additional
taxes, assessments, levies, impositions or charges, to the extent so levied,
assessed or imposed, shall be deemed to be included within the Real Estate
Taxes to the extent that such substitute or additional tax would be payable
if the Project were the only property of the Landlord subject to such tax.
(iii) "Adjustment Period" means each calendar year occurring
during the Term beginning with calendar year 1999, which shall be the first
Adjustment Period.
(iv) "Tenant's Pro Rata Share" means the percentage calculated
by dividing the Rentable Area of the Premises (numerator) by the Rentable
Area of the Building (denominator), and expressing the fraction as a
percentage. Tenant's Pro Rata Share shall be 25.48%.
(b) Gross-Up Adjustment. If the Building is less than fully
occupied during the Base Year or any Adjustment Period, then Operating
Expenses for the Base Year or such Adjustment Period shall be "grossed up" by
Landlord to that amount of Operating Expenses that, using reasonable
projections, would normally be expected to be incurred during the Base Year
or Adjustment Period if the Building was ninety-five percent (95%) occupied
during the Base Year or Adjustment Period, as determined under generally
accepted accounting principles consistently applied.
(c) Payment by Tenant. If the Operating Expenses for any Adjustment
Period exceed the of Base Operating Expenses (any such excess being known
collectively as the "Expense Increase"), then Tenant agrees to pay Landlord
as additional rent (the "Additional Rent") Tenant's Pro Rata Share of the
Expense Increase.
(d) Manner of Payment.
(i) Landlord may give Tenant notice of Landlord's reasonable
estimate of amounts payable under this Section 3.2 for each Adjustment Period
based upon generally accepted accounting principles consistently applied. By
the first day of each month during the Adjustment Period, Tenant shall pay
Landlord one-twelfth (1/12th) of the estimated amount. If for any reason the
estimate is not given before the Adjustment Period begins, Tenant shall
continue to pay on the basis of the previous year's estimate, if any, until
the month after the new estimate is given.
(ii) Within one hundred twenty (120) days after each Adjustment
Period ends, or as soon thereafter as reasonably practical, Landlord shall
give Tenant a statement (the "Statement") showing the: (A) actual Operating
Expenses for the Adjustment Period; (B) Base Operating Expenses; (C) the
Expense Increase for the Adjustment Period; (D) the amount of Tenant's Pro
Rata Share of the Expense Increase; (E) the amount, if any, paid by Tenant
during the Adjustment Period towards the Expense Increase; and (F) the amount
Tenant owes towards the Expense Increase or the amount Landlord owes as a
refund. Delay by Landlord in providing to Tenant any Statement shall not
relieve Tenant from the obligation to pay any Expense Increase upon the
rendering of such Statements.
(iii) If the Statement shows that the actual amount Tenant owes
for the Adjustment Period is less than any estimated Expense Increase paid by
Tenant during the Adjustment Period, Landlord shall return the difference
(the "Overpayment"). If the Statement shows that the actual amount Tenant
owes is more than any estimated Expense Increase paid by Tenant during the
Adjustment Period, Tenant shall pay the difference (the "Underpayment"). The
Overpayment or Underpayment shall be paid within thirty (30) days after the
Statement is delivered to Tenant.
(iv) During any Adjustment Period in which this Lease is not in
effect for a complete calendar year, unless it was ended due to Tenant's
default, Tenant's obligation for Additional Rent for those Adjustment Periods
shall be prorated by multiplying the Additional Rent for the Adjustment
Period by a fraction expressed as a percentage, the numerator of which is the
number of days of the Adjustment Period included in the Term and the
denominator of which is 365.
Section 3.3 Security Deposit and Prepaid Rent. As security for its
full and faithful performance of this Lease, Tenant shall pay Landlord a
security deposit of Twenty Four Thousand Seven Hundred Two and 13/100 Dollars
($24,702.13) upon execution of this Lease (the "Security Deposit"). If
Tenant defaults with respect to any covenant or condition of this Lease,
including but not limited to the payment of Rent or any other payment due
under this Lease, Landlord may apply all or any part of the Security Deposit
to the payment of any sum in default or any other sum which Landlord may be
required to or deem necessary to spend or incur by reason of Tenant's
default. In such event, Tenant shall, upon demand, deposit with Landlord the
amount so applied to replenish the Security Deposit. Within thirty (30) days
of the expiration or sooner termination of this Lease, Landlord will refund
Tenant the Security Deposit less any amounts necessary to cure any default of
Tenant under this Lease.
ARTICLE IV.
Section 4.1 Services. (a) Services Provided. So long as no default
by Tenant under this Lease has occurred and is continuing, Landlord shall
furnish to Tenant while Tenant is occupying the Premises:
(i) Hot and cold domestic water in common use restrooms and
toilets in locations provided for general use and as reasonably deemed by
Landlord to be in keeping with the Project standards.
(ii) Heating and air conditioning in season from 7:00 a.m. to
7:00 p.m. on Monday through Friday and 8:00 a.m. to 2:00 p.m. on Saturday,
excluding the hereinafter defined Holidays, subject to curtailment as
required by governmental laws, rules or regulations, in such amounts as are
considered by Landlord to be standard, but such service at times during
weekdays other than the hours stated above, and on Saturdays, Sundays and
Holidays, shall be furnished only upon request of Tenant, and for such
service Tenant shall pay Landlord upon demand an amount equal to the
reasonable rate Landlord at that time is charging for such service.
(iii) Electric lighting service for all public areas and special
service areas of the Building in the manner and to the extent deemed by
Landlord to be standard.
(iv) Janitor service on a five (5) day week basis in a manner
considered by Landlord to be standard; provided, however, if Tenant's floor
coverings or other improvements require special care, Tenant shall pay the
additional cleaning cost attributable thereto.
(v) Access control for the Project comparable as to coverage,
control and responsiveness (but not necessarily as to means for accomplishing
same) to other similarly situated multi-tenant office buildings in the
vicinity; provided, however, Landlord shall have no responsibility to
prevent, and shall not be liable to Tenant for, any liability or loss to
Tenant, its agents, employees and visitors arising out of losses due to
theft, burglary, or damage or injury to persons or property caused by persons
gaining access to the Premises, and Tenant hereby releases Landlord from all
liability for such losses, damages or injury.
(vi) Sufficient electrical capacity to operate (i) incandescent
lights, typewriters, calculating machines, photocopying machines, personal
computers and desk top printers and other machines of similar low voltage
electrical consumption (120/208 volts), provided that the total rated
electrical design load for said lighting and machines of low electrical
voltage shall not exceed two (2.00) watts per square foot of rentable area;
and (ii) lighting and equipment of high voltage electrical consumption
(277/480 volts), provided that the total rated electrical design load for
said lighting and equipment of high electrical voltage shall not exceed two
(2.00) watts per square foot of rentable area (each such rated electrical
design load to be hereinafter referred to as the "Building standard rated
electrical design load"). Tenant shall be allocated Tenant's pro rata share
of the Building standard circuits provided on the floor(s) Tenant occupies.
Should Tenant's fully connected electrical design load exceed the
Building standard rated electrical design load for either low or high voltage
electrical consumption, or if Tenant's electrical design requires low voltage
or high voltage circuits in excess of Tenant's share of the Building standard
circuits, Landlord will (at Tenant's expense) install one (1) additional high
voltage panel and/or one (1) additional low voltage panel with associated
transformer, space for which has been provided in the base building
electrical closets based on a maximum of two (2) such additional panels per
floor for all tenants on the floor (which additional panels and transformers
shall be hereinafter referred to as the "additional electrical equipment").
If the additional electrical equipment is installed because Tenant's low or
high voltage rated electrical design load exceeds the applicable Building
standard rated electrical design load, then a meter shall also be added (at
Tenant's expense) to measure the electricity used through the additional
electrical equipment.
The design and installation of any additional electrical equipment
(or related meter) required by Tenant shall be subject to the prior approval
of Landlord (which approval shall not be unreasonably withheld). All
reasonable Out-of-pocket expenses incurred by Landlord in connection with the
review and approval of any additional electrical equipment shall also be
reimbursed to Landlord by Tenant. Tenant shall also pay on demand the actual
metered cost of electricity consumed through the additional electrical
equipment (if applicable).
If any of Tenant's electrical equipment requires conditioned air in
excess of Building standard air conditioning, the same shall be installed by
Landlord (on Tenant's behalf), and Tenant shall pay all design, installation,
metering and operating costs relating thereto.
If Tenant requires that certain areas within the Premises must
operate in excess of the normal Building operating hours set forth above, the
electrical service to such areas shall be separately circuited and metered
such that Tenant shall be billed the costs associated with electricity
consumed during hours other than Building operating hours.
(vii) All fluorescent bulb and ballast replacement for Building
standard lighting in all areas and all incandescent bulb replacement in
public areas, toilet and restroom areas and stairwells.
(viii) Nonexclusive operatorless passenger elevator service to the
Premises twenty-four (24) hours per day; provided, that Landlord may
reasonably limit the number of elevators in operation on weekdays after the
hours stated in subsection (ii) above and on Sundays and Holidays.
(b) Cessation of Services. To the extent the services described in
Section 4.l(a) of this Lease require electricity, gas and water supplied by
public utilities, Landlord's covenants thereunder shall only impose on
Landlord the obligation to use its best efforts to cause the applicable
public utilities to furnish the same. Failure by Landlord to furnish the
services described in this Section 4.1, as a result of the failure by public
utilities or any other cause not within Landlord's reasonable control, to any
extent, or any cessation thereof, shall not render Landlord in default
hereunder or liable in any respect for damages to either person or property,
or be construed as an eviction of Tenant, or work an abatement of Rent, or
relieve Tenant from fulfillment of any covenant or agreement hereof. In
addition to the foregoing, should any of the equipment or machinery break
down, cease to function properly for any cause, or be intentionally turned
off for testing or maintenance purposes, Tenant shall have no claim for
abatement or reduction of Rent or damages on account of an interruption in
service occasioned thereby or resulting therefrom; except as caused by
Landlord's negligence or willful misconduct, provided, however, Landlord
agrees to use diligent efforts to repair said equipment or machinery and to
restore said services as soon as reasonably possible.
(c) Holidays. The following dates shall collectively be known as
"Holiday" and individually known as a "Holiday": New Year's Day; Memorial
Day; Independence Day; Labor Day; Thanksgiving Day; Friday following
Thanksgiving Day; Christmas Day; and any other holiday recognized and taken
by tenants occupying at least one-half (1/2) of the rentable area of office
space of the Building. If in the case of any Holiday, a different day shall
be observed than the respective day above-described, then that day which
constitutes the day observed by national banks in the city or proximate area
in which the Building is located, on account of such Holiday, shall
constitute the Holiday under this Lease.
Section 4.2 Keys and Locks. Landlord shall initially furnish Tenant
with keys for the standard corridor doors serving the Premises. Additional
keys will be furnished by Landlord upon an order signed by Tenant and at
Tenant's expense. All such keys shall remain the property of Landlord.
Without the prior written consent of Landlord, no additional locks shall be
allowed on any door of the Premises, and Tenant shall not make or permit to
be made any duplicate keys, except those furnished by Landlord. Upon
termination or expiration of this Lease or a termination of possession of the
Premises by Tenant, Tenant shall surrender to Landlord all keys to any locks
on doors entering or within the Premises.
Section 4.3 Graphics and Building Directory. Landlord shall provide
and install, at Tenant's expense to be paid for through the Allowance (as
hereinafter defined), all letters or numerals at the entrance to the
Premises, and a strip containing a listing of Tenant's name on the Building
directory board to be placed in the main lobby of the Building. All such
letters and numerals shall be in Building standard graphics. Landlord shall
not be liable for any inconvenience or damage occurring as a result of any
error or omission in any directory or graphics. No signs, numerals, letters
or other graphics shall be used or installed by Tenant on the exterior of, or
which may be visible from outside, the Premises, unless approved in writing by
Landlord.
ARTICLE V.
Section 5.1 Occupancy of Premises. Tenant shall throughout the Term
of this Lease, at its own expense, maintain the Premises and all improvements
thereon and keep them free from waste, damage or nuisance, and shall deliver
up the Premises in a clean and sanitary condition at the expiration or
termination of this Lease or the termination of Tenant's right to occupy the
Premises by Tenant, in good repair and condition, reasonable wear and tear,
damage by fire or other casualty excepted. In the event Tenant should
neglect to maintain and/or return the Premises in such manner, Landlord shall
have the right, but not the obligation, to cause repairs or corrections to be
made, and any reasonable costs therefor shall be payable by Tenant to
Landlord within ten (10) days of demand therefor by Landlord. Upon the
expiration or termination of this Lease or the termination of Tenant's right
to occupy the Premises by Tenant, Landlord shall have the right to reenter
and resume possession of the Premises. No act or thing done by Landlord or
any of Landlord's agents (hereinafter defined) during the Term of the Lease
shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accept a surrender of the Premises shall be valid unless the
same be made in writing and executed by Landlord. Tenant shall notify
Landlord at least fifteen (15) days prior to vacating the Premises and shall
arrange to meet with Landlord for a joint inspection of the Premises. If
Tenant fails to give such notice or to arrange for such inspection, then
Landlord's inspection of the Premises shall be deemed correct for the purpose
of determining Tenant's responsibility for repair and restoration of the
Premises.
Section 5.2 Entry for Repairs and Inspection. Tenant shall permit
Landlord and its agents to enter the Premises at all reasonable times to
inspect the same; to show the Premises to prospective tenants (within twelve
(12) months of the expiration of the Term of this Lease), or interested
parties such as prospective lenders and purchasers; to exercise its rights
under this Lease; to clean, repair, alter or improve the Premises or the
Building; to discharge Tenant's obligations when Tenant has failed to do so
within the time required under this Lease or within any applicable grace and
cure period, after written notice from Landlord, whichever is earlier; to
post "For Sale" signs at any time and to place "For Lease" signs upon or
adjacent to the Building or the Premises at any time within twelve (12)
months of the expiration of the Term of this Lease. Tenant shall permit
Landlord and its agents to enter the Premises at any time in the event of an
emergency. When reasonably necessary for repairs and emergencies, Landlord
may temporarily close entrances, doors, corridors, elevators or other
facilities without liability to Tenant by reason of such closure.
Section 5.3 Hazardous Materials
(a) As used in this Lease, the term "Hazardous Materials",
shall mean and include any substance that is or contains petroleum, asbestos,
polychlorinated biphenyls, lead, or any other substance, material or waste
which is now or is hereafter classified or considered to be hazardous or
toxic under any federal, state or local law, rule, regulation or ordinance
relating to pollution or the protection or regulation of human health,
natural resources or the environment (collectively "Environmental Laws") or
poses or threatens to pose a hazard to the health or safety of persons on the
Premises or any adjacent property.
(b) Tenant agrees that during its use and occupancy of the
Premises it will not permit Hazardous Materials to be present on or about the
Premises except in a manner and quantity necessary for the ordinary
performance of Tenant's business and that it will comply with all
Environmental Laws relating to Tenant's use, storage or disposal of any such
Hazardous Materials.
(c) If Tenant's use of Hazardous Materials on or about the
Premises results in a release, discharge or disposal of Hazardous Materials
on, in, at, under, or emanating from, the Premises or the property in which
the Premises are located, Tenant agrees to investigate, clean up, remove or
remediate such Hazardous Materials in full compliance with (a) the
requirements of (i) all Environmental Laws and (ii) any governmental agency
or authority responsible for the enforcement of any Environmental Laws; and
(b) any additional requirements of Landlord that are reasonably necessary to
protect the value of the Premises or the property in which the Premises are
located. Landlord shall also have the right, but not the obligation, to take
whatever action with respect to any such Hazardous Materials that it deems
reasonably necessary to protect the value of the Premises or the property in
which the Premises are located. All costs and expenses paid or incurred by
Landlord in the exercise of such right shall be payable by Tenant upon
demand.
(d) Upon reasonable notice to Tenant, Landlord may inspect
the Premises for the purpose of determining whether there exists on the
Premises any Hazardous Materials or other condition or activity that is in
violation of the requirements of this Lease or of any Environmental Laws.
The right granted to Landlord herein to perform inspections shall not create
a duty on Landlord's part to inspect the Premises, or liability on the part
of Landlord for Tenant's use, storage or disposal of Hazardous Materials, it
being understood that Tenant shall be solely responsible for all liability in
connection therewith.
(e) Tenant shall surrender the Premises to Landlord upon
the expiration or earlier termination of this Lease free of debris, waste or
Hazardous Materials placed on or about the Premises by Tenant or its agents,
employees, contractors or invitees.
(f) Tenant agrees to indemnify and hold harmless Landlord
from and against any and all claims, losses (including, without limitation,
loss in value of the Premises or the property in which the Premises are
located), liabilities and expenses (including reasonable attorney's fees)
sustained by Landlord attributable to (i) any Hazardous Materials placed on
or about the Premises by Tenant or its agents, employees, contractors or
invitees or (ii) Tenant's breach of any provision of this Section.
(g) The provisions of this Section shall survive with
respect to claims made by Landlord against Tenant for a period of one (1)
year after the expiration or earlier termination of this Lease.
ARTICLE VI.
Section 6.1 Leasehold Improvements. (a) Acceptance of Premises.
Tenant has made a complete inspection of the Premises and shall accept the
Premises and the Project in their "AS IS," "WHERE IS," and "WITH ALL FAULTS"
condition on the Commencement Date without recourse to Landlord, subject to
the terms of Exhibit E attached hereto and hereby made a part hereof. Except
as expressly provided in this Lease or in Exhibit E attached hereto, Landlord
shall have no obligation to furnish, equip or improve the Premises or the
Project. Except for those items, if any, set forth a punch list to be
executed by Landlord and Tenant prior to Tenant's possession of the Premises,
the taking of possession of the Premises by Tenant shall be conclusive
evidence against Tenant that (i) Tenant accepts the Premises and the Project
as being suitable for its intended purpose and in a good and satisfactory
condition, (ii) acknowledges that the Premises and the Project comply fully
with Landlord's covenants and obligations under this Lease and (iii) waives
any defects in the Premises and its appurtenances and in all other parts of
the Project.
(b) Improvements and Alterations. Tenant shall not make or allow to
be made (except as otherwise provided in this Lease) any improvements,
alterations or physical additions (including fixtures) in or to the Premises
or the Project, without first obtaining the written consent of Landlord,
including Landlord's written approval of Tenant's contractor(s) and of the
plans, working drawings and specifications relating thereto. Approval by
Landlord of any of Tenant's drawings and plans and specifications prepared in
connection with any alterations, improvements, modifications or additions to
the Premises or the Project shall not constitute a representation or warranty
of Landlord as to the adequacy or sufficiency of such drawings, plans and
specifications, or alterations, improvements, modifications or additions to
which they relate, for any use, purpose or conditions, but such approval
shall merely be the consent of Landlord as required hereunder. Except as
otherwise expressly provided in Exhibit E attached hereto, any and all
furnishing, equipping and improving of or other alteration and addition to
the Premises shall be: (i) made at Tenant's sole cost, risk and expense, and
Tenant shall pay for Landlord's actual costs incurred in connection with and
as a result of such alterations or additions; (ii) performed in a prompt,
good and workmanlike manner with labor and materials of such quality as
Landlord may reasonably require; (iii) constructed in accordance with all
plans and specifications approved in writing by Landlord prior to the
commencement of any such work; (iv) prosecuted diligently and continuously to
completion so as to minimize interference with the normal business operations
of other tenants in the Building, the performance of Landlord's obligations
under this Lease or any mortgage or ground lease covering or affecting all or
any part of the Building or the Land and any work being done by contractors
engaged by Landlord with respect to or in connection with the Building; and
(v) performed by contractors approved in writing by Landlord. Tenant shall
have no (and hereby waives all) rights to payment or compensation for any
such item. Tenant shall notify Landlord upon completion of such alterations,
improvements, modifications or additions and Landlord shall inspect same for
workmanship and compliance with the approved plans and specifications.
Tenant and its contractors shall comply with all reasonable requirements
Landlord may impose on Tenant or its contractors with respect to such work
(including but not limited to, insurance, indemnity and bonding
requirements), and shall deliver to Landlord a complete copy of the
"as-built" or final plans and specifications for all alterations or physical
additions so made in or to the Premises within thirty (30) days of completing
the work. Tenant shall not place safes, vaults, filing cabinets or systems,
libraries or other heavy furniture or equipment within the Premises without
Landlord's prior written consent.
(c) Title to Alterations. All alterations, physical additions,
modifications or improvements in or to the Premises (including fixtures)
shall, when made, become the property of Landlord and shall be surrendered to
Landlord upon termination or expiration of this Lease or termination of
Tenant's right to occupy the Premises, whether by lapse of time or otherwise,
without any payment, reimbursement or compensation therefor; provided,
however, that Tenant shall retain title to and shall remove from the Premises
movable equipment or furniture owned by Tenant and Tenant repairs any damage
caused thereby and Tenant returns the Premises to their preexisting
condition. Notwithstanding any of the foregoing to the contrary, Landlord
may require Tenant, by written notice to Tenant with respect to any
improvements, alterations, or physical additions approved by Landlord
pursuant to subparagraph (b) above by written notice to Tenant at the time
Landlord gives such approval, to remove all alterations, additions or
improvements to the Premises including, without limitation, any cabling or
other computer, satellite or telecommunications equipment or hardware,
whether or not such alterations, additions, or improvements are located in
the Premises upon the expiration or earlier termination of this Lease or the
termination of Tenant's right to possession of the Premises and restore the
same to Building standard condition, reasonable wear and tear excepted. The
rights conferred to Landlord under this Section 6.1(c) shall be in addition
to (and not in conflict with) any other rights conferred on Landlord by this
Lease, in equity or at law.
(d) Personal Property Taxes; Sales, Use and Excise Taxes. Tenant
shall be responsible for and shall pay ad valorem taxes and other taxes,
assessments or charges levied upon or applicable to Tenant's personal
property, the value of Tenant's leasehold improvements in the Premises in
excess of Building standard (and if the taxing authorities do not separately
assess Tenant's leasehold improvements, Landlord may make a reasonable
allocation of the taxes assessed on the Project to give effect to this
Section 6.1(d)) and all license fees and other fees or charges imposed on the
business conducted by Tenant on the Premises before such taxes, assessments,
charges or fees become delinquent. All work to be performed by Landlord
pursuant to Exhibit E shall be deemed to be Building standard.
Section 6.2 Repairs by Landlord. All repairs, alterations or
additions that affect the Project's structural components or major
mechanical, electrical or plumbing systems shall be made by Landlord or its
contractors only, and, in the case of any damage to such components or
systems caused by Tenant or Tenant's agents, shall be paid for by Tenant in
an amount equal to Landlord's costs plus fifteen percent (15%) as an overhead
expense. Landlord shall also repair and maintain all landscaping, parking
areas and other Common Areas of the Project. Unless otherwise provided
herein and on Exhibit E hereto, Landlord shall not be required to make any
improvements to or repairs of any kind or character to the leasehold
improvements located in the Premises during the Term, except such repairs as
Landlord deems necessary for normal maintenance operations of the Building.
Section 6.3 Repairs by Tenant. Subject to Section 6.2 of this
Lease, Tenant shall be responsible, at its own cost and expense, for all
repair or replacement of any damage to the leasehold improvements in the
Premises, together with any damage to the Project or any part thereof caused
by Tenant or any of Tenant's agents. Except insofar as Landlord is expressly
obligated under this Lease to maintain and repair the Building, in addition
to the maintenance and repair obligations of Tenant otherwise expressly set
forth in this Lease, Tenant is also obligated to perform, at Tenant's own
cost and expense and risk, all other maintenance and repairs necessary or
appropriate to cause the Premises to be maintained in good condition and
suitable for Tenant's intended commercial purpose.
Section 6.4 Liens. Tenant shall keep the Premises and the Building
free from any liens, including but not limited to liens filed against the
Premises by any governmental agency, authority or organization, arising out
of any work performed, materials ordered or obligations incurred by or on
behalf of Tenant, and Tenant hereby agrees to indemnify and hold Landlord,
its agents, employees, independent contractors, officers, directors,
partners, and shareholders harmless from any liability, cost or expense for
such liens. Tenant shall cause any such lien imposed to be released of record
by payment or posting of the proper bond acceptable to Landlord within twenty
(20) days after the earlier of imposition of the lien or written request by
Landlord. Tenant shall give Landlord written notice of Tenant's intention to
perform work on the Premises which might result in any claim of lien, at
least ten (10) days prior to the commencement of such work to enable Landlord
to post and record a notice of nonresponsibility or other notice deemed
proper before commencement of any such work. If Tenant fails to remove any
lien within the prescribed twenty (20) day period, then Landlord may do so at
Tenant's expense and Tenant's reimbursement to Landlord for such amount,
including attorneys' fees and costs, shall be deemed Additional Rent. Tenant
shall have no power to do any act or make any contract which may create or be
the foundation for any lien, mortgage or other encumbrance upon the reversion
or other estate of Landlord, or of any interest of Landlord in the Premises.
Section 6.5 Indemnification. Tenant shall defend, indemnify and
hold harmless Landlord, its agents, employees, officers, directors, partners
and shareholders ("Landlord's Related Parties") from and against any and all
liabilities, judgments, demands, causes of action, claims, losses, damages,
costs and expenses, including reasonable attorneys' fees and costs, arising
out of the willful misconduct or negligence of, Tenant, its officers,
contractors, licensees, agents, servants, employees, guests, invitees, or
visitors in connection with the use, occupancy, conduct, operation, or
management of the Premises or arising from any breach or default under this
Lease by Tenant. This indemnification shall survive with respect to claims
made by Landlord against Tenant for a period of one (1) year after the
termination or expiration of this Lease. This provision shall not be
construed to make Tenant responsible for loss, damage, liability or expense
resulting from injuries to third parties caused by the negligence or willful
misconduct of Landlord, or its officers, contractors, licensees, agents,
servants, employees, guests, visitors or invitees.
ARTICLE VII.
Section 7.1 Condemnation. (a) Total Taking. In the event of a taking
or damage related to the exercise of the power of eminent domain, by any
agency, authority, public utility, person, corporation or entity empowered to
condemn property (including without limitation a voluntary conveyance by
Landlord in lieu of such taking or condemnation) (individually, a "Taking") of
(i) the entire Premises, (ii) so much of the Premises as to prevent or
substantially impair its use by Tenant during the Term of this Lease or (iii)
portions of the Building or Project required for reasonable access to, or
reasonable use of, the Premises (individually, a "Total Taking"), the rights of
Tenant under this Lease and the leasehold estate of Tenant in and to the
Premises shall cease and terminate as of the date upon which title to the
property taken passes to and vests in the condemnor or the effective date of
any order for possession if issued prior to the date title vests in the
condemnor ("Date of Taking").
(b) Partial Taking. In the event of a Taking of only a part of
the Premises or of a part of the Project which does not constitute a Total
Taking during the Term of this Lease (individually, a "Partial Taking"), the
rights of Tenant under this Lease and the leasehold estate of Tenant in and to
the portion of the property taken shall cease and terminate as of the Date of
Taking, and an equitable adjustment to the Rent shall be made based upon the
reduced area of the Premises or in the case where only a part of the Project
but no part of the Premises is taken, based upon the reduction in beneficial
use of the Premises to Tenant for its intended business use.
(c) Termination by Landlord. In the event of a Taking of the
Building (other than the Premises) such that, in Landlord's reasonable opinion,
the Building cannot be restored in a manner that makes its continued operation
practically or economically feasible, Landlord may terminate this Lease by
giving notice to Tenant within ninety (90) days after the date notice of such
Taking is received by Landlord.
(d) Rent Adjustment. If this Lease is terminated pursuant to
this Section 7.1, Landlord shall refund to Tenant any prepaid unaccrued Rent
and any other sums due and owing to Tenant (less any sums then due and owing
Landlord by Tenant), and Tenant shall pay to Landlord any remaining sums due
and owing Landlord under this Lease, each prorated as of the Date of Taking
where applicable.
(e) Repair. If this Lease is not terminated as provided for in
this Section 7.1, then Landlord at its expense shall promptly repair and
restore the Building, Project and/or the Premises to approximately the same
condition that existed at the time Tenant entered into possession of the
Premises, wear and tear excepted (and Landlord shall have no obligation to
repair or restore Tenant's improvements to the Premises or Tenant's Property),
except for the part taken, so as to render the Building or Project as complete
an architectural unit as practical, but only to the extent of the condemnation
award received by Landlord for the damage.
(f) Awards and Damages. Landlord reserves all rights to damages
and awards paid because of any Partial or Total Taking of the Premises or the
Project. Tenant assigns to Landlord any right Tenant may have to the damages or
award. Further, Tenant shall not make claims against Landlord or the condemning
authority for damages. Notwithstanding, Tenant may claim and recover from the
condemning authority a separate award for Tenant's moving expenses, business
dislocation damages, Tenant's Property and any other award that would not
reduce the award payable to Landlord.
Section 7.2 Force Majeure. Neither Landlord nor Tenant shall be
required to perform any term, provision, agreement, condition or covenant in
this Lease (other than the obligations of Tenant to pay Rent as provided
herein) so long as such performance is delayed or prevented by "Force Majeure",
which shall mean acts of God, strikes, injunctions, lockouts, material or labor
restrictions by any governmental authority, civil riots, floods, fire, theft,
public enemy, insurrection, war, court order, requisition or order of
governmental body or authority, and any other cause not reasonably within the
control of Landlord or Tenant and which by the exercise of due diligence
Landlord or Tenant is unable, wholly or in part, to prevent or overcome.
Neither Landlord nor any mortgagee shall be liable or responsible to Tenant for
any loss or damage to any property or person occasioned by any Force Majeure,
or for any damage or inconvenience which may arise through repair or alteration
of any part of the Project as a result of any Force Majeure.
Section 7.3 Fire or Other Casualty. (a) Damage. If any portion of
the Premises shall be destroyed or damaged by fire or any other casualty,
Tenant shall immediately give notice thereof to Landlord. If any portion of
the Premises or Project shall be destroyed or damaged by fire or any other
casualty then, at the option of Landlord, (i) Landlord may restore and repair
the portion of the Premises or Project damaged and, if the Premises are
rendered untenantable in whole or in part by reason of such casualty as
determined by Landlord, Tenant shall be entitled to an equitable abatement of
the Rent hereunder until such time as the damaged portion of the Premises
(exclusive of any of Tenant's Property or Tenant's improvements) are repaired
or restored by Landlord to the extent required hereby or (ii) Landlord may
terminate this Lease whereupon all Rent accrued up to the time of such
termination and any other sums due and owing shall be paid by Tenant to
Landlord (less any sums then due and owing Tenant by Landlord) and any
remaining sums due and owing by Landlord to Tenant shall be paid to Tenant.
(b) Repair. Landlord shall give Tenant written notice of its
decisions, estimates or elections under this Section 7.3 within forty five (45)
days after any such damage or destruction. If Landlord fails to give written
notice to Tenant within such 45 day period, Landlord shall be deemed to have
elected not to repair and restore the Premises or Project and to terminate this
Lease as provided in subparagraph (a) above. If Landlord has elected to repair
and restore the Premises or other portion of the Project, this Lease shall
continue in full force and effect, and the repairs will be made within a
reasonable time thereafter (not to exceed 180 days after the date of such
damage or destruction and not subject to any extension as a result of force
majeure) subject to the provisions of Section 7.2 of this Lease. Should the
repairs not be completed within that period, both Landlord and Tenant shall
each have the option of terminating this Lease by written letter of
termination. If this Lease is terminated as herein permitted, Landlord shall
refund to Tenant any prepaid Rent (unaccrued as of the date of damage or
destruction) and any other sums due and owing by Landlord to Tenant (less any
sums then due and owing Landlord by Tenant) and any remaining sums due and
owing by Tenant to Landlord shall be paid to Landlord. If Landlord has elected
to repair and reconstruct the Premises or other portion of the Project to the
extent stated above, the Term will be extended for a time equal to the period
from the occurrence of such damage to the completion of such repair and
reconstruction. If Landlord elects to rebuild the Premises or other portion of
the Project, Landlord shall only be obligated to restore or rebuild the
Premises or other portion of the Project to approximately the same condition as
existed at the time Tenant entered into possession of the Premises, wear and
tear excepted and not be required to rebuild, repair or replace any part of
Tenant's Property or Tenant's leasehold improvements. Notwithstanding anything
contained in this Lease to the contrary, if Landlord shall elect to repair and
restore the Premises or other portion of the Project pursuant to this Section
7.3, in no event shall Landlord be required to expend under this Article VII
any amount in excess of the proceeds actually received from the insurance
carried by Landlord pursuant to Section 7.4(a) of this Lease. Landlord shall
not be liable for any inconvenience or annoyance to Tenant or injury to the
business of Tenant resulting in any way from such damage or destruction or the
disregard of the repair thereof.
Section 7.4 Insurance. (a) Landlord shall maintain, or cause to be
maintained, standard fire and extended coverage insurance on the Buildings and
Building standard tenant improvements (excluding leasehold improvements by
Tenant in excess of Building standard and Tenant's Property) in an amount not
less than 100% of the replacement cost (excluding foundations) and not more
than a $25,000 deductible. The insurance required to be obtained by Landlord
may be obtained by Landlord through blanket or master policies insuring other
entities or properties owned or controlled by Landlord.
(b) Tenant shall, at its sole cost and expense, procure and
maintain during the Term of this Lease all such policies of insurance as
Landlord may require, including without limitation comprehensive general
liability insurance (including personal injury liability, premises/operation,
property damage, independent contractors and broad form contractual coverage in
support of the indemnifications of Landlord by Tenant under this Lease) in
amounts of not less than a combined single limit of $1,000,000; comprehensive
automobile liability insurance; business interruption insurance; contractual
liability insurance; property insurance with respect to Tenant's Property, and
all leasehold improvements, alterations and additions in excess of Building
standard, to be written on an "all risk" basis for full replacement cost;
worker's compensation and employer's liability insurance; and comprehensive
catastrophe liability insurance; all maintained with companies, on forms and in
such amounts as Landlord may, from time to time, reasonably require and
endorsed to include Landlord as an additional insured, where appropriate, with
the premiums fully paid on or before the due dates. The insurer must be
licensed to do business in the state in which the Building is located. Tenant,
and not Landlord, will be liable for any costs or damages in excess of the
statutory limit for which Tenant would, in the absence of worker's
compensation, be liable. In the event that Tenant fails to take out or
maintain any policy required by this Section 7.4 to be maintained by Tenant,
such failure shall be a defense to any claim asserted by Tenant against
Landlord by reason of any loss sustained by Tenant that would have been covered
by such policy, notwithstanding that such loss may have been proximately caused
solely or partially by the negligence or willful misconduct of Landlord or any
of Landlord's Related Parties. If Tenant does not procure insurance as
required, Landlord may, upon advance written notice to Tenant, cause this
insurance to be issued and Tenant shall pay to Landlord the premium for such
insurance within ten (10) days of Landlord's demand, plus interest at the past
due rate provided for in Section 3.1(c) of this Lease until repaid by Tenant.
All policies of insurance required to be maintained by Tenant shall
specifically make reference to the indemnifications by Tenant in favor of
Landlord under this Lease and shall provide that Landlord shall be given at
least thirty (30) days' prior written notice of any cancellation or nonrenewal
of any such policy. A certificate evidencing each such policy shall be
deposited with Landlord by Tenant on or before the Commencement Date, and a
replacement certificate evidencing each subsequent policy shall be deposited
with Landlord at least thirty (30) days prior to the expiration of the
preceding such policy. All insurance policies obtained by Tenant shall be
written as primary policies (primary over any insurance carried by Landlord),
not contributing with and not in excess of coverage which Landlord may carry,
if any.
Section 7.5 Waiver of Subrogation Rights. Each party hereto waives
all rights of recovery, claims, actions or causes of actions arising in any
manner in its (the "Injured Party's") favor and against the other party for
loss or damage to the Injured Party's property located within or constituting a
part or all of the Project, to the extent the loss or damage: (a) is covered by
the Injured Party's insurance; or (b) would have been covered by the insurance
the Injured Party is required to carry under this Lease, whichever is greater,
regardless of the cause or origin, including the sole, contributory, partial,
joint, comparative or concurrent negligence of the other party. This waiver
also applies to each party's directors, officers, employees, shareholders,
partners, representatives and agents. All insurance carried by either Landlord
or Tenant covering the losses and damages described in this Section 7.5 shall
provide for such waiver of rights of subrogation by the Injured Party's
insurance carrier to the maximum extent that the same is permitted under the
laws and regulations governing the writing of insurance within the state in
which the Building is located. Both parties hereto are obligated to obtain
such a waiver and provide evidence to the other party of such waiver. The
waiver set forth in this Section 7.5 shall be in addition to, and not in
substitution for, any other waivers, indemnities or exclusions of liability set
forth in this Lease.
ARTICLE VIII.
Section 8.1 Default by Tenant. The occurrence of any one or more of
the following events shall constitute a default by Tenant under this Lease:
(a) Tenant shall fail to pay to Landlord any Rent or any other
monetary charge due from Tenant hereunder on or before five (5) days after
written notice thereof from Landlord to Tenant, provided that Landlord shall
not be required to provide such notice more than twice during any twelve month
period with respect to non-payment of Rent, the third such non-payment
constituting a default without the requirement of notice;
(b) Tenant breaches or fails to comply with any term, provisions,
conditions or covenant of this Lease, other than as described in Section
8.1(a), or with any of the Building rules and regulations now or hereafter
established to govern the operation of the Project;
(c) A Transfer (hereinafter defined) shall occur, without the
prior written approval of Landlord;
(d) The interest of Tenant under this Lease shall be levied on
under execution or other legal process;
(e) Any petition in bankruptcy or other insolvency proceedings
shall be filed by or against Tenant, or any petition shall be filed or other
action taken to declare Tenant a bankrupt or to delay, reduce or modify
Tenant's debts or obligations or to reorganize or modify Tenant's capital
structure or indebtedness or to appoint a trustee, receiver or liquidator of
Tenant or of any property of Tenant, or any proceeding or other action shall be
commenced or taken by any governmental authority for the dissolution or
liquidation of Tenant and, within ninety (90) days hereafter, Tenant fails to
secure a discharge thereof;
(f) Tenant shall become insolvent, or Tenant shall make an
assignment for the benefit of creditors, or Tenant shall make a transfer in
fraud of creditors, or a receiver or trustee shall be appointed for Tenant or
any of its properties;
(g) Tenant shall voluntarily desert, abandon or vacate the
Premises or any substantial portion thereof or fails to operate its business in
the Premises for any reason other than destruction or condemnation of the
Premises; or
(h) Tenant shall do or permit to be done anything which creates a
lien upon the Premises or the Project in violation of Section 6.4.
Section 8.2 Landlord's Remedies. Upon occurrence of any default by
Tenant under this Lease and (i) if the event of default described in Section
8.1(a) is not cured within five (5) days after written notice from Landlord of
such default; or (ii) the events described in Sections 8. l(b), (d), (f) and
(g) are not cured within thirty (30) days after written notice from Landlord of
such default (there being no notice and cure period for events of defaults
described in Sections 8. 1(c), (e) and (h) except as otherwise set forth
herein), the Landlord shall have the option to do and perform any one or more
of the following in addition to, and not in limitation of, any other remedy or
right permitted it by law or in equity or by this Lease:
(a) Continue this Lease in full force and effect, and this Lease shall
continue in full force and effect as long as Landlord does not terminate this
Lease, and Landlord shall have the right to collect Rent, Additional Rent and
other charges when due.
(b) Terminate this Lease, and Landlord may forthwith repossess the
Premises and be entitled to recover as damages a sum of money equal to the
total of (i) the cost of recovering the Premises, (ii) the cost of removing and
storing Tenant's or any other occupant's property, (iii) the unpaid Rent and
any other sums accrued hereunder at the date of termination, (iv) a sum equal
to the amount, if any, by which the present value of the total Rent and other
benefits which would have accrued to Landlord under this Lease for the
remainder of the Term, if the terms of this Lease had been fully complied with
by Tenant, discounted at five percent (5%) per annum exceeds the total fair
market value of the Premises for the balance of the Term (it being the
agreement of the parties hereto that Landlord shall receive the benefit of its
bargain), (v) the cost of reletting the Premises including, without limitation,
the cost of restoring the Premises to the condition necessary to rent the
Premises at the prevailing market rental rate, normal wear and tear excepted,
(vi) any increase in insurance premiums caused by the vacancy of the Premises,
(vii) the amount of any unamortized improvements to the Premises paid for by
Landlord, (viii) the amount of any unamortized brokerage commission or other
costs paid by Landlord in connection with the leasing of the Premises and (ix)
any other sum of money or damages owed by Tenant to Landlord. In the event
Landlord shall elect to terminate this Lease, Landlord shall at once have all
the rights of reentry upon the Premises, without becoming liable for damages,
or guilty of trespass.
(c) Terminate Tenant's right of occupancy of the Premises and reenter
and repossess the Premises by entry, forcible entry or detainer suit or
otherwise, without demand or notice of any kind to Tenant and without
terminating this Lease, without acceptance of surrender of possession of the
Premises, and without becoming liable for damages or guilty of trespass, in
which event Landlord may, but shall be under no obligation to, relet the
Premises or any part thereof for the account of Tenant (nor shall Landlord be
under any obligation to relet the Premises before Landlord relets or leases any
other portion of the Project or any other property under the ownership or
control of Landlord) for a period equal to or lesser or greater than the
remainder of the Term of the Lease on whatever terms and conditions Landlord,
at Landlord's sole discretion, deems advisable. Tenant shall be liable for and
shall pay to Landlord all Rent payable by Tenant under this Lease (plus
interest at the past due rate provided in Section 3.1(c) of this Lease if in
arrears) plus an amount equal to (i) the cost of recovering possession of the
Premises, (ii) the cost of removing and storing any of Tenant's or any other
occupant's property left on the Premises or the Project after reentry, (iii)
the cost of decorations, repairs, changes, alterations and additions to the
Premises and the Project, (iv) the cost of any attempted reletting or reletting
and the collection of the rent accruing from such reletting, (v) the cost of
any brokerage fees or commissions payable by Landlord in connection with any
reletting or attempted reletting, (vi) any other costs incurred by Landlord in
connection with any such reletting or attempted reletting, (vii) the cost of
any increase in insurance premiums caused by the termination of possession of
the Premises, (viii) the amount of any unamortized improvements to the Premises
paid for by Landlord, (ix) the amount of any unamortized brokerage commissions
or other costs paid by Landlord in connection with the leasing of the Premises
and (x) any other sum of money or damages owed by Tenant to Landlord at law, in
equity or hereunder, all reduced by any sums received by Landlord through any
reletting of the Premises; provide , however, that in no event shall Tenant be
entitled to any excess of any sums obtained by reletting over and above Rent
provided in this Lease to be paid by Tenant to Landlord. For the purpose of
such reletting Landlord is authorized to decorate or to make any repairs,
changes, alterations or additions in or to the Premises that may be necessary.
Landlord may file suit to recover any sums falling due under the terms of this
Section 8.2(c) from time to time, and no delivery to or recovery by Landlord of
any portion due Landlord hereunder shall be any defense in any action to
recover any amount not theretofore reduced to judgment in favor of Landlord.
No reletting shall be construed as an election on the part of Landlord to
terminate this Lease unless a written notice of such intention is given to
Tenant by Landlord. Notwithstanding any such reletting without termination,
Landlord may at any time thereafter elect to terminate this Lease for such
previous default and/or exercise its rights under Section 8.3(b) of this Lease;
provided, however, any rents received from reletting the Premises shall offset
any Rent owed by Tenant after its default under this Lease as provided herein
above.
(d) Enter upon the Premises and do whatever Tenant is obligated to do
under the terms on this Lease; and Tenant agrees to reimburse Landlord on
demand for any expenses which Landlord may incur in effecting compliance with
Tenant's obligations under this Lease plus fifteen percent (15%) of such cost
to cover overhead plus interest at the past due rate provided in this Lease,
and Tenant further agrees that Landlord shall not be liable for any damages
resulting to Tenant from such action. No action taken by Landlord under this
Section 8.2(d) shall relieve Tenant from any of its obligations under this
Lease or from any consequences or liabilities arising from the failure to
perform such obligations.
(e) Without waiving such default, apply all or any part of the
Security Deposit and/or any unapplied Prepaid Rent to cure the default or to
any damages suffered as a result of the default to the extent of the amount of
damages suffered. Tenant shall reimburse Landlord for the amount of such
depletion of the Security Deposit and/or any Prepaid Rent on demand.
(f) Change all door locks and other security devices of Tenant at the
Premises and/or the Project, and Landlord shall not be required to provide the
new key to the Tenant except during Tenant's regular business hours, and only
upon the condition that Tenant has cured any and all defaults hereunder and in
the case where Tenant owes Rent to the Landlord, reimbursed Landlord for all
Rent and other sums due Landlord hereunder. Landlord, on terms and conditions
satisfactory to Landlord in its sole discretion, may upon request from Tenant's
employees, enter the Premises for the purpose of retrieving therefrom personal
property of such employees, provided, Landlord shall have no obligation to do
so.
(g) Exercise any and all other remedies available to Landlord in this
Lease, at law or in equity.
(h) Notwithstanding the foregoing, the cumulative effect of the
provisions of this Section 8.2 shall not entitle Landlord to collect more than
the actual costs, expenses or damages (actual, liquidated or otherwise)
sustained by Landlord.
Section 8.3 Duty to Relet or Mitigate. In the event applicable law
requires Landlord to attempt to mitigate damages, Landlord and Tenant agree
that any such duty to mitigate shall be satisfied and Landlord shall be deemed
to have used objectively reasonable efforts to fill the Premises by doing the
following: (a) posting a "For Lease" sign on the Premises; (b) advising
Landlord's leasing agent of the availability of the Premises; and (c) advising
at least one outside commercial brokerage entity of the availability of the
Premises; provided, however, that Landlord shall not be obligated to relet the
Premises before leasing any other unoccupied portions of the Project and any
other property under the ownership or control of Landlord. If Landlord
receives any payments from the reletting of the Premises and is required to
mitigate damages, any such payment shall first be applied to any costs or
expenses incurred by Landlord as a result of Tenant's Default under this Lease.
Section 8.4 Reentry. If Tenant fails to allow Landlord to reenter and
repossess the Premises, Landlord shall have full and free license to enter into
and upon the Premises with or without process of law for the purpose of
repossessing the Premises, expelling or removing Tenant and any others who may
be occupying or within the Premises, removing any and all property therefrom
and changing all door locks of the Premises. Landlord may take these actions
without being deemed in any manner guilty of trespass, eviction or forcible
entry or detainer, without accepting surrender of possession of the Premises by
Tenant, and without incurring any liability for any damage resulting therefrom,
including without limitation any liability arising under applicable state law
and without relinquishing Landlord's right to Rent or any other right given to
Landlord hereunder or by operation of law or in equity, Tenant hereby waiving
any right to claim damage for such reentry and expulsion, including without
limitation any rights granted to Tenant by applicable state law.
Section 8.5 Rights of Landlord in Bankruptcy. Nothing contained in
this Lease shall limit or prejudice the right of Landlord to prove for and
obtain in proceedings for bankruptcy or insolvency, by reason of the expiration
or termination of this Lease or the termination of Tenant's right of occupancy,
an amount equal to the maximum allowed by any statute or rule of law in effect
at the time when, and governing the proceedings in which, the damages are to be
proved, whether or not the amount be greater, equal to, or less than the amount
of the loss or damages referred to in this Section 8.5. In the event that
under applicable law, the trustee in bankruptcy or Tenant has the right to
affirm this Lease and continue to perform the obligations of Tenant hereunder,
such trustee or Tenant shall, in such time period as may be permitted by the
bankruptcy court having jurisdiction, cure all defaults of Tenant hereunder
outstanding as of the date of the affirmance of this Lease and provide to
Landlord such adequate assurances as may be necessary to ensure Landlord of the
continued performance of Tenant's obligations under this Lease.
Section 8.6 Waiver of Certain Rights. Tenant hereby expressly waives
any and all rights Tenant may have under applicable state law to its right to
recover possession of the Premises or terminate this Lease, except as may be
permitted by applicable state law. Tenant hereby waives any and all liens
(whether statutory, contractual or constitutional) it may have or acquire as a
result of a breach by Landlord under this Lease. Tenant also waives and
releases any statutory lien it may have against Landlord.
Section 8.7 NonWaiver. Failure on the part of either party to
complain of any action or nonaction on the part of to the other party, no
matter how long the same may continue, shall not be deemed to be a waiver by
the other party of any of its rights under this Lease. Further, it is
covenanted and agreed that no waiver at any time of any of the provisions
hereof by either party shall be construed as a waiver of any of the other
provisions hereof and that a waiver at any time of any of the provisions hereof
shall not be construed as a waiver at any subsequent time of the same
provisions. The consent or approval by either party to or of any action by the
other party requiring such consent or approval shall not be deemed to waive or
render unnecessary such consent or approval to or of any subsequent similar act
by such party.
Section 8.8 Holding Over. In the event Tenant remains in possession
of the Premises after the expiration or termination of this Lease without the
execution of a new lease, then Tenant, at Landlord's option, shall be deemed to
be occupying the Premises as a tenant at will at a base rental equal to one
hundred fifty percent (150%) of the then applicable Base Rent, and shall
otherwise remain subject to all the conditions, provisions and obligations of
this Lease insofar as the same are applicable to a tenancy at will, including
without limitation the payment of all other Rent; provided, however, nothing
contained herein shall require Landlord to give Tenant more than thirty (30)
days prior written consent to terminate Tenant's tenancy-at-will. No holding
over by Tenant after the expiration or termination of this Lease shall be
construed to extend or renew the Term or in any other manner be construed as
permission by Landlord to hold over. Tenant shall indemnify Landlord (y)
against all claims for damages by any other tenant to whom Landlord may have
leased all or any part of the Premises effective upon the termination or
expiration of this Lease, and (z) for all other losses, costs and expenses,
including reasonable attorneys' fees, incurred by reason of such holding over.
Section 8.9 Abandonment of Personal Property. Any personal property
left in the Premises or any personal property of Tenant left about the Project
at the expiration or termination of this Lease, the termination of Tenant's
right to occupy the Premises or the abandonment, desertion or vacating of the
Premises by Tenant, shall be deemed abandoned by Tenant and may, at the option
of Landlord, be immediately removed from the Premises or such other space by
Landlord and stored by Landlord at the full risk, cost and expense of Tenant.
Landlord shall in no event be responsible for the value, preservation or
safekeeping thereof. In the event Tenant does not reclaim any such personal
property and pay all costs for any storage and moving thereof within thirty
(30) days after the expiration or termination of this Lease, the termination of
Tenant's right to occupy the Premises or the abandonment, desertion or vacating
of the Premises by Tenant, Landlord may dispose of such personal property in
any way that it deems proper. If Landlord shall sell any such personal
property, it shall be entitled to retain from the proceeds the amount of any
Rent or other expenses due Landlord, together with the cost of storage and
moving and the expense of the sale. Notwithstanding anything contained herein
to the contrary, in addition to the rights provided herein with respect to any
such property, Landlord shall have the option of exercising any of its other
rights or remedies provided in the Lease or exercising any rights or remedies
available to Landlord at law or in equity.
Section 8.10 Default by Landlord. If Landlord shall default in the
performance of its obligations and duties hereunder and such default shall
continue for thirty (30) days following written notice thereof from Tenant,
Tenant may exercise any and all remedies available to Tenant at law or in
equity.
ARTICLE IX.
Section 9.1 Transfers. Tenant shall not, by operation of law or
otherwise, (a) assign, transfer, mortgage, pledge, hypothecate or otherwise
encumber this Lease, the Premises or any part of or interest in this Lease or
the Premises, (b) grant any concession or license within the Premises, (c)
sublet all or any part of the Premises or any right or privilege appurtenant to
the Premises, or (d) permit any other party to occupy or use all or any part of
the Premises (collectively, a "Transfer"), without the prior written consent of
Landlord. If Tenant requests Landlord's consent to any Transfer, then Tenant
shall provide Landlord with a written description of all terms and conditions
of the proposed Transfer, copies of the proposed documentation, and the
following information about the proposed transferee: name and address;
reasonably satisfactory information about its business and business history;
its proposed use of the Premises; a copy of the proposed sublease or assignment
agreement; banking, financial and other credit information; and general
references sufficient to enable Landlord to determine the proposed transferee's
creditworthiness and character. With respect to any assignment of this Lease,
Tenant acknowledges and agrees that one of the reasonable factors Landlord may
consider in determining whether or not to approve the assignment is any
assignee's name and logo signage to be placed on the exterior of the Building
pursuant to Special Stipulation No. 2 in Exhibit C. Landlord's consent to a
Transfer shall not release Tenant from performing its obligations under this
Lease, but rather Tenant's transferee shall assume all of Tenant's obligations
under this Lease in a writing satisfactory to Landlord, and Tenant and its
transferee shall be jointly and severally liable therefor. Landlord's consent
to any Transfer shall not waive Landlord's rights as to any subsequent
Transfer. While the Premises or any part thereof are subject to a Transfer,
Landlord may collect directly from such transferee all rents or other sums
relating to the Premises becoming due to Tenant or Landlord and apply such
rents and other sums against the Rent and any other sums payable hereunder. If
the aggregate rental, bonus or other consideration paid by a transferee, except
for Permitted Transfers (as that term is hereinafter defined) for any such
space exceeds the sum of (y) Tenant's Rent to be paid to Landlord for such
space during such period and (z) Tenant's costs and expenses actually incurred
in connection with such Transfer. including reasonable brokerage fees,
reasonable costs of finishing or renovating the space affected and reasonable
cash rental concessions, which costs and expenses are to be amortized over the
term of the Transfer, then fifty percent (50%) of such excess shall be paid to
Landlord within fifteen (15) days after such amount is earned by Tenant. Such
arrearage amounts in the case of a sublease shall be calculated and adjusted
(if necessary) on a Lease Year (or partial Lease Year) basis, and there shall
be no cumulative adjustment for the Term. Landlord shall have the right to
audit Tenant's books and records relating to the Transfer. Tenant authorizes
its transferees to make payments of rent and any other sums due and payable,
directly to Landlord upon receipt of notice from Landlord to do so. Any
attempted Transfer by Tenant in violation of the terms and covenants of this
Article IX shall be void and shall constitute a default by Tenant under this
Lease. In the event that Tenant requests that Landlord consider a sublease or
assignment hereunder, Tenant shall pay (i) Landlord's reasonable fees, not to
exceed Five Hundred and 00/100 Dollars ($500.00) per transaction, incurred in
connection with the consideration of such request, and (ii) all attorneys' fees
and costs incurred by Landlord in connection with the consideration of such
request or such sublease or assignment.
Notwithstanding any provision to the contrary, Tenant may assign this
Lease or sublet the Premises without Landlord's consent (i) any corporation or
other entity that controls, is controlled by or is under common control with
Tenant; (ii) to any corporation or other entity resulting from a merger,
acquisition, consolidation or reorganization of or with Tenant; (iii) in
connection with the sale of all or substantially all of the assets of tenant
(the "Permitted Transfers"), so long as Tenant provides evidence to Landlord in
writing that such assignment or sublease complies with (i), (ii) or (iii) above
and provided such assignee, subtenant or successor-in-interest expressly
assumes Tenant's obligations and liabilities hereunder. No such assignment or
transfer, however, shall release Tenant from any covenant, liability or
obligation under this Lease.
Section 9.2 Assignment by Landlord. Landlord shall have the right at
any time to sell, transfer or assign, in whole or in part, by operation of law
or otherwise, its rights, benefits, privileges, duties, obligations or
interests in this Lease or in the Premises, the Building, the Land, the Project
and all other property referred to herein, without the prior consent of Tenant,
and such sale, transfer or assignment shall be binding on Tenant. After such
sale, transfer or assignment, Tenant shall attorn to such purchaser, transferee
or assignee, and Landlord shall be released from all liability and obligations
under this Lease accruing after the effective date of such sale, transfer or
assignment.
Section 9.3 Limitation of Landlord's Liability. Any provisions of
this Lease to the contrary notwithstanding, Tenant hereby agrees that no
personal, partnership or corporate liability of any kind or character
(including, without limitation, the payment of any judgment) whatsoever now
attaches or at any time hereafter under any condition shall attach to Landlord
or any of Landlord's Related Parties or any mortgagee for payment of any
amounts payable under this Lease or for the performance of any obligation under
this Lease. The exclusive remedies of Tenant for the failure of Landlord to
perform any of its obligations under this Lease shall be to proceed against the
interest of Landlord in and to the Project including any proceeds therefrom.
The provision contained in the foregoing sentence is not intended to, and shall
not, limit any right that Tenant might otherwise have to obtain injunctive
relief against Landlord or Landlord's successors in interest or any suit or
action in connection with enforcement or collection of amounts which may become
owing or payable under or on account of insurance maintained by Landlord. In
no event shall Landlord be liable to Tenant, or any interest of Landlord in the
Project be subject to execution by Tenant, for any indirect, special,
consequential or punitive damages.
ARTICLE X.
Section 10.1 Subordination. This Lease shall be subject and
subordinated at all times to (a) all ground or underlying leases now existing
or which may hereinafter be executed affecting the Project, and (b) the lien or
liens of all mortgages and deeds of trust in any amount or amounts whatsoever
now or hereafter placed on the Project or Landlord's interest or estate therein
or on or against such ground or underlying leases and to all renewals,
modifications, consolidations, replacements and extensions thereof and to each
advance made or hereafter to be made thereunder; provided that all such ground
lessors and mortgagees agree not to disturb Tenant's rights under this Lease so
long as Tenant is not in default hereunder. Tenant shall execute and deliver
upon demand any instruments, releases or other documents requested by any
lessor or mortgagee for the purpose of subjecting and subordinating this Lease
to such ground leases, mortgages or deeds of trust. Tenant shall attorn to any
party succeeding to Landlord's interest in the Premises, whether by purchase,
foreclosure, deed in lieu of foreclosure, power of sale, termination of lease
or otherwise, only upon such party's request and at such party's sole
discretion but not otherwise. Notwithstanding such attornment, Tenant agrees
that any such successor in interest shall not be (a) liable for any act or
omission of, or subject to any rights of setoff, claims or defenses otherwise
assertable by Tenant against, any prior owner of the Project (including without
limitation, Landlord), (b) bound by any rents paid more than one (1) month in
advance to any prior owner, (c) liable for any Security Deposit not paid over
to such successor by Landlord, and (d) if such successor is a mortgagee or a
ground lessor whose address has been previously given to Tenant, bound by any
modification, amendment, extension or cancellation of the Lease not consented
to in writing by such mortgagee or ground lessor. Tenant shall execute all
such agreements confirming such attornment as such party may reasonably
request, provided that all such ground lessors and mortgagees agree not to
disturb Tenant's rights under this Lease so long as Tenant is not in default
hereunder. Tenant shall not seek to enforce any remedy it may have for any
default on the part of Landlord without first giving written notice by
certified mail, return receipt requested, specifying the default in reasonable
detail, to any mortgagee or lessor under a lien instrument or lease covering
the Premises whose address has been given to Tenant, and affording such
mortgagee or lessor a reasonable opportunity to perform Landlord's obligations
hereunder. Notwithstanding the generality of the foregoing, any mortgagee or
ground lessor may at any time subordinate any such deeds of trust, mortgages,
other security instruments or ground leases to this Lease on such terms and
conditions as such mortgagee or ground lessor may deem appropriate.
Section 10.2 Estoppel Certificate or Three-Party Agreement. Tenant
agrees within ten (10) days following request by Landlord (a) to execute,
acknowledge and deliver to Landlord and any other persons specified by
Landlord, a certificate or three-party agreement among Landlord, Tenant and/or
any third party dealing with Landlord, certifying (i) that this Lease is
unmodified and in full force and effect, or, if modified, stating the nature of
such modification (ii) the date to which the Rent and other charges are paid in
advance, if any, (iii) that there are not, to Tenant's knowledge, any uncured
defaults on the part of Landlord hereunder, or so specifying such defaults, if
any, as are claimed and/or (iv) any other matters as such third party may
reasonably require in connection with the business dealings of Landlord and/or
such third party and (b) to deliver to Landlord current financial statements of
Tenant, including a balance sheet and a profit and loss statement for at least
two (2) years, all prepared in accordance with generally accepted accounting
principles consistently applied. Tenant's failure to deliver such certificate
or three-party agreement within such ten (10) day period shall be conclusive
upon Tenant (x) that this Lease is in full force and effect without
modification except as may be represented by Landlord, (y) that to Tenant's
knowledge there are no uncured defaults in Landlord's performance, and (z) that
no Rent has been paid in advance except as set forth in this Lease.
Section 10.3 Notices. Any notice, request, approval, consent or other
communication required or contemplated by this Lease must be in writing, unless
otherwise in this Lease expressly provided, and may be given or be served by
depositing the same in the United States Postal Service, postpaid and certified
and addressed to the party to be notified, with return receipt requested, or by
delivering the same in person to such party (or, in case of a corporate party,
to an officer of such party), or by prepaid telegram or express overnight mail
service, when appropriate, addressed to the party to be notified. Notice
deposited in the mail in the manner hereinabove described shall be effective
from and after three (3) days (exclusive of Saturdays, Sundays and postal
holidays) after such deposit. Notice given in any other manner shall be
effective only if and when delivered to the party to be notified or at such
party's address for purposes of notice as set forth herein. For purposes of
notice the addresses of the parties shall, until changed as herein provided, be
as provided on the first page of this Lease; provided, that any notices sent to
Landlord will only be effective if copies thereof are simultaneously sent to
Brookdale Investors Two, L.P., 3343 Peachtree Road, N.E., Suite 510, Atlanta,
Georgia, 30326, Attention: Mr. Fred Henritze; and provided, that any notices
sent to Tenant will only be effective if copies thereof are simultaneously sent
to the attention of Tenant's president at P. 0. Box 37144, Louisville,
Kentucky, 40223-7144 and to Tenant's counsel at P. 0. Box 37144, Louisville,
Kentucky, 40223-7144. The parties hereto shall have the right from time to
time to change their respective addresses by giving at least fifteen (15) days'
written notice to the other party in the manner set forth in this Section 10.3.
ARTICLE XI.
Section 11.1 Right to Relocate Tenant. [Intentionally Omitted]
Section 11.2 Rights and Remedies Cumulative. The rights and remedies
of each party under this Lease shall be nonexclusive and each right or remedy
shall be in addition to and cumulative of all other rights and remedies
available to such party under this Lease or at law or in equity. Pursuit of
any right or remedy shall not preclude pursuit of any other rights or remedies
provided in this Lease or at law or in equity, nor shall pursuit of any right
or remedy constitute a forfeiture or waiver of any sums due to either party or
of any damages accruing to such party by reason of the violation by the other
party of any of the terms of this Lease.
Section 11.3 Legal Interpretation. This Lease and the rights and
obligations of the parties hereto shall be interpreted, construed and enforced
in accordance with the laws of the state in which the Building is located and
the United States. The determination that one or more provisions of this Lease
is invalid, void, illegal or unenforceable shall not affect or invalidate any
other provision of this Lease, and this Lease shall be construed as if such
invalid, illegal or unenforceable provision had never been contained in this
Lease, and, so far as is reasonable and possible, effect shall be given to the
intent manifested by the portion held invalid or inoperative. All obligations
of either party hereunder not fully performed as of the expiration or
termination of the Term of this Lease shall survive the expiration or
termination of the Term of this Lease for a period of one (1) year and shall be
fully enforceable in accordance with those provisions pertaining thereto.
Article and section titles and captions appearing in this Lease are for
convenient reference only and shall not be used to interpret or limit the
meaning of any provision of this Lease. No custom or practice which may evolve
between the parties in the administration of the terms of this Lease shall
waive or diminish the right of either party to insist upon the performance by
the other party in strict accordance with the terms of this Lease. This Lease
is for the sole benefit of Landlord and Tenant, and, without the express
written consent thereto, no third party shall be deemed a third party
beneficiary hereof. Landlord and Tenant agree that this Lease supersedes and
cancels any and all previous statements, negotiations, arrangements, brochures,
agreements and understandings, if any, between Landlord and Tenant with respect
to the subject matter of this Lease or the Premises and that this Lease,
including written extrinsic documents referred to herein, is the entire
agreement of the parties, and that there are no representations,
understandings, stipulations, agreements, warranties or promises (express or
implied, oral or written) between Landlord and Tenant with respect to the
subject matter of this Lease or the Premises. It is likewise agreed that this
Lease may not be altered, amended, changed or extended except by an instrument
in writing signed by both Landlord and Tenant. The terms and provisions of
this Lease shall not be construed against or in favor of a party hereto merely
because such party is the "Landlord" or the "Tenant" hereunder or because such
party or its counsel is the draftsman of this Lease. All references to days in
this Lease and any Exhibits or Addendums hereto mean calendar days, not working
or business days, unless otherwise stated.
Section 11.4 Authority. (a) Both Tenant and the person executing this
Lease on behalf of Tenant warrant and represent unto Landlord that (i) Tenant
is a duly organized and validly existing legal entity, in good standing and
qualified to do business in the state in which the Building is located, with no
proceedings pending or contemplated for its dissolution or reorganization,
voluntary or involuntary, (ii) Landlord has full right, power and authority to
execute, deliver and perform this Lease, (iii) the person executing this Lease
on behalf of Tenant is authorized to do so, (iv) upon execution of this Lease
by Tenant, this Lease shall constitute a valid and legally binding obligation
of Tenant, and (v) upon request of Landlord, such person will deliver to
Landlord satisfactory evidence of the matters set forth in this Section.
(b) Both Landlord and the person executing this Lease on behalf
of Landlord warrant and represent unto Landlord that (i) Landlord is a duly
organized and validly existing legal entity, in good standing and qualified to
do business in the state in which the Building is located, with no proceeding
pending or contemplated for its dissolution or reorganization, voluntary or
involuntary, (ii) Tenant has full right, power and authority to execute,
deliver and perform this Lease, (iii) the person executing this Lease on behalf
of Landlord is authorized to do so, (iv) upon execution of this Lease by
Landlord, this Lease shall constitute a valid and legally binding obligation of
Landlord, and (v) upon request of Tenant, such person will deliver to Tenant
satisfactory evidence of the matters set forth in this Section.
Section 11.5 No Brokers. Landlord and Tenant warrant and represent to
the other that it has not dealt with any real estate broker and/or salesman
(other than Insignia Commercial Group, Inc. who represented Landlord and Carl
R. Smith & Company who represented Tenant) in connection with the negotiation
or execution of this Lease and no such broker or salesman has been involved in
connection with this Lease, and each party agrees to defend, indemnify and hold
harmless the other party from and against any and all costs, expenses,
attorneys' fees or liability for any compensation, commission and charges
claimed by any real estate broker and/or salesman (other than the aforesaid
brokers) due to acts of such party or such party's representatives. Landlord
shall pay all commissions due to either or both Insignia Commercial Group, Inc.
and Carl R. Smith and Company.
Section 11.6 Consents by Landlord. With respect to any provision of
this Lease which provides that Tenant shall obtain Landlord's prior consent or
approval, Landlord's consent or approval will not be unreasonably withheld,
delayed or denied unless the provision of the Lease provides that such consent
is within Landlord's sole discretion.
With respect to any provision of this Lease which provides that Landlord
shall not unreasonably withhold or unreasonably delay any consent or any
approval, Tenant, in no event, shall be entitled to make, nor shall Tenant
make, any claim for, and Tenant hereby waives any claim for money damages; nor
shall Tenant claim any money damages by way of setoff, counterclaim or defense,
based upon any claim or assertion by Tenant that Landlord has unreasonably
withheld or unreasonably delayed any consent or approval; but Tenant's sole
remedy shall be an action or proceeding to enforce any such provision, or for
specific performance, injunction or declaratory judgment.
Section 11.7 Joint and Several Liability. If there is more than one
Tenant, then the obligations hereunder imposed upon Tenant shall be joint and
several. If there is a guarantor of Tenant's obligations hereunder, then the
obligations hereunder imposed upon Tenant shall be the joint and several
obligations of Tenant and such guarantor, and Landlord need not first proceed
against Tenant before proceeding against such guarantor nor shall any such
guarantor be released from its guaranty for any reason whatsoever.
Section 11.8 Independent Covenants. The obligation of Tenant to pay
Rent and other monetary obligations provided to be paid by Tenant under this
Lease and the obligation of Tenant to perform Tenant's other covenants and
duties under this Lease constitute independent, unconditional obligations of
Tenant to be performed at all times provided for under this Lease, save and
except only when an abatement thereof or reduction therein is expressly
provided for in this Lease and not otherwise, and Tenant acknowledges and
agrees that in no event shall such obligations, covenants and duties of Tenant
under this Lease be dependent upon the condition of the Premises or the
Project, or the performance by Landlord of its obligations hereunder.
Section 11.9 Attorneys' Fees and Other Expenses. In the event either
party hereto defaults in the faithful performance or observance of any of the
terms, covenants, provisions, agreements or conditions contained in this Lease,
the party in default shall be liable for and shall pay to the nondefaulting
party all expenses incurred by such party in enforcing any of its remedies for
any such default, and if the nondefaulting party places the enforcement of all
or any part of this Lease in the hands of an attorney, the party in default
agrees to pay the nondefaulting party's reasonable attorneys' fees in
connection therewith.
Section 11.10 Recording. Neither Landlord nor Tenant shall record
this Lease, but a short-form memorandum hereof may be recorded at the request
of either party. Both parties shall, upon the request of either, execute a
short form memorandum, if any, as may be permitted by applicable statute. Upon
the expiration or earlier termination of this Lease, the parties shall execute,
deliver and record an instrument acknowledging such fact and the actual date of
termination of this Lease, and Tenant hereby appoints Landlord its attorney-in-
fact, coupled with an interest , with full power of substitution to execute
such instrument.
Section 11.11 Disclaimer; Waiver of Jury Trial. LANDLORD AND TENANT
EXPRESSLY ACKNOWLEDGE AND AGREE, AS A MATERIAL PART OF THE CONSIDERATION FOR
LANDLORD'S ENTERING INTO THIS LEASE WITH TENANT, THAT, EXCEPT AS OTHERWISE SET
FORTH IN THIS LEASE, LANDLORD HAS MADE NO WARRANTIES TO TENANT AS TO THE USE OR
CONDITION OF THE PREMISES OR THE PROJECT, EITHER EXPRESS OR IMPLIED, AND
LANDLORD AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE PREMISES
OR THE PROJECT ARE SUITABLE FOR TENANT'S INTENDED COMMERCIAL PURPOSE OR ANY
OTHER WARRANTY (EXPRESS OR IMPLIED) REGARDING THE PREMISES OR THE PROJECT.
EXCEPT AS EXPRESSLY SET FORTH IN THIS LEASE OR ON EXHIBIT E, LANDLORD AND
TENANT EXPRESSLY AGREE THAT THERE ARE NO, AND SHALL NOT BE ANY, IMPLIED
WARRANTIES OF MERCHANTABILITY, HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE
OR ANY OTHER KIND ARISING OUT OF THIS LEASE, ALL SUCH OTHER EXPRESS OR IMPLIED
WARRANTIES IN CONNECTION HEREWITH BEING EXPRESSLY DISCLAIMED AND WAIVED.
LANDLORD AND TENANT WAIVE THE RIGHT TO A TRIAL BY JURY IN ANY ACTION
OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS LEASE.
THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY TENANT AND
TENANT ACKNOWLEDGES THAT NEITHER LANDLORD NOR ANY PERSON ACTING ON BEHALF OF
LANDLORD HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY
JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. TENANT FURTHER
ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE
REPRESENTED) IN THE SIGNING OF THIS LEASE AND IN THE MAKING OF THIS WAIVER BY
INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD
THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. TENANT FURTHER
ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF
THIS WAIVER PROVISION AND AS EVIDENCE OF SAME HAS EXECUTED THIS LEASE.
Section 11.12 No Access to Roof. Tenant shall have no right of access
to the roof of the Premises or the Building.
Section 11.13 Parking. Tenant's occupancy of the Premises shall
include the use of up to sixty-four (64) unreserved surface parking spaces,
which shall be used in common with other tenants, invitees and visitors of the
Building. Tenant shall have the right to park in the Building parking
facilities in common with other tenants of the Building. Tenant agrees not to
overburden the parking facilities and agrees to cooperate with Landlord and
other tenants in use of the parking facilities. Landlord reserves the right in
its reasonable discretion to determine whether the parking facilities are
becoming overburdened and to allocate and assign parking spaces among Tenant
and other tenants, and to reconfigure the parking area and modify the existing
ingress to and egress from the parking area as Landlord shall reasonably deem
appropriate.
Section 11.14 No Accord or Satisfaction. No payment by Tenant or
receipt by Landlord of a lesser amount than the Rent and other sums due
hereunder shall be deemed to be other than on account of the earliest Rent or
other sums due, nor shall any endorsement or statement on any check or
accompanying any check or payment be deemed an accord and satisfaction; and
Landlord may accept such check or payment without prejudice to Landlord's right
to recover the balance of such Rent or other sum and to pursue any other remedy
provided in this Lease.
Section 11.15 Acceptance. The submission of this Lease by Landlord
does not constitute an offer by Landlord or other option for, or restriction
of, the Premises, and this Lease shall only become effective and binding upon
Landlord, upon full execution hereof by Landlord and delivery of a signed copy
to Tenant.
Section 11.16 Waiver of Counterclaim. Tenant hereby waives the right
to interpose any nonmandatory or noncompulsory counterclaim of whatever
description in any summary or forcible detainer proceeding.
Section 11.17 Time Is of the Essence. Time is of the essence of this
Lease. Unless specifically provided otherwise, all references to terms of days
or months shall be construed as references to calendar days or calendar months,
respectively.
Section 11.18 Counterparts. This Lease may be executed in any number
of counterparts, each of which when so executed and delivered shall be an
original, but such counterparts shall together constitute one and the same
instrument.
Section 11.19 Special Stipulations. The terms and conditions of the
Special Stipulations set forth on Exhibit C attached hereto are incorporated
herein by reference.
IN TESTIMONY WHEREOF, the parties hereto have executed this Lease as of
the day and year first above written.
LANDLORD:
PARAGON CENTRE ASSOCIATES, LLC,
a Georgia limited liability company
By: BROOKDALE INVESTORS TWO, L.P.,
a Delaware limited partnership,
its sole member
By: BROOKDALE PARTNERS II, LLC,
a Georgia limited liability company,
its sole general partner
By:/s/ Fred Henritze
Fred Henritze, Manager
TENANT:
STRATEGIA CORPORATION a Kentucky corporation
By:/s/ James A. Huguenard
Name:James A. Huguenard
Title:V.P. and General Counsel
EXHIBIT A
DESCRIPTION OF THE TWO PARAGON CENTRE LAND
Being a portion of the tract conveyed to Louisville Dutchmans Lane
Associates, Ltd. as recorded in Dead Book 5533 Page 278, in the Office of the
County Clerk of Jefferson County, Kentucky; and more particularly described
as follows:
Beginning at a pipe at the intersection of the southerly line of
Dutchmans Lane as established in instrument of record in Deed Book 1238 Page
397, in the Office of the Clerk of the County Court of Jefferson County,
Kentucky, thence with the northwesterly line of the tract conveyed to
Louisville Dutchmans Lane Associates, Ltd. by Deed of record in Deed Book
5533 Page 278, in the Office of the Clerk aforesaid; thence with the
southerly line of Dutchmans Lane and with an arc of a curve to the left
having a radius of 216-33 feet and the following chords:
South 66 degrees 19 minutes 48 seconds East 43.05 feet to an iron pipe; South
78 degrees 40 minutes 38 seconds east 50.00 feet to an iron pipe; North 88
degrees 03 minutes 02 seconds East 50.00 feet to an iron pipe; North 74
degrees 46 minutes 42 seconds east 50.00 feet to an iron pipe; North 61
degrees 30 minutes 22 seconds East 50.00 feet to an iron pipe; thence
continuing with the southeasterly line of Dutchmans Lane, North 54 degrees 52
minutes 12 seconds East 46.50 feet to an iron pipe in the southwesternmost
comer of the tract conveyed to Louisville OPC Associates, Ltd. by Deed of
record in Deed Book 5559 Page 255; thence with the most southwesterly line of
said tract South 35 degrees 07 minutes 48 seconds East 31.00 feet to an iron
pipe; thence South 46 degrees 11 minutes 52 seconds East 112.93 feet to an
iron pipe; thence with arc of a curve to the left having a radius of 867.00
feet, and a chord of south 48 degrees 27 minutes 20 seconds cast 118.26 feet
to an iron pipe; thence with the arc of a curve to the right having a radius
of 12.00 feet, and a chord of South 06 degrees 36 minutes 16 seconds East
17.20 feet; thence South 39 degrees 09 minutes 26 seconds west 18.32 feet to
an iron pipe; South 50 degrees 50 minutes 34 seconds east 24.00 feet to an
iron pipe; North 84 degrees 09 minutes 25 seconds east 62.44 feet to an iron
pipe; thence with the arc of a curve to the right having a radius of 11.00
feet, and a chord of South 73 degrees 20 minutes 26 seconds East 8.43 feet;
thence the following courses and distances: South 50 degrees 50 minutes 16
seconds east 5.34 feet to an iron pipe; South 05 degrees 50 minutes 34
seconds east 34.25 feet to an iron pipe; South 47 degrees 17 minutes 46
seconds East 243.59 feet to an iron pipe on the west line of right-of-way for
Watterson Expressway I-264, said point also being on the southeasternmost
line of the tract conveyed to Louisville OPC Associates, Ltd. as recorded in
Deed Book 5559 Page 255 in aforementioned clerks office; thence along west
Right-of-way line of Watterson Expressway I-264, south 59 degrees 37 minutes
00 seconds west 389.94 feet to an iron pipe; thence leaving the existing
right-of-way of Watterson Expressway I-264, with the following courses, north
33 degrees 22 minutes 13 seconds west 701.67 feet to the point of beginning
containing approximately 4.410 acres.
EXCEPTING THEREFROM that certain parcel conveyed to the Commonwealth of
Kentucky by Deed of Conveyance dated June 28, 1989, and recorded in Deed Book
5876 Page 97 in the Office of the Clerk of the County Court of Jefferson
County, Kentucky, and further described as follows:
Beginning at a point in the existing access control and right of way line,
said point being the Grantor's east property corner, 38.00 feet left of I-264
Station 606+52.59; thence with said existing access control and right of way
line and the Grantor's southeast property line South 60 degrees 51 minutes 23
seconds West (Grantor's Survey South 59 degrees 37 minutes 00 second West),
389.94 feet to the Grantor's south property comer 38.00 feet left of I-264
Station 602+62.65; thence with the Grantor's southwest property line North 32
degrees 07 minutes 50 seconds West (Grantor's Survey North 33 degrees 22
minutes 13 seconds West), 98.13 feet to a point in the proposed access
control and right of way line 136.00 feet left of I-264 Station 602+57.54;
thence with said proposed access control and right of way line the following
courses: South 89 degrees 45 minutes 09 seconds East 77.43 feet to a point
98.00 feet left of I-264 Station 603+25.00; North 60 degrees 15 minutes 12
seconds East, 308.38 feet to a point in the Grantor's northeast property line
101.25 feet left of I-264 Station 606+33.36; thence with said northeast
property line South 46 degrees 03 minutes 23 seconds East (Grantor's Survey
South 47 degrees 17 minutes 46 seconds East), 66.11 feet to the point of
beginning containing approximately 0.567 acre.
EXHIBIT B
FLOOR PLAN OF PREMISES
{Floor Plan Schematic}
EXHIBIT C
SPECIAL STIPULATIONS
These Special Stipulations are hereby incorporated into this Lease and
in the event that they conflict with any provisions of this Lease, these
Special Stipulations shall control.
1. Condition to Lease. This Lease is expressly conditioned upon the
existing tenant of the Premises, the Kentucky Lottery Corporation,
terminating its lease of the Premises and vacating the Premises on or before
November 15, 1997.
2. Signage. So long as this Lease is in full force and effect and Tenant
is not in default thereunder, and subject to the foregoing terms and
conditions, Tenant shall have the right, at its sole cost and expense, to
install and maintain identification signage on the following: (i) the
exclusive right to place the name and logo "Strategia" on the exterior of the
Building, subject to Landlord's prior approval, such sign to be illuminated
and located in the same area as previously used by Kentucky Lottery
Corporation; (ii) the existing monument sign located on Dutchmans Lane and
(iii) the existing monument sign located between the Building and the One
Paragon Centre building. Such signage shall be subject to the following terms
and conditions:
a. The location, design, construction, size and all other aspects of
such signage shall be subject to Landlord's prior approval, which approval
shall not be unreasonably withheld;
b. The expense of installing, construction, maintaining and removing
such signage shall be the sole cost and expense of Tenant and shall be paid
directly by Tenant. Tenant shall be responsible for all costs and expenses
associated with such signage and Tenant shall promptly repair any damage to
the Building or the Project resulting from the installation, construction,
maintenance or removal of such signage. Upon the termination or expiration
of this Lease and upon the terms and conditions of this Special Stipulation,
Tenant shall promptly remove such signage at its sole cost and expense.
c. Tenant agrees to indemnify and hold Landlord harmless for any
cost, expense, loss (normal wear and tear excepted) or other liability
associated with the installation, construction, maintenance and removal of
such signage.
d. Tenant shall be solely responsible for ensuring that such signage
conforms to all applicable federal, state and local laws, ordinances and
regulations relating to such signage.
e. The foregoing rights granted to Tenant under this paragraph shall
be personal to Tenant, and in the event of any assignment of this Lease or
any sublease of the Premises by Tenant, Tenant's signage rights as contained
above shall be void and of no further force and effect and Tenant shall
promptly remove such signage in accordance with the foregoing terms and
conditions, unless such assignment or sublease is a Permitted Transfer, as
that term is defined in Section 9.1 of this Lease or approved in writing by
Landlord pursuant to Section 9.1. Further, Tenant's signage rights are
conditioned upon Tenant occupying the entire Premises. If Tenant vacates the
Premises for a period in excess of sixty (60) days, Tenant's signage rights
shall be similarly void and of no further force and effect.
3. Extension Option. So long as this Lease is in full force and effect
and Tenant is not in default hereunder, Tenant shall have the option (the
"Extension Option") to extend the Term for the entire Premises for one (1)
additional period of five (5) years (the "Extension Period") subject to the
following terms and conditions:
a. In the event that Tenant assigns this Lease and such assignment
is either a Permitted Transfer or is approved by Landlord in writing pursuant
to Section 9.1 of this Lease, the Extension Option shall also be assigned by
Tenant to such assignee and such assignee shall have the right, pursuant to
and in accordance with the other terms and conditions of this provision, to
exercise the Extension Option. In the event that Tenant subleases all of the
Premises to a subtenant for the remainder of the term of this Lease, and such
sublease is a Permitted Transfer or is approved by Landlord in writing
pursuant to Section 9.1 of this Lease, the Extension Option may only be
exercised by Tenant (and not the subleasee) and the Tenant must reaffirm in
writing at the time it notifies Landlord of its election to exercise the
Extension Option that Tenant shall remain liable, as tenant, for all
obligations and liabilities under this Lease during the Extension Period.
b. Tenant shall have given Landlord written notice of its desire to
exercise the Extension Option on or before nine (9) months prior to the
expiration of the Term.
c. The Extension Option shall be only applicable to the entire
Premises, as it may have expanded or contracted from time to time pursuant to
the terms of this Lease, as it may have been amended from time to time, or by
other agreement of Landlord and Tenant.
d. The terms and conditions of this Lease, as it may have been
amended from time to time, shall remain in full force and effect during any
Extension Period except that the term "Base Rent" shall be modified to mean
the rent charged at the Prevailing Market Rate (as hereinafter defined).
e. "Prevailing Market Rate" shall mean the then prevailing market
rate, in Louisville, Kentucky, for rent for leases comparable to this Lease
for space comparable to the Premises taking into account such factors offered
to third party tenants for comparable space as the base services year for
pass-through expenses, the value of the tenant improvements already in place
in the Premises at the commencement of the Extension Period, rent
concessions, tenant improvement allowances, lease commissions saved or
incurred, and moving allowances. Landlord hereby agrees to make its
determination of the Prevailing Market Rate in good faith and in a
commercially reasonable manner. Within fifteen (15) days after receipt by
Landlord of Tenant's election to exercise the Extension Option, Landlord
shall advise Tenant in writing of its determination of the Prevailing Market
Rate on a rentable square foot basis as of the beginning of the Extension
Period and shall provide to Tenant all information and materials used by
Landlord in making its determination of the Prevailing Market Rate. Within
Forty-five (45) days of receipt of Landlord's notice, Tenant shall advise
Landlord, in writing, whether or not Tenant accepts or rejects the Prevailing
Market Rate proposed by Landlord. Tenant shall have the right to negotiate
with Landlord the Prevailing Market Rate proposed by Landlord during such
forty-five (45) day period. Landlord shall negotiate with Tenant in a good
faith, commercially reasonable manner and hereby agrees to meet, upon the
written request of Tenant, with Tenant and Tenant's representations up to
three (3) times at either the Premises, the offices of the Landlord's
management company or other location mutually agreed upon by Landlord and
Tenant during such forty-five (45) day period. Tenant's failure to accept or
reject in writing the Prevailing Market Rate proposed by Landlord or the
failure by Landlord and Tenant to reach a written agreement as to the
Prevailing Market Rate within such forty-five (45) day period, shall be
deemed a rejection by Tenant, and this Lease shall end on the expiration date
of the then-current Term of this Lease. If Tenant accepts such rate in
writing, then the Base Rent rate during the Extension Period shall be said
rate.
4. Landlord's Representations. As an inducement to Tenant to enter into
this Lease, Landlord represents and warrants, to the best of Landlord's
knowledge and belief, to Tenant that the Project, the Building and the
Premises are on the Commencement Date in compliance with all governmental
laws, rules, regulations and directives applicable thereto, including but not
limited to all Environmental Laws (as defined in Section 5.3(a) of this
Lease). Landlord hereby covenants and agrees to take all commercially
reasonable and prudent actions during the Term to ensure that such
representation and warranty remains in full force and effect.
5. Removal of Liebert Unit. Tenant shall have the right, at Tenant's
sole cost and expense, to remove the existing Liebert unit from the Premises,
in which event the unit shall become the sole property of Tenant. Tenant
shall notify Landlord of Tenant's exercise of this right within thirty (30)
days after the full execution and delivery of this Lease by both parties.
6. Delivery of Premises. In the event that Landlord fails to deliver the
Premises to Tenant substantially complete in accordance with the terms and
conditions of Exhibit E on or before December 8, 1997 for any reason except
if and to the extent that such delay is caused by Tenant or its agents
(including a request by Tenant to change the Improvements, as that term is
hereinafter defined) or force majeure, Tenant shall receive an abatement of
all Rent due hereunder of two (2) day for each day after December 8, 1997
that Landlord delays in so delivering the Premises to Tenant. The foregoing
abatement of Rent shall be outside the Term of this Lease and shall delay the
Commencement Date for purposes of determining the Term of this Lease (but
shall not delay the other terms and conditions of this Lease including
Tenant's occupancy of the Premises) by the number of days Rent is so abated
(by way of example only, if Landlord does not deliver the Premises to Tenant
until December 11, 1997, Tenant shall be entitled to an abatement of six (6)
days of Rent; all other terms of this Lease shall be in effect beginning
December 11, 1997, except the Commencement Date shall be December 17, 1997
and the Term shall commence from such date). Further, and in addition to the
foregoing abatement, if Landlord delivers the Premises to Tenant after
December 15, 1997 as provided hereinabove, Tenant shall have the right, at
its election, to delay its occupancy of the Premises and to defer the
Commencement Date of the Term until January 1, 1998.
7. Building Roof. Landlord hereby represents and warrants to Tenant
that, as of the Commencement Date, the Building roof shall be in good
condition and Landlord covenants to make all repairs to the roof reasonably
necessary to prevent the reoccurrence of roof leaks which might affect the
Premises. Tenant agrees to provide prompt notice, both oral, via a telephone
call to Landlord's on-site building manager and written, to Landlord of any
roof leaks affecting the Premises. Landlord hereby agrees that it shall be
responsible for the repair or restoration of any damage to Tenant's Premises
caused by a leak. For purposes of this paragraph, the term "leak" shall not
include any leak in the building roof caused by casualty or Force Majeure.
Further, Landlord shall promptly reimburse Tenant for any reasonable, out-of-
pocket expenses incurred by Tenant in repairing or replacing any of Tenant's
equipment or personalty damaged by a leak. Tenant acknowledges and agrees
that Landlord shall not be responsible for any consequential or special
damages caused by such a leak which Tenant might sustain.
EXHIBIT D
COMMENCEMENT DATE AGREEMENT
This Commencement Date Agreement (this "Agreement") is made and entered
into this day of , 1997, by and between PARAGON CENTRE ASSOCIATES,
LLC ("Landlord") and STRATEGIA CORPORATION ("Tenant").
WHEREAS, Landlord and Tenant entered into that certain Lease (the
"Lease") dated September, 1997, with respect to certain premises, known as
Suite 400, located on the 4th floor, at Two Paragon Centre, 640 Dutchmans
Lane, Louisville, Kentucky 40205, as such demised premises are more
particularly described in the Lease.
WHEREAS, this Agreement is executed by Landlord and Tenant to confirm
the Commencement Date and the Expiration Date, as those terms are defined in
the Lease;
NOW, THEREFORE, for and in consideration of the demised premises and the
mutual covenants expressed in the Lease, it is hereby agreed by Landlord and
Tenant as follows:
1. The Premises were substantially complete and the Base Rent and
Additional Rent (as such terms are defined in the Lease) commenced on
,1997 (the "Commencement Date") and will expire on ,
2003 (the "Expiration Date").
2. This Agreement shall not be deemed or construed to alter or amend
the Lease in any manner.
IN WITNESS WHEREOF, Landlord and Tenant have caused this Agreement to be
executed as of the day and year first above written.
TENANT: LANDLORD:
STRATEGIA CORPORATION, a Kentucky PARAGON CENTRE ASSOCIATES, LLC,
Corporation a corporation
By: By: BROOKDALE INVESTORS TWO, L.P.
---------------------------------- a Delaware limited partnership,
Title: its sole member
-------------------------------
By:
--------------------------------
Fred Henritze, Manager
EXHIBIT E
Tenant hereby accepts the Premises "AS IS" and "WHERE IS" and acknowledges
and agrees Landlord's only obligation to construct any tenant improvements to
the Premises or make any alterations or additions thereto are as follows:
Landlord agrees that it shall construct, at reasonable market costs, the
tenant improvements described in Exhibit E-1 (the "Improvements") for the
Premises. Tenant shall bear the cost of the Improvements to Tenant's
Premises, (including, without limitation, a five percent (5%) construction
management fee to Insignia Commercial Group, Inc. on all of the Improvements
constructed by Landlord on Tenant's behalf) except that Tenant shall receive
an allowance (the "Allowance") of Ninety Six Thousand One Hundred Thirty
Eight and No/100 Dollars ($96,138.00) (or $6.00 per square foot). Any
portion of the Allowance not used or expended in the design and construction
of the Improvements to the Premises shall be paid to Tenant by Landlord and
shall be and become the property of Tenant and shall be used by Tenant for
further Improvements to the Premises, including the costs incurred by Tenant
for the furnishing of the Premises, which furnishing shall become the sole
property of Tenant. Tenant shall be responsible for all costs and expenses
of the tenant improvements for the Premises, if any, in excess of the
Allowance.
EXHIBIT E-1
1. Replace all carpeting and VCT within the Premises with Building
standard grade materials.
2. Repaint all non-wallpapered drywall surfaces within the Premises.
3. Reconfigure the area commonly referred to as the "Computer Room" in
accordance with construction drawings agreed upon by Landlord and Tenant
which is anticipated to be as follows:
(a) remove the raised computer floor and replace with Building
standard carpeting.
(b) repaint the walls.
(c) remove and properly dispose of the existing Halon fire
suppression system.
(d) remove the wall (approximately ten (10) lineal feet) currently
demising the Computer Room.
4. Signage as described in this Lease.
5. Such other work as may be agreed by Landlord and Tenant in writing.
EXHIBIT F
BUILDING RULES AND REGULATIONS
1. Sidewalks, doorways, vestibules, halls, stairways, and other similar
areas shall not be used for the disposal of trash, be obstructed by Tenant or
be used by Tenant for any purpose other than ingress and egress to and from
the Premises and for going from one part of the Building to another part of
the Building.
2. Plumbing fixtures and appliances shall be used only for the purposes
for which designed, and no sweepings, rubbish, rags, or other unsuitable
material shall be thrown or placed therein. Damage resulting to any such
fixtures or appliances from misuse by Tenant shall be paid by such Tenant and
Landlord shall not in any case be responsible therefor.
3. Signs, advertisements. or notices visible in or from public corridors
or from outside the Building shall be subject to Landlord's prior written
approval. Without Landlord's prior consent, no nails, hooks, or screws shall
be driven or inserted into any part of the Building, and no curtains or other
window treatments shall be placed between the glass and the Building standard
window treatments.
4. With respect to work being performed by Tenant in the Premises, Tenant
shall refer all contractors, contractors' representatives, and installation
technicians rendering any service to Tenant to Landlord for Landlord's
supervision and approval before the performance of any contractual services.
This provision shall apply to all work performed in the Building, including,
but not limited to, installations of telephones, telegraph equipment,
electrical devices and attachments, and any and all installations of every
nature affecting floors, walls, woodwork, trim, windows, ceilings, equipment,
and other physical portions of the Building.
5. Movement in or out of the Building of furniture, office equipment,
safes and other heavy equipment, or the dispatch or receipt by Tenant of any
bulky material or merchandise, or materials which require use of elevators or
stairways or movement through the Building entrances or lobby, shall be
restricted to such hours as Landlord designates. All such movement shall be
under the supervision of Landlord and in the manner agreed between Tenant and
Landlord by prearrangement before performance. Such prearrangement, to be
initiated by Tenant, will include determination by Landlord as to the time,
method, and routing of such movement and as to limitations for safety or
other concerns. Tenant assumes all risks of damage to articles moved and
injury to persons engaged or not engaged in such movement. Tenant shall be
liable to personnel of Landlord damaged or injured as a result of acts in
connection with carrying out this service for Tenant, and Landlord shall not
be liable for the acts of any person engaged in, or any damage or loss to any
property or persons resulting from any act in connection with, such service
performed for Tenant.
6. Building management shall have the right and authority to prescribe
the maximum weight and position of safes and other heavy equipment which may
overstress any portion of a floor. All damages done to the Building by
taking in or putting out any property of Tenant, or done by Tenant's property
while in the Building, shall be repaired at the expense of Tenant.
7. Corridor doors, when not in use, shall be kept closed.
8. Tenant space visible from a public area must be kept neat and clean.
9. Should Tenant require telegraphic, telephonic, annunciator, or other
communication services, Landlord will direct the electricians as to where and
how wires are to be introduced and placed, and none shall be introduced or
placed except as Landlord shall direct. Electric current shall not be used
for power or heating without Landlord's prior written permission.
10. No animals shall be brought into or kept in, on, or about the
Building.
11. All routine deliveries to the Premises during 8:00 a.m. to 5:00 p.m.
weekdays shall be made through the freight elevators. Passenger elevators
are to be used only for the movement of persons, unless an exception is
approved by the Building management office.
12. Tenant shall not tamper with or attempt to adjust temperature control
thermostats in the Premises. Landlord shall adjust thermostats as required
to maintain the Building standard temperature. Landlord requests that all
window blinds remain down and tilted at a 45 degree angle toward the street
to help maintain comfortable room temperatures and conserve energy.
13. Tenant will comply with all security procedures during business hours
and after hours and on weekends.
14. Tenants are requested to lock all office doors leading to corridors
and to turn out all lights at the close of their working day.
15. All requests for overtime air conditioning or heating (i) for a
Saturday, Sunday or holiday must be submitted in writing to the Building
management office by 4:00 p.m. on the preceding business day and (ii) for
regular business days must be submitted in writing to the Building management
office by office by 4:00 p.m. of that business day.
16. No flammable or explosive fluids or materials shall be kept or used
within the Building except in areas approved by Landlord, and Tenant shall
comply with all applicable building and fire codes relating thereto.
17. Tenant may not place any items on the balconies of the Building
without obtaining Landlord's prior written consent.
18. Landlord reserves the right to rescind any of these rules and
regulations and to make such other and further rules and regulations as in
its good faith judgment shall from time to time be needed for the safety,
protection, care and cleanliness of the Property, the operation thereof, the
preservation of good order therein, and the protection and comfort of the
tenants and their agents, employees, and invitees, which rules and
regulations, when made and written notice thereof is given to Tenant, shall
be binding upon Tenant in like manner as if originally herein prescribed.
Exhibit 10.13
AGREEMENT ADDENDUM
This is an Addendum (this "Addendum") dated as of September 30, 1998, to the
agreement (the "Agreement") dated as of October 24, 1997, between James P.
Buren ("Buren") and Strategia Corporation ("Strategia").
Recitals
A. Buren has resigned from Strategia's Board of Directors effective as of
September 28, 1998.
B. Strategia and Buren wish to amend the Amendment to modify the terms on
which Buren will continue to provide consulting services to Strategia
following Buren's resignation as a director of Strategia.
C. Except as set forth in this Addendum, all terms of the Agreement shall
remain in full force and effect.
In consideration of the terms and conditions and covenants set forth herein,
Buren and Strategia agree that the Agreement shall be amended as follows:
A. Section 3.b of the Agreement is amended to read in its entirety as follows:
a. Availability. During the term of this Agreement, Buren agrees to
be available to provide consulting services for up to 30 days on such projects
as Strategia may request from time to time. For purposes of this Agreement, a
"day" shall mean any calendar day in which Buren provides 4 or more hours of
services.
B. Section 3.b of the Agreement is amended to read in its entirety as follows:
b. Compensation. In consideration of Buren's agreement to provide
consulting services pursuant to section 3.a of the Agreement, Strategia shall
pay Buren the compensation, which shall be payable on such dates, as are set
forth below:
<TABLE>
<CAPTION>
Period Compensation Payment Date
<C> <C> <C>
9/1/1998 to 12/31/1998 $15,600 October 31, 1998
1/1/1999 to 6/31/1999 18,200 January 2, 1999
7/1/1999 to 12/31/1999 18,200 July 2, 1999
1/1/2000 to 3/31/2000 9,800 January 3, 2000
</TABLE>
(i) If Buren provides consulting services for more than 30 days
during the term of this Agreement, Strategia will compensate Buren for such
additional days of service at a mutually agreed upon rate.
(ii) If Buren shall breach the Agreement by failing to provide
services when and as required and in a professional and competent manner, and
such breach is not cured within 15 days after Strategia has given Buren written
notice specifying in detail the particulars of the breach, then Strategia shall
have the right to terminate its obligation to make any further payments to
Buren pursuant to this Section 3.b. If Buren shall dispute Strategia's
determination regarding the above, the matter shall submitted to binding
arbitration at which the burden of proof shall be on Strategia.
C. The fourth sentence of Section 3.c of the Agreement is amended to read in
its entirety as follows:
If Buren requests and Strategia consents, Buren may spread one day's worth
of services over more than one day, but for purposes of Section 3.b, Buren will
be treated as if the services were all performed on a single day.
D. The following shall be appended to Section 3.g and shall supercede any
conflicting provision of that Section:
During the Noncompete Period, Buren shall not directly or indirectly
offer or provide employment (or an independent contractor position or similar
engagement) to any person who, at any time within the twelve months prior to
such offer or provision was an employee (or independent contractor or similar
person) of Strategia or any of its subsidiaries or affiliates (a "Present or
Recent Strategia Employee"), or otherwise encourage or entice any Present or
Recent Strategia Employee to leave Strategia. During the Noncompete Period,
Buren agrees to refrain from making any communication that, directly or
indirectly, disparages or is otherwise critical of Strategia or any of its
affiliates or any of their products, services, financial or technical status
or ability, directors, employees, officers, agents, or any other aspect of any
of the foregoing. The foregoing shall not in any way limit Buren from
communicating directly to those individuals that are now on the Board of
Directors of Strategia so long as such communication is specifically made in a
manner that ensures it will reach only those individuals. If Buren shall in any
way violate this Section 3.g, Strategia shall have no obligation to make any
payments that would otherwise be due hereunder and may, in addition, pursue all
other remedies available to it at equity and law. Buren acknowledges that any
violation of this Section 3.g will cause immeasurable damages to Strategia and
thus Strategia shall be entitled to injunctive relief restraining any breach or
threatened breach of this Section 3.g.
IN WITNESS WHEREOF, and intending to be legally bound thereby, Buren and
Strategia have executed the foregoing Addendum on the dates indicated.
/s/ James P. Buren
James P. Buren
STRATEGIA
By /s/ Richard W. Smith
Title: President
Date: 10/29/98
Exhibit 21
SUBSIDIARIES OF STRATEGIA CORPORATION
Dataguard Limited (Kentucky)
Twinsys Dataguard SA (France)
Twin-X SA (France)
Strategia Europe SAS (France)
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement (Form
S-8 No. 333-36233) pertaining to the 1988 Stock Option Plan of Strategia
Corporation of our report dated March 31, 1999, with respect to the
consolidated financial statements of Strategia Corporation and subsidiaries
included in the annual report (Form 10-KSB) for the year ended December 31,
1998.
/s/ Carpenter, Mountjoy & Bressler PSC
Louisville, Kentucky
April 1, 1999
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-36233) pertaining to the 1988 Stock Option Plan of Strategia
Corporation of our report dated March 26, 1998, with respect to the
consolidated financial statements of Strategia Corporation and subsidiaries for
the year ended December 31, 1997, included in the Annual Report (Form 10-KSB)
for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 26, 1999
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