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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-17953
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DIAMOND ENTERTAINMENT CORPORATION
(Name of small business issuer in its charter)
New Jersey 22-2748019
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
16200 Carmenita Road, Cerritos CA 90703
(Address of principal executive offices) (Zip Code)
(562) 921-3999
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under to Section 12(g) of the Exchange Act: Common Stock,
no par value.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [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 issuer's revenue for the fiscal year ended March 31, 1998 totaled
$8,724,149.
The aggregate market value of registrant's Common Stock held by non-affiliates
based upon the closing bid price on December 7, 1998, as reported by the OTC
Bulletin Board, was approximately $584,400.
As of December 7, 1998, there were 33,314,299 shares of the registrant's Common
Stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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FORWARD LOOKING INFORMATION
This annual report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to the Company or management. When used in this document, the words
"anticipate," "believe," "estimate," "expect" and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current view of
the Company regarding future events and are subject to certain risks,
uncertainties and assumptions, including the risks and uncertainties noted.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. In each instance, forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.
PART I
Item 1. Description of Business.
General
Diamond Entertainment Corporation (the "Company"), formerly known as
(i) ATI Mark V Products, Inc. and (ii) Trans-Atlantic Video, Inc., was formed
under the laws of the State of New Jersey on April 3, 1986. On July 15, 1991,
the Company completed the acquisition (the "Acquisition") of all of the issued
and outstanding shares of Diamond Entertainment Corporation, a California
corporation (the "California Subsidiary"), and concurrently therewith, the
parent company's name was changed to Diamond Entertainment Corporation. The
Company's principal executive offices are located at 16200 Carmenita Road,
Cerritos, California 90703.
The Company, through the California Subsidiary, markets and sells a
variety of videocassette titles to the budget home video market, principally
through the Company's New Jersey sales office. In February 1997 the Company
acquired a company, now the wholly-owned subsidiary known as Jewel Products
International, Inc., which is in the business of manufacturing, purchasing and
distributing children's toy products.
The Company distributes and sells videocassette titles including
certain public domain programs and certain licensed programs. Public domain
programs are video titles that are not subject to copyright protection. Licensed
programs are programs that have been licensed by the Company from a third party
for duplication and distribution, generally on a non-exclusive basis. The
Company markets its video programs to national and regional mass merchandisers,
department stores, drug stores, supermarkets and other similar retail outlets.
They generally sell the Company's products to the public at retail prices
ranging from $1.99 to $9.99 per videocassette. The Company's video products are
also offered by consignment arrangements through two large mail order catalog
companies.
Management is committed to acquiring more licensed video titles and
upgrading the quality of its packaging and pre-printed materials in order to
enhance its available products. The Company's program inventory currently
consists of approximately 600 titles, including approximately 350 public domain
programs and 250 licensed programs, comprising motion pictures, cartoons,
educational, sports highlights, computer-literacy and exercise programs. The
Company is continually identifying new titles to add to its program inventory
and intends to expand its selection of licensed programs which have historically
shown a higher profit margin than public domain programs.
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Until 1995, the Company was a full-service video product duplicating,
manufacturing, packaging and distribution company, and was engaged in several
distinct video production activities. In April 1995 the Company sold its Custom
Duplication Division, through which the Company duplicated and packaged
videocassettes on a custom-made basis. The Board believed that this transaction
was in the best interest of the Company since it could not compete effectively
in the manufacturing and duplicating of videotapes. The Company's focus had
changed to development, acquisition and distribution of video-related products
to mass merchandisers and retailers.
Subsequent to the 1998 fiscal year end, the Company implemented a plan
to reduce its production costs in order to be more competitive in price. As a
consequence, the Company took over certain final-stage manufacturing processes
and implemented new quality control procedures to ensure its standards of
quality. The Company acquired two video loaders and a shrink-wrap packaging
machine, and intends to obtain two additional video loaders. Using this
equipment and these new procedures, the Company hopes to realize up to 20% in
production cost savings. The Company now contracts with a
manufacturer/duplicator to duplicate programs, using Company-supplied masters,
copying up to 250 copies of a single program onto a bulk reel of video tape
called a pancake. After duplication, the pancakes and master tapes are returned
to the Company and the Company uses the video loaders to automatically load, cut
and splice the video programs from the pancake into empty videocassette shells.
The videocassettes are then labeled, packaged, shrink wrapped and boxed for
shipment. At least one sample of each batch of any newly manufactured video
products are tested when delivered to the Company by the duplicator to insure
acceptable duplication quality. The Company has implemented three
work-in-process quality control procedures and one final finished goods
inspection procedure prior to all product shipments. Further, the Company
continues its efforts to acquire and license better quality titles and thus
improve the performance of the Company's products in retail stores.
Product Lines
The Company's program inventory consists of a total of nearly 600
titles appealing to all age groups. The programs include cartoons, horror films,
science fiction, dramas, adventure stories, mysteries, musicals, comedies, fairy
tale adaptations, educational programs, sports highlights, instructional and
exercise programs. Public domain programs account for approximately 350 titles,
and licensed programs account for approximately 250 titles of the Company's
program inventory.
Motion Pictures - Public Domain. The Company offers a total of 37
feature motion picture titles including many film classics, such as "Life With
Father," "Meet John Doe," "Pygmalion" and "The Little Princess," which generally
appeal to adult audiences. The Company also markets its own special collection
of favorite performers' "Festivals," including The Three Stooges, Shirley
Temple, Bob Hope, Jack Benny and Milton Berle. The Company has recently added
numerous episodes of various 1950s popular television programs and a science
fiction category.
Children's Programs - Licensed and Public Domain. Most of the Company's
cartoons are in the public domain, including 21 cartoon programs redubbed in
Spanish. These programs are generally 30 minutes in length and consist of a
series of cartoons selected by the Company. The Company also markets
approximately 18 holiday children's features, and 40 titles in its Testaments
and Children's Bible series.
Educational Programs - Licensed. The Company has licenses to market
approximately 60 educational videos in two categories. For adults, titles
include "Battle of Britain," "The Shores of Iwo
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Jima," and "Guadalcanal," along with titles which instruct preschoolers and
school age children on topics such as learning numbers, telling time, simple
mathematics, color identification and other practical skills.
Sports Programs - Licensed. The Company has licenses to market 16
sports videos including five volumes of "Great Sports Memories" and
"Basketball's Fabulous 50 Stars."
Computer Software Learning Tutorial Programs - Licensed. The Company
has licensed approximately 40 titles of computer tutorial videos including
titles such as "Family Guide to the Computer," "Family Guide to the Internet,"
"Windows Literacy," "Word for Windows," "Mastering WordPerfect" and "Mastering
Excel for Windows."
The Company continuously seeks to expand its program inventory by
identifying titles which appeal to children and those which include popular
performers, characters or themes. The Company also identifies videos which are
classic films, are educational or instructional videos or which have been
requested by distributors. The Company enters into a licensing agreement with
respect to those programs that are subject to copyright protection or obtains
documentation confirming public domain status from various unaffiliated program
suppliers.
The costs associated with the Company's film masters (used for
duplicating) and artwork (for packaging and advertising) include the purchase
cost of masters, initial fee for rights to duplicate, shooting costs and
developing costs. During the year ended March 31, 1998, the Company acquired in
excess of 65 new titles. As of March 31, 1998, the net book value of Company's
film masters and artwork was in excess of approximately $361,000. The Company
believes that its film masters and artwork are significant assets since the
Company derives the majority of its revenue from their use.
Suppliers - Video Products
The Company's programs are duplicated, and in some cases packaged, by
one CD-ROM and five videotape manufacturers/duplicators located in the United
States. Generally, the Company arranges with these firms to duplicate
Company-supplied masters, then label, package, shrink-wrap and carton the
videocassettes or CD-ROMs. Labels and packaging sleeves are supplied by the
Company. The Company submits its orders and instructions by purchase order with
terms payable within 90 days of delivery. For the year ended March 31, 1998, the
video products business of the Company had purchases from three suppliers that
amounted to approximately $2,180,000, or 80.6%, of net purchases. The suppliers
and the percentage of net video products purchases made from each are: Glory
Enterprises, Inc., 41.6%; National Media, Inc., 22.3%; and Skura
Intercontinental Trading, 16.7%. Management believes that, if for any reason it
could not rely on or retain the services of any of its current suppliers,
duplicators or manufacturers, other sufficient suppliers are available in the
marketplace.
Markets and Customers - Video Products
The Company markets its program inventory to large retail chain outlets
and provides each retail chain operator with brochures, advertising materials
and literature describing and promoting the Company's program inventory. The
Company's products are sold through more than ten mass merchandisers such as
Sam's Club, Target, Costco and Best Buy, primarily in the Northeast, the South
and the East Coast. These outlets sell the Company's products to the general
public at retail prices ranging from approximately $1.99 to $9.99 per
videocassette. For the years ended March 31, 1998 and
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1997, the Company derived revenue from its program inventory of approximately
$6,426,000 and $6,170,000, respectively. For the years ended March 31, 1998 and
1997, the Company had net sales to one customer, Sam's Club, of approximately
$1,012,000 and $1,154,000, respectively. The Company sells to Sam's Club on
terms of net sixty days. The loss of this single customer would have a material
adverse effect on the financial condition and results of operations of the
Company.
The Company's marketing strategy of distributing directly to retail
chain outlets has allowed the Company to market its products at all consumer
levels. In particular, the Company seeks to attract retail customers in
department, drug, discount, electronic, music, toy and book stores as well as
supermarkets and convenience stores. The Company has implemented a new sales
method which seeks to improve the name recognition of the Company as a video
company specializing in educational, children and film classic video titles. In
addition, through its sales program, the Company seeks to place increased focus
on the promotion of sales to major mass merchandising companies which would
increase the delivery of high volume orders. The Company also uses independent
sales representatives in certain geographical marketing areas.
The Company derives approximately 60% of its gross revenue from sales
to mass merchandisers and other retail outlets. Approximately 40% of gross
revenue is derived from sales through consignment arrangements with certain
catalog companies under which the Company delivers tapes to their facilities
pending receipt of orders by customers. The Company only books sales from
consignment sales after the catalog company delivers the actual funds from such
sales. Less than one percent of revenue comes from programs sold on a retail
basis directly to consumers.
In 1997 the Company introduced its Audio Books product line, and is now
actively marketing 12 such titles. Also in 1997 the Company introduced its
CD-ROM product into the market place with only limited success, due largely to
shifting customer preferences, alternative entertainment sources and evolving
technologies. Beginning in 1999 the Company's marketing strategy and products
will include Digital Video Disk ("DVD") titles and a new product line using the
CineChrome-TM- process (see below). These plans will help the Company handle the
increasing competitiveness in the entertainment marketplace.
Seasonality
The Company generally experiences higher sales of its programs from
September through January due to increased consumer spending around the year-end
holidays. The Company estimates that it derives approximately 55% of its gross
revenue from sales during those five months, with 45% of revenue generated in
the other seven months of the year.
License Arrangements
The Company enters into license agreements whereby it acquires from
licensors the right to duplicate and distribute a licensed program. Licenses may
be exclusive or non-exclusive, but typically are non-exclusive. Generally
licenses cover specific titles. In return for the grant of rights, the Company
pays certain advance payments or guarantees and also royalties. Royalty payments
under license agreements typically are credited against any advances paid.
Generally, the Company's licenses are for a term of between three and seven
years. While the Company's efforts to renegotiate and renew its license
agreements have generally been successful, there can be no assurance that such
licenses will be renegotiated or renewed in the future. The programs that the
Company has acquired under license contain limitations from the licensors
regarding the geographic areas to which the Company can
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distribute its products and are usually restricted to distribution and sales in
the United States and Canada.
The various licensing agreements that the Company has entered into with
licensors provide for advance payments ranging from $1,500 to $15,000 and
subsequent royalty payments based upon either a per video sold fee or a
percentage of wholesale price fee. During the year ended March 31, 1998, the
Company incurred royalty expenses of approximately $128,000 under its licensing
agreements.
Competition
The Company competes with other distributors of videotapes, including
major film studios and independent production companies. The Company also
competes with manufacturers and distributors of other video formats, including
laserdisc and DVD, as well as other forms of in-home entertainment such as
syndicated and pay/cable television and home satellite systems. Most of the
companies with which the Company competes are better established, have broader
public and industry recognition, have financial resources substantially greater
than those of the Company and have manufacturing and distribution facilities
better than those which now or in the foreseeable future will become available
to the Company.
Jewel Products International, Inc.
In May 1997, the Company consummated an agreement and plan of merger
between BDC Acquisition, Inc. ("BDC Acquisition"), a subsidiary of the Company,
and Beyond Design Corporation (subsequently renamed Jewel Products
International, Inc. and referred to herein as "JPI"). JPI became the wholly
owned subsidiary of the Company via reverse merger when BDC Acquisition acquired
all of the issued and outstanding stock of JPI in consideration of the issuance
of an aggregate of 2,427,273 shares of the Company's common stock and the
assumption of certain obligations of JPI. The JPI acquisition was an arms-length
transaction. JPI is in the business of (i) manufacturing one toy product, (ii)
purchasing various other children's toy products from U.S.-based importers or
directly from Asia and (iii) distributing the toys to mass merchandisers in the
United States. In the fiscal year ended March 31, 1998, revenue realized from
JPI's business amounted to approximately $2,478,000.
Product Lines - Toy Products
At the time of its acquisition, JPI's sole line of business was the
manufacture and sale of its patented Woblong-Registered Trademark- Double
Wing Flier, a bi-wing aerodynamic flying toy. The Woblong is a game of catch
intended to compete directly with Frisbee-Registered Trademark-,
Aerobie-Registered Trademark- and Whoosh-TM-. Since its acquisition in July
1997, JPI has introduced approximately 30 new toy items and one non-toy item
to its product line. Popular products include various plastic toy sets (for
example, Fire Rescue set, Airport set and City Movers set) and handheld
electronic games. JPI's products sell at retail prices ranging from
approximately $2.00 to $12.00 per item.
Suppliers - Toy Products
For the year ended March 31, 1998, 100% of JPI's supplier purchases
were from Progen Technology, Inc. Since March 31, 1998, the Company has
diversified its supplier base, and makes purchases from six U.S. suppliers and
three suppliers in China.
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Markets and Customers - Toy Products
JPI markets its products using outside sales personnel and manufacturer
representatives and provides them with color sales brochures and other sales
tools, but avoids the costs of excessive sales samples. The Company's marketing
plan uses independent manufacturer's representatives to reach a minimum of
approximately 125 retail outlets per week. At the Company's direction, the
manufacturers representatives have mainly, but not exclusively, focussed on
sales to Wal-Mart stores during the current calendar year; and the Company has
begun to pursue other major chain retailers and drug store chains, such as
Target, K-Mart, Toys R Us and Rite Aid.
Seasonality - Toy Products
JPI's revenues are very seasonal, depending in large part on the
end-of-year holiday season which begins in September when retailers begin to
stock for Christmas.
American Top Real Estate
American Top Real Estate, Inc. ("ATRE") was formed in March 1989 for
the purposes of acquiring, owning and holding real property for commercial
development. ATRE does not engage in any other business operations. The Company
paid $50,000 for a 50% interest in ATRE. The Company's arrangement with its
partners in ATRE requires that all parties contribute capital or loans pro rata
according to their interests whenever required by ATRE for land acquisition,
principal or interest payments, property taxes or other expenses.
Upon sale or development of land, proceeds are used to repay all
related loans and other obligations, with the remaining balance distributed
among the shareholders of ATRE pro rata based on their interests. None of the
other investors in ATRE are otherwise associated or affiliated with the Company,
nor are any of ATRE's co-investors in its real estate holdings associated or
affiliated with the Company. ATRE has interests in two real estate parcels.
Parcel 1 consists of approximately 20 undeveloped acres purchased in
two transactions, in 1989 and 1997. ATRE has a 70% interest in Parcel 1, located
in Clark County, Washington. The total cost of Parcel 1, including financing
expenses and taxes, was approximately $2,300,000 through 1997.
Parcel 2 consists of 5.5 acres of undeveloped property, also in Clark
County, Washington. ATRE's interest in Parcel 2 is 25%. Parcel 2 was purchased
in 1989 for $717,000. Approximately 2.5 acres of Parcel 2 were sold in 1996. The
Company received net proceeds of $121,600 from ATRE during fiscal 1997 relating
to Parcel 2 sales. Approximately 3 acres remain unsold as of the date of this
report.
During the year ended March 31, 1998, ATRE sold approximately 11 acres.
The Company advanced an additional $80,320 to ATRE and received $220,600 from
the proceeds of the parcel of 10 acres as repayment of the advances to ATRE in
fiscal 1998. The Company has subsequently received approximately $400,000 from
ATRE during the period April 1, 1998 through August of 1998 and anticipates
another $100,000 by March 31, 1999.
At November 30, 1998, ATRE has no binding sales contracts for the
remaining parcels of real estate owned by ATRE as these parcels of land continue
to be developed for commercial use. Contracts that were pending have not closed
due to possible changes in interest rates or possible overall market
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conditions. In addition, the Company was advised by ATRE that proceeds realized
by ATRE during fiscal 1998 were reinvested into other parcels to improve the
ability to sell the remaining parcels. In December of 1998, the Company received
from a real estate development specialist an aggregate approximate value of
$5,200,000 for the remaining ATRE parcels. Although the Company believes that
final sales contracts will be able to be consummated, at this time it is not
possible to predict with any certainty when the closing of such sales contracts
of commercial real estate may occur or whether the proceeds expected by the
Company for their share in this real estate could be significantly less than
anticipated. Therefore, the ultimate realizable value of the receivable for
advances from ATRE could be substantially less than the preadjusted carrying
value of $1,600,000. The Company setup a valuation allowance in March 1998 of
$1,117,788 and accordingly, charged operations for that amount so that the
amount due from ATRE at March 31, 1998 is presented at the amount of the 1998
subsequent receipts of approximately $500,000. Based upon the above
circumstances the likelihood is that $1,117,788 from future proceeds from the
sale of the ATRE parcels will not be realized by the Company with any certainty.
Employees of the Company
As of March 31, 1998, the Company and its subsidiaries employed 30
full-time and two part-time employees, of which three are executives, 16 are
engaged in manufacturing and warehousing activities, and 13 are engaged in
administration, sales and related activities. During the peak season the Company
engages additional part-time or temporary employees to help with the surge for
Christmas season orders. The Company reduces its manufacturing force after the
peak season to improve the profitability of the operations when sales orders
decline. Neither the Company's nor the subsidiaries' employees are unionized.
Management believes that it has good working relations with its employees.
Item 2. Description of Property.
The Company leases 48,500 square feet at 16200 Carmenita Road in
Cerritos, California under a lease commencing October 1, 1998 and expiring in
June 2002, for use as executive offices and manufacturing and warehouse
facilities. It pays $21,500 per month. Also, the Company leases 1,200 square
feet in Freehold, New Jersey for its sales office for $1,950 per month. This
lease expires October 31, 2001. In addition, the Company leases approximately
22,080 square feet in Cerritos, California ("Cerritos Property") for $9,274 per
month which space was formerly used by the Company for executive offices and
warehousing. The Company has sublet the Cerritos Property beginning January 1,
1999 for a term that expires on March 31, 2001. The sublease requires the
subtenant to pay the Company $9,494 per month through February 2000, and $9,936
per month through the remaining term of the Sublease. All of the Company's lease
and sublease agreements are with unaffiliated parties. The Company believes that
it has sufficient space for operations for the next twelve months.
Item 3. Legal Proceedings.
In 1998, the Company was contacted by attorneys for a foreign
manufacturer claiming that a game distributed by JPI infringed on the
manufacturer's trademark and copyright. After internal investigation, the
Company and JPI voluntarily ceased all sales of its allegedly infringing
product, and has stored its inventory of the game pending a resolution of the
conflict. The Company places a book value of approximately $450,000 on the
stored inventory. JPI has subsequently agreed with the manufacturer in question
that JPI may sell the game to distributors in Eastern Europe or South America.
The Company is searching for a buyer in either or both of those markets, but to
date has not
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located any such buyer. There has been no litigation threatened or begun, and
management believes that resolution of this matter will be amicable.
The Company is involved in litigation relating to claims arising out of
its operations in the normal course of business. The Company believes that it
has adequate legal defenses and intends to vigorously defend itself in these
actions. The Company believes after consulting with counsel that an adverse
decision in any one lawsuit would not have a material adverse impact on the
Company, however, the aggregate affect of an adverse decision in a majority of
the lawsuits outstanding could have a material adverse impact on the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the OTC Bulletin Board under
the symbol "DMEC." The Company's shares of Preferred Stock are not listed on any
exchange or quoted on the OTC Bulletin Board. The range of high and low bid
information for the Company's Common Stock for each full quarterly period during
the Company's last two fiscal years, is as follows:
<TABLE>
<CAPTION>
Period High Bid Low Bid
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<S> <C> <C>
Fiscal 1997
1st quarter 0.55 0.22
2nd quarter 1.00 0.25
3rd quarter 0.34 0.15
4th quarter 0.24 0.17
Fiscal 1998
1st quarter 0.22 0.13
2nd quarter 0.25 0.09
3rd quarter 0.19 0.04
4th quarter 0.19 0.03
Fiscal 1999
1st quarter 0.135 0.041
2nd quarter 0.16 0.055
</TABLE>
These quotations were obtained from OTC Electronic Bulletin Board
quarterly quote summaries, and reflect interdealer prices, without retail
markup, markdown, or commission and may not represent actual transactions. On
December 7, 1998, the closing bid price for the Company's Common Stock was
$0.04. As of the same date, there were 1,600 holders of record of Common Stock.
The Company has not paid any cash dividends and does not anticipate
paying any cash dividends in the foreseeable future. The Company intends to use
any earnings which it may generate to finance the growth of its business.
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The transfer agent for the Company's Common Stock is Continental Stock
Transfer & Trust Company, New York, New York.
Sales of Unregistered Stock
In June 1995 Mr. Lu converted approximately $1,131,000 in
obligations of the Company, which he had assumed personally, into 8,212,785
shares of Common Stock. In August 1995 Jeffrey I. Schillen and Murray T. Scott,
each a director of the Company, agreed to assume $413,400 and $110,240,
respectively, of the obligations assumed by Mr. Lu. In consideration for the
assumption of such obligations, Mr. Lu agreed to assign 3,000,000 and 800,000 of
shares of Common Stock, respectively, to Messrs. Schillen and Scott.
On April 23, 1996 the Board of Directors agreed to reserve 1,000,000
shares of common stock for distribution to Messrs. Lu (as to 600,000 shares) and
Schillen (as to 400,000 shares). Such shares can be purchased for $.25 per
share, in installment payments with a five year promissory note with interest at
6% per annum. As of March 31, 1998 such officers had not purchased any of such
shares.
In April 1996 pursuant to a financing arrangement, three-year warrants
to purchase 1,000,000 shares of Common Stock for $.10 per share were issued to a
lender; such warrants were exercised in June 1996 and thereupon 1,000,000 shares
of Common Stock were issued.
On June 21, 1996 the Company entered into consulting agreements with
three individuals and issued three-year warrants to purchase an aggregate of
1,000,000 shares of Common Stock as full consideration therefor. Such warrants
may be exercised for $0.25 per share for a period of three years from the date
of issuance.
During the quarter ended June 30, 1996 the Company issued 10%
convertible debentures ("10% Debentures") in the original principal amount of
$1,257,988. The principal was convertible into shares of the Company's Common
Stock. Through March 31, 1998, 10% Debentures in the aggregate amount of
$519,848 (including $39,848 in accrued interest and $37,650 in extension
bonuses) had been converted into 7,487,668 shares of the Company's Common Stock.
Subsequent to March 31, 1998, an additional $91,750 in 10% Debentures had been
converted into 2,823,077 additional shares of Common Stock. See "Certain
Relationships and Related Transactions."
In connection with the placement of the 10% Debentures, the Company
issued warrants, exercisable for $0.25 per share, for the purchase of 500,000
shares to each of Peter Benz and George Furla in consideration of their
providing financial consulting services to the Company. On April 9, 1997,
warrants to purchase 46,000 shares of Common Stock were exercised by Peter Benz
in consideration of the payment of $11,500.
Effective May 14, 1997 the Company consummated the merger between a
subsidiary of the Company and Beyond Design Corporation (which has since changed
its name and is referred to herein as "JPI"), pursuant to which the Company
acquired all of the outstanding shares of JPI in exchange for the issuance of
2,427,273 shares of Common Stock and the assumption of certain obligations of
JPI; JPI then became a wholly-owned subsidiary of the Company.
On August 25, 1997, as compensation pursuant to four consulting
agreements, the Company issued 250,000 shares of Common Stock, and warrants to
purchase an aggregate of 2,050,000 shares of Common Stock, exercisable at $0.10
per share. The warrants expire on August 24, 1999. Murray T.
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Scott, a director of the Company, received the 250,000 shares of Common Stock
and 250,000 of such warrants. In July 1998 two individuals who received warrants
under the consulting agreements each exercised warrants to purchase 100,000
shares of Common Stock. All of the issued shares and all of the shares
underlying the warrants were subsequently registered pursuant to the Company's
Registration Statement on Form S-8 filed in September 1997.
The Company executed nine employment agreements effective September 1,
1997, pursuant to which an aggregate of 550,000 shares of Common Stock were
issued, with a deemed value of $11,000, as payment for services. Such shares
were subsequently registered pursuant to the Company's Registration Statement on
Form S-8 filed in September 1997.
On September 1, 1997 each of Messrs. Lu and Schillen were issued shares
of Common Stock and granted warrants as consideration for agreeing to defer
payment of their salaries. Mr. Lu was issued 3,000,000 shares of Common Stock
and granted warrants to purchase an additional 3,000,000 shares of Common Stock
at $0.10 per share through September 1, 2002. Mr. Schillen was issued 750,000
shares of Common Stock and granted warrants to purchase an additional 750,000
shares of Common Stock at $0.10 per share through September 1, 2002. All of such
shares and such warrants were subsequently registered pursuant to the Company's
Registration Statement on Form S-8 filed in September 1997.
On September 24, 1997 the Company renegotiated and extended the 10%
Debentures. As an inducement to have the holders of the 10% Debentures agree to
extend the maturity dates of the 10% Debentures, the principal amount of the
outstanding 10% Debentures ($967,988) on such date was increased by 15%, and the
conversion terms of the 10% Debentures were revised. See "Certain Relationships
and Related Transactions."
On March 11, 1998, the Company issued 347,368 shares of
Common Stock to a salesman in lieu of commissions owed of $66,000.
On July 9, 1998, options to be issued to each of Messrs. Lu and Peter
Benz were approved by the Board of Directors for the purchase of shares of
Common Stock for $0.10 per share, as follows: 4,000,000 options to be issued to
Mr. Lu contingent on certain events; 2,000,000 options to be issued to Mr. Benz
contingent on certain other events; and 2,000,000 options to be issued to each
of Messrs. Lu and Benz upon the first closing of a joint private offering of
securities of the Company and another issuer, which offering was subsequently
terminated without closing. To date, none of the other contingent events have
occurred. Such options, if issued, will expire July 9, 2003.
On July 9, 1998 Mr. Lu was granted additional options (which were
issued in August 1998) to purchase 2,000,000 shares of Common Stock for $0.10
per share in consideration of his (i) personal guaranty of the Company's bank
line of credit and (ii) loans made to the Company. Such options expire July 9,
2003.
On July 9, 1998, the Company granted options to purchase 1,000,000
shares of Common Stock to the chief executive officer of a potential customer
and in consideration of certain fulfillment orders submitted to the Company.
These options may be exercised for $0.10 per share.
On October 24, 1998, the Company issued 1,499,523 shares of Common
Stock to Mr. Lu pursuant to a settlement agreement between the Company, Mr. Lu
and four consultants. See "Certain Relationships and Related Transactions."
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<PAGE>
The Company believes that the transactions set forth above were exempt
from registration with the Commission pursuant to either Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering,
Section 3(a)(9) of the Securities Act as a transaction involving an exchange by
an issuer with existing security holders, or Regulation S under the Securities
Act as a transaction that occurred outside the United States. No broker-dealer
or underwriter was involved in the foregoing transactions. All certificates
representing such securities have been or will be appropriately legended.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Year Ended March 31, 1998 Compared with the Year Ended March 31, 1997
Results of Operations
The Company's net loss for the year ended March 31, 1998 was
approximately $1,500,000, and arose primarily as a result of a valuation
adjustment of $1,100,000 for ATRE. The Company's net loss for the year ended
March 31, 1997 was approximately $1,300,000, primarily from a loss from
operations of approximately $1,200,000.
The Company's operating loss for the year ended March 31, 1998 was
$192,940 as compared to an operating loss of $1,186,472 for the same period last
year. This decrease in operating loss of approximately $993,000 was primarily
attributable to an increase in gross profit from the prior year of approximately
$344,000 and a reduction in operating expenses of approximately $650,000.
The Company's sales for the years ended March 31, 1998 and 1997 were
$8,724,149 and $6,444,586 respectively. The Company's sales increased as a
result of its acquisition of Beyond Design Corporation which accounted for
$2,477,792 in sales. On September 11, 1998, Beyond Design Corporation changed
its corporate name to Jewel Products International, Inc.
Cost of sales for the years ended March 31, 1998 and 1997 were
$5,696,810 and $3,761,175 or 65% and 58% of sales, respectively.
Gross profit for the years ended March 31, 1998 and 1997 were
$3,027,339 and $2,683,411, or 35% and 42% of sales, respectively. The decrease
in gross profit as a percentage of sales from the same period a year ago, was
primarily the result of an increase in product mix in total sales which produced
a lower gross profit percentage. Depreciation and amortization, included in the
cost of sales, for the years ended March 31, 1998 and 1997 were $322,440 and
$334,292, respectively.
Operating expenses for the years ended March 31, 1998 and 1997 were
$3,220,279 and $3,869,883, respectively. The decrease in operating expenses of
approximately $650,000 from the period a year earlier was due to the reduction
of selling expenses, G&A expenses and factoring fees of $149,000, $395,000 and
$139,000, respectively, and offset by an increase in bad debt expense of
approximately $33,000. Selling expenses in the fourth quarter of fiscal 1998
increased over $300,000 as compared to the previous nine months due to an
increase in royalty expenses, sales commissions, and related travel costs.
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<PAGE>
Interest expense for the years ended March 31, 1998 and 1997 were
$420,583 and $267,798, respectively. As of March 31, 1998, the outstanding debt
of the Company was approximately $2,500,000, primarily all of which is
classified as current.
The Company's auditors issued a going concern report. There can be no
assurance that management's plans to reduce working capital deficiency or obtain
additional financing will be successful.
Liquidity and Capital Resources
The Company's working capital (deficit) at March 31, 1998 was
$(2,537,031) as compared with a working capital (deficit) of $(2,722,958) at
March 31, 1997. This decrease in the working capital (deficit) of approximately
$186,000 is primarily the result of increased inventory levels partially offset
by higher accounts payable and lower accounts receivable.
Operations
For the year ended March 31, 1998, cash generated from operations was
$641,937 as compared to $1,074,027 of cash utilized for operations for the year
ended March 31, 1997. The Company intends to utilize future debt or equity
financing or debt to equity conversions to help satisfy past due obligations and
to pay down its debt obligations.
The Company has also been experiencing difficulties in paying its
vendors on a timely basis. These factors create uncertainty whether the Company
can continue as a going concern. The Company's plans to mitigate the effects of
the uncertainties are (i) to collect the sales proceeds from parcels of property
owned by ATRE (50% owned by the Company) located in Vancouver, Washington, (ii)
to continue to acquire new licensed titles to improve sales and profit margin,
(iii) to create new products with better gross profits, (iv) to continue to
negotiate with several reliable investors to provide the Company with debt and
equity financing for working capital purposes, (v) to convert debt to equity and
(vi) to continue to negotiate with major vendors for discounts.
In 1991, two employment agreements were executed for two officers for
annual compensation totaling $240,000. These agreements terminate in the year
2001 and are adjusted annually in accordance with the Consumer Price Index. The
Board of Directors agreed on April 23, 1996 to reserve 1,000,000 shares of
common stock for distribution to two officers of the Company. The common stock
can be purchased in installment payments with a five year promissory note with
interest at 6% per annum. As of March 31, 1998, the officers had not purchased
these shares.
On May 8, 1995, the Company closed a sales agreement with a Mexican
company, Central Video, for $750,000 by allowing credit to the Company for
future duplication services. The general manager of Central Video is the former
President of the Company. The Company received $750,000 of duplication services
and surrendered equipment having a book value of approximately $630,000. The
Company guaranteed Central Video's general manager a minimum of $2,500,000 a
year of production orders for three years and agreed to pay Central Video's
general manager a 3% commission on orders the Company places with Central Video.
The Company satisfied this obligation in fiscal 1996, however, in 1997, the
Company did not fulfill this obligation and was delinquent in payments to
Central Video. The Company settled this contract with Central Video in September
of 1997. The Company agreed to pay Central Video $12,500 a week until the total
obligation of $740,000 is paid. This settlement dissolved the production
contract and all outstanding payable obligation. As of March
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<PAGE>
31, 1998, the balance owed to Central Video was $288,701 and on September 9,
1998, the Company satisfied this obligation in full.
In June of 1996, the Company engaged three consultants for a period of
two years. The Company will reimburse the consultants' business expenses not to
exceed $750 per month. The financial consultants received a total of 1,000,000
warrants with an exercise price of $0.25 per share in exchange for services to
be rendered. The Company recorded deferred consulting costs of $50,000 for the
fair value of the warrants to purchase the 1,000,000 shares of common stock and
expensed $14,858 and $35,142 for the years ended March 31, 1998 and 1997,
respectively. The fair value of the warrants was determined based upon the fair
value of services to be rendered by the consultant.
In August of 1997, the Company engaged a consulting firm to provide
financial advice for a period of six months. The fee for services includes a
$7,500 cash payment, a two percent cash fee on refinancing commitments and a
five percent, non-dilutive equity interest in the Company. The consulting firm
will also be entitled to a five percent fee based on the transaction value of
any concluded merger or acquisition introduced by the consulting firm.
In August of 1997, the Company engaged four consultants for a period of
two years to provide assistance in restructuring and designing the Company's
operations and long-term strategic plan. The consultants received warrants to
purchase an aggregate 2,050,000 shares of the Company's common stock at an
exercise price of $.10 per share. In addition, the Company issued 250,000 shares
of stock to one of the consultants in consideration of entering into a two year
consulting agreement and recorded $5,000 as a signing bonus. The warrants expire
at the end of the two year consulting period. The Company recorded deferred
consulting costs of $100,000 for the fair value of the warrants and expensed
approximately $31,000 for the year ended March 31, 1998.
In May of 1997, the Company entered into an agreement and plan of
merger between BDC Acquisition, Inc., a newly formed wholly-owned subsidiary of
the Company, and Beyond Design Corporation ("BDC"). The Company's subsidiary has
acquired all of the issued and outstanding stock of BDC for the issuance of an
aggregate of 2,427,273 shares of the Company's common stock and the assumption
of certain outstanding obligations of BDC. The book value of the net assets
acquired approximates the fair value of the shares issued in connection with the
acquisition. This acquisition was deemed immaterial for accounting purposes. On
September 11, 1998, BDC changed its corporate name to Jewel Products
International, Inc., as it was not primarily engaged in the design business.
In September 1997, the two officers agreed to defer 90% of their
salaries until further notice, but not beyond March 31, 1998. As consideration,
the Company granted a total of 3,750,000 shares of common stock and warrants to
purchase 3,750,000 shares of the Company's common stock at an exercise price of
$.10 per share. The Common Stock granted vested during fiscal 1997 and the
warrants are exercisable over a two year period beginning March 31, 1997. The
Company recorded $75,000 in deferred costs for the fair value of the shares
granted and amortized $50,000 in the year ended March 31, 1998. No deferred
costs were recorded for the warrants granted as the fair market value of the
underlying Common Stock was approximately equal to the exercise price.
In September 1997, the Company entered into employment agreements with
nine employees holding key positions. The agreements provide for an aggregate of
550,000 shares of common stock with a fair value of $11,000 for past services
and semi-monthly compensation of approximately $14,000. The agreements will
continue for an indefinite period of time.
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<PAGE>
Investing
Capital expenditures for the years ended March 31, 1998 and 1997 were
$184,645 and $47,638, respectively. For the years ended March 31, 1998 and 1997,
investments in masters and artwork were $137,059 and $531,277, respectively.
Management continues to seek to acquire new titles to enhance its product lines.
American Top Real Estate, Inc. ("ATRE") was formed in March 1989 for
the purposes of acquiring, owning and holding real property for commercial
development. ATRE does not engage in any other business operations. The Company
paid $50,000 for a 50% interest in ATRE. The Company's arrangement with its
partners in ATRE requires that all parties contribute capital or loans pro rata
according to their interests whenever required by ATRE for land acquisition,
principal or interest payments, property taxes or other expenses.
Upon sale or development of land, proceeds are used to repay all
related loans and other obligations, with the remaining balance distributed
among the shareholders of ATRE pro rata based on their interests. None of the
other investors in ATRE are otherwise associated or affiliated with the Company,
nor are any of ATRE's co-investors in its real estate holdings associated or
affiliated with the Company. ATRE has interests in two real estate parcels.
Parcel 1 consists of approximately 20 undeveloped acres purchased in
two transactions, in 1989 and 1997. ATRE has a 70% interest in Parcel 1, located
in Clark County, Washington. The total cost of Parcel 1, including financing
expenses and taxes, was approximately $2,300,000 through 1997.
Parcel 2 consists of 5.5 acres of undeveloped property, also in Clark
County, Washington. ATRE's interest in Parcel 2 is 25%. Parcel 2 was purchased
in 1989 for $717,000. Approximately 2.5 acres of Parcel 2 were sold in 1996. The
Company received net proceeds of $121,600 from ATRE during fiscal 1997 relating
to Parcel 2 sales. Approximately 3 acres remain unsold as of the date of this
report.
During the year ended March 31, 1998, ATRE sold approximately 11 acres.
The Company advanced an additional $80,320 to ATRE and received $220,600 from
the proceeds of the parcel of 10 acres as repayment of the advances to ATRE in
fiscal 1998. The Company has subsequently received approximately $400,000 from
ATRE during the period April 1, 1998 through August of 1998 and anticipates
another $100,000 by March 31, 1999.
At November 30, 1998, ATRE has no binding sales contracts for the
remaining parcels of real estate owned by ATRE as these parcels of land continue
to be developed for commercial use. Contracts that were pending have not closed
due to possible changes in interest rates or possible overall market conditions.
In addition, the Company was advised by ATRE that proceeds realized by ATRE
during fiscal 1998 were reinvested into other parcels to improve the ability to
sell the remaining parcels. In December of 1998, the Company received from a
real estate development specialist an aggregate approximate value of $5,200,000
for the remaining ATRE parcels. Although the Company believes that final sales
contracts will be able to be consummated, at this time it is not possible to
predict with any certainty when the closing of such sales contracts of
commercial real estate may occur or whether the proceeds expected by the Company
for their share in this real estate could be significantly less than
anticipated. Therefore, the ultimate realizable value of the receivable for
advances from ATRE could be substantially less than the preadjusted carrying
value of $1,600,000. The Company setup a valuation allowance in the quarter
ended March 31, 1998, of $1,117,788 and accordingly, charged operations for
14
<PAGE>
that amount so that the amount due from ATRE at March 31, 1998 is presented at
the amount of the 1998 subsequent receipts of approximately $500,000. Based upon
the above circumstances the likelihood is that $1,117,788 from future proceeds
from the sale of the ATRE parcels will not be realized by the Company with any
certainty.
Financing
On August 30, 1996, the Company established a line of credit up to
$2,500,000, whereby, $2,000,000 was backed by pledged receivables and inventory
and $500,000 was guaranteed by the Company's President. Interest was at a prime
rate plus 3%. Interest expense from April 1, 1997 through December 31, 1997 was
approximately $148,500. In December 1997, the Company repaid $469,221 on this
line of credit and engaged another financial institution for a $2,500,000 line
of credit. This line of credit is also backed by pledged receivables and
inventory. Cost is 1.5% discounted from pledged invoices for every 30 days for
the accounts receivable portion of the line of credit. Interest expense from
December 1997 through March 31, 1998 was approximately $27,500.
In March 1993 a loan was renegotiated for the sum of $292,058 with
principal payments of $5,000 per month with an interest rate of 10% per annum
due November 14, 1999. This note was paid in full on July 15, 1998 for
approximately $60,000. As a result, the Company recorded forgiveness of debt of
approximately $66,000 in July 1998. During the year ended March 31, 1998,
interest expense of approximately $12,500 was recorded.
On May 8, 1995, the Company closed a sales agreement with a Mexican
Company, for $750,000 by allowing credit to the Company for duplication services
and received $750,000 of duplication services in exchange for equipment having a
book value of approximately $630,000. The Company classifies the outstanding
obligation of $288,701 at March 31, 1998 as notes payable. This note was repaid
in weekly installments of $12,500 with the final payment made in September of
1998. Interest expense of approximately $40,000 was recorded for the year ended
March 31, 1998.
During the quarter ended June 30, 1996, the Company issued convertible
debentures of $1,257,988 with 10% interest per annum and a 7% commission. The
principal amount is convertible in whole or in part into shares of the common
stock of the Company at a conversion price equal to 65% of the average closing
bid price for the common stock for five trading days immediately prior to the
conversion. In no event shall the conversion price be less than $.20 per share
or more than $.75 per share. In conjunction with the debentures, the Company
granted 1,000,000 warrants exercisable at $.25 per share to two consultants.
Warrants for 46,000 shares were exercised for $11,500 during the year ended
March 31, 1997. The Company recorded a financing expense of $25,000 for the fair
value of the warrants granted. The fair value of the warrants was determined
based upon the fair value of services received by the Company in May and June of
1996.
As of March 31, 1997, convertible debentures of $290,000 were converted
into 1,450,000 shares of the Company's common stock by several off shore
companies under Regulation S and $967,988 of convertible promissory notes
payable were outstanding and in default by the Company. Interest expense of
$97,000 and $24,702 was recorded for the years ended March 31, 1998 and 1997.
Subsequent to September 30, 1997, the Company negotiated a one year extension
agreement and agreed to add 15% to the note as a deferred financing cost of
$110,724.
During fiscal March of 1998, convertible debentures of $229,848 were
converted into 6,037,668 shares of the Company's common stock. This brought the
total conversion of $519,848 of
15
<PAGE>
debentures into 7,487,668 shares as of March 31, 1998. For the five months ended
March 31, 1998, the Company amortized $46,134 as a non-cash financing cost,
which is classified as interest expense. The convertible notes are secured by
the Company's entitlement to any net cash proceeds derived from its interest in
ATRE property.
In June of 1998, a convertible debenture holder converted a note
payable with a balance of $91,750 into 2,823,077 shares of the Company's common
stock.
In August 1997, the Company issued 2,050,000 common stock warrants at
an exercise price of $.10 per share as part of a consulting agreement entered
into, whose term ends August 1999. Deferred consulting costs of $100,000
resulting from this transaction were recorded at the fair market value of the
services rendered and approximately $31,000 was expensed for the year ended
March 31, 1998.
In October 1997, the Company borrowed $360,000 from an unaffiliated
entity with interest at 10% per year. At March 31, 1998, $185,208 is outstanding
on this obligation. This note was repaid in September of 1998 by weekly payments
of $7,500. Interest expense for the year ended March 31, 1998 was $12,708.
The Company owed approximately $2,500,000 in short-tem debt financing
at March 31, 1998.
Year Ended March 31, 1997 Compared with the Year Ended March 31, 1996
Results of Operations
The Company's operating loss for the year ended March 31, 1997 was
$1,186,472 as compared to an operating loss of $571,303 for the same period last
year. This increase in operating loss was primarily attributable to a 29%
reduction in sales that could not support the operating expenses of the Company.
The Company's sales for the years ended March 31, 1997 and 1996 were
$6,444,586 and $9,117,113, respectively. The decrease in sales of approximately
$2,700,000 is primarily attributable to the Company's lack of working capital to
provide the Company the ability to deliver orders. Management believes its
customer base, has decreased over the prior year, however, it also believes it
could recover to previous levels based upon management's intent to expand its
product offerings into higher growth and higher margin products with licensed
title CD-ROM and DVD distribution, or through the acquisition of an existing
distribution company.
Cost of sales for the years ended March 31, 1997 and 1996 were
$3,761,175 and $5,678,340 or 58% and 61% of sales, respectively.
Gross profit for the years ended March 31, 1997 and 1996 were
$2,683,411 and $3,438,773, or 42% and 39% of sales, respectively. Depreciation
and amortization, included in the cost of sales, for the years ended March 31,
1997 and 1996 were $64,872 and $67,216, respectively.
Operating expenses for the years ended March 31, 1997 and 1996 were
$3,869,883 and $4,010,076, respectively. The Company has instituted a plan to
reduce operating expenses by streamlining its operations and reducing personnel
from 32 to 22 employees.
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Interest expense for the years ended March 31, 1997 and 1996 was
$267,798 and $221,140, respectively. As of March 31, 1997, the outstanding debt
of the Company was approximately $7,000,000 primarily all of which is classified
as current.
The Company's auditors have issued a going concern report. There can be
no assurance that management's plans to reduce operating losses or obtain
additional financing will be successful.
Operations
For the year ended March 31, 1997, cash used for operations was
$1,074,027 as compared to $1,433,641 of cash generated from operations for the
year ended March 31, 1996. The Company intends to use future debt or equity
financing or debt to equity conversions to help satisfy past due obligations and
to pay down its debt obligations.
New Authoritative Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Earlier application is permitted. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
SFAS No. 130 is not expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 changes how operating
segments are reported in annual financial statements and requires the
reporting of selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 131 is effective for
periods beginning after December 15, 1997, and comparative information for
earlier years is to be restated. SFAS No. 131 need not be applied to interim
financial statements in the initial year of its application. SFAS No. 131 is
not expected to have a material impact on the Company.
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it is designated; for
example, gains or losses related to changes in the fair value of a derivative
not designated as a hedging instrument is recognized in earnings in the period
of the change, while certain types of hedges may be initially reported as a
component of other comprehensive income (outside earnings) until the
consummation of the underlying transaction. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Initial
application of SFAS No. 133 should be as of the beginning of a fiscal quarter;
on that date, hedging relationships must be designated anew and documented
pursuant to the provisions of SFAS No. 133. Earlier application of all of the
provisions of SFAS No. 133 is encouraged, but it is permitted only as of the
beginning of any fiscal quarter. SFAS No. 133 is not to be applied retroactively
to financial statements of prior periods. The Company does not currently have
any derivative instruments and is not currently engaged in any hedging
activities.
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Year 2000 Issue
The Company has attempted to evaluate the impact of the year 2000 issue
on its business and does not expect the amounts to be expensed over the next 12
months to be material. No such costs have been expensed to date, since the
Company utilizes an off the shelf software package.
Currently, the Company anticipates commencing communication with its
significant vendors and customers to determine the extent that year 2000
compliance issues of such parties may affect the Company. At this time, the
Company believes that there will be no disruption in business due to its
customers' or vendors' year 2000 readiness. The Company has not established a
contingency plan. There can be no guarantee that the systems of such other
companies will be timely converted without a material adverse effect on the
Company's business, financial condition or results of operations.
Impact of Inflation
The Company does not believe that inflation had an impact on sales or income
during the past several years. Increase in supplies or other operating costs
could adversely affect the Company's operations; however, the Company believes
it could increase prices to offset increases in costs of goods sold or other
operating costs.
Item 7. Financial Statements.
See Index to Consolidated Financial Statements on page F-1.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The Company's directors and officers are as follows:
<TABLE>
<CAPTION>
Name Age Title
- --------------------------------------------- --- -------------------------------------------------
<S> <C> <C>
James K.T. Lu................................ 51 Chairman of the Board, President, Chief Executive
Officer, Secretary and Director
Jeffrey I. Schillen.......................... 52 Executive Vice President, Sales and Marketing and
Director
Murray T. Scott.............................. 76 Director
</TABLE>
Background of Executive Officers and Directors
Set forth below is a description of the backgrounds of the executive
officers and directors of the Company.
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James K.T. Lu (Class 2 Director). Mr. Lu has been a director of the
Company since February 1989. Mr. Lu was elected as Chairman of the Board, Chief
Executive Officer and Secretary of the Company as of March 1, 1990. In July
1991, Mr. Lu was appointed to the additional position of President. In order to
involve other executives in the management of the Company, Mr. Lu resigned as
President and Chief Executive Officer in September 1991. Mr. Lu was President
and Chief Executive Officer of the California Subsidiary from 1985 to 1990. In
May 1995, Mr. Lu was reappointed as President of the Company. Mr. Lu received
his B.S.I.E. degree from Chung Yuen University Taiwan in 1969, his M.S.I.E.
degree from the Illinois Institute of Technology in 1972 and a Master of
Business Administration (MBA) from California State University in 1981.
Jeffrey I. Schillen (Class 1 Director). Mr. Schillen was appointed
Executive Vice President of Sales and Marketing of the Company in 1993 and has
been a Director of the Company since its inception in April 1986. From April
1986 to July 1991 Mr. Schillen was the President and Treasurer of the Company.
From May 1984 to April 1986, Mr. Schillen was President and Chief Operating
Officer of Music Corner Inc., a retail record, tape and video chain he
co-founded. From 1974 to April 1984, Mr. Schillen founded and served as Vice
President in charge of purchasing, store openings and acquisitions of Platter
Puss Records, Inc., a retail record, tape and video chain.
Murray T. Scott (Class 2 Director). Mr. Scott became a director in
November 1993. Mr. Scott was the President and Chief Executive Officer of
Gregg's Furniture, a custom furniture building business in Victoria, Canada,
from 1958 to 1995. Scott remains involved with Gregg's Furniture in a consulting
and advisory capacity.
All directors hold office for terms of three (3) years and until the
next annual meeting of stockholders scheduled to vote on such class of Directors
and the election and qualification of their respective successors. Directors
receive no compensation for serving on the Board, except for reimbursement of
reasonable expenses incurred in attending meetings. Officers are elected
annually by the Board of Directors and, subject to existing employment
agreements, serve at the discretion of the Board.
Under the certificate of incorporation of the Company ("Certificate of
Incorporation"), the Board of Directors of the Company is divided into three (3)
classes, with each class to be elected by the shareholders every three years.
The Company's Board presently consists of three (3) directors: one (1) Class 1
director whose term expires in 1998, two (2) Class 2 directors whose terms
expire in 1998, which directors were elected for such terms at the Company's
annual meeting of shareholders held August 23, 1996. No director of the Company
has resigned or declined to stand for re-election due to a disagreement on any
matter relating to the Company's operations, policies or practices.
Committees of the Board of Directors
The Company has no standing audit, nominating or compensation
committee, or any committee performing similar functions.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in
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<PAGE>
ownership of equity securities of the Company with the Securities and Exchange
Commission ("SEC"). Officers, directors, and greater than ten percent
shareholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms that they file.
Except as set forth below, based solely upon a review of Forms 3 and
Forms 4 furnished to the Company pursuant to Rule 16a-3 under the Exchange Act
during its most recent fiscal year and Forms 5 with respect to its most recent
fiscal year, the number of (i) late reports, (ii) transactions that were not
reported on a timely basis during the fiscal year ended March 31, 1998, and
(iii) any known failure to file a required report by officers, directors and
beneficial owners of more than 10% of the Company's common stock is as follows:
James K.T. Lu: one late report and two transactions not reported on a timely
basis; Murray T. Scott: one late report and two transactions not reported on a
timely basis; Jeffrey I. Schillen: one late report and two transactions not
reported on a timely basis. Such late reports have subsequently been filed to
report the transactions not timely reported.
Item 10. Executive Compensation.
The following table sets forth aggregate compensation paid for services
rendered to the Company during the last three fiscal years by the Company to its
Chief Executive Officer ("CEO") and its one most highly compensated executive
officer other than the CEO who served as such at the end of the last fiscal
year.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------------- --------------------------------------------
Awards Payouts
------------ -------------------------------
Securities LTIP Payouts All Other
Underlying ($) Compensation
Name and Principal Position Year Salary ($) Bonus ($) Options (#) ($)
- ------------------------------- ------------ ----------- -------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
James K.T. Lu (1) 1998 78,350 0 0 0 31,572
President, Chief Executive 1997 130,500 0 0 0 33,742
Officer and Secretary 1996 167,885 0 0 0 37,920
- ------------------------------- ------------ ----------- -------------- ------------ -------------- ----------------
Jeffrey I. Schillen (2) 1998 51,500 0 0 0 20,792
Executive Vice President of 1997 93,000 0 0 0 12,547
Sales and Marketing 1996 122,308 0 0 0 19,631
- ------------------------------- ------------ ----------- -------------- ------------ -------------- ----------------
</TABLE>
(1) Mr. Lu's annual salary is $150,000; during the fiscal year ended March
31, 1998 Mr. Lu elected to defer $71,650 in salary payments. Through
March 31, 1998 the total of accrued payments Mr. Lu has deferred, and
which are owed to him, equal $106,250. As of the date of this report, Mr.
Lu continues to defer a portion of his salary.
(2) Mr. Schillen's annual salary is $120,000; during the fiscal year ended
March 31, 1998 Mr. Schillen elected to defer $68,500 in salary payments.
Through March 31, 1998 the total of accrued payments Mr. Schillen has
deferred, and which are owed to him, equal $95,500. As of the date of
this report, Mr. Schillen continues to defer a substantial portion of his
salary.
Option/SAR Grants in Last Fiscal Year
The following table sets forth certain information with respect to the
options granted during the year ended March 31, 1998, for the persons named in
the Summary Compensation Table (the "Named Executive Officers"):
20
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Percent of Total
Underlying Options/SARs
Options/SARs Granted to Employees Exercise or Base Price Expiration Date
Name Granted (#) in Fiscal Year ($/Sh)
- ------------------------------- --------------------- -------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
James K.T. Lu 3,000,000 80% 0.10 3/31/99
- ------------------------------- --------------------- -------------------- ---------------------- ---------------------
Jeffrey I. Schillen 750,000 20% 0/10 3/31/99
- ------------------------------- --------------------- -------------------- ---------------------- ---------------------
</TABLE>
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table sets forth certain information with respect to
options exercised during 1998 by the Named Executive Officers and with respect
to unexercised options held by such persons at the end of 1998.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options/SARs Money Options/SARs
Shares at FY-End ($) At FY-End (#)
Acquired On Value -------------------------------- -----------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- --------------------- -------------- ------------- -------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James K.T. Lu 0 0 5,600,000 4,000,000 0 0
- --------------------- -------------- ------------- -------------- ----------------- ------------- ---------------
Jeffrey I. Schillen 0 0 1,150,000 0 0 0
- --------------------- -------------- ------------- -------------- ----------------- ------------- ---------------
</TABLE>
Employment Agreements
In 1991 the Company entered into employment agreement with each of
Messrs. Lu and Schillen for annual compensation of $150,000 and $90,000,
respectively; both provide for annual adjustments in accordance with the
consumer price index, however, no price index adjustments have ever been made.
Consequently, contracted salary levels remain at $150,000 for Mr. Lu and $90,000
for Mr. Schillen. Both employment agreements terminate December 31, 2001. See
"Summary Compensation Table" above, and the notes thereto.
On April 23, 1996 the Board of Directors agreed to reserve 1,000,000
shares of common stock for distribution to Messrs. Lu and Schillen. Such shares
can be purchased for $.25 per share, in installment payments with a five year
promissory note with interest at 6% per annum. As of March 31, 1998 such
officers had not purchased any of such shares.
In September 1997 as consideration for each of Messrs. Lu and Schillen
agreeing to defer up to 90% of their salaries through March 31, 1998, the
Company issued 3,000,000 shares of Common Stock and warrants to purchase
3,000,000 shares of Common Stock to Mr. Lu, and issued 750,000 shares of Common
Stock and warrants to purchase 750,000 shares of Common Stock to Mr. Schillen.
All of such warrants have an exercise price of $.10 per share. The warrants are
fully vested and are exercisable until March 31, 1999.
The Company maintains two life insurance policies on Mr. Lu, one for
the benefit of the Company in the amount of $1,000,000 and one for the benefit
of Mr. Lu's designated beneficiary in the amount of $500,000. The Company
maintains a life insurance policy on Mr. Schillen, for the benefit of Mr.
Schillen's designated beneficiary, in the amount of $500,000.
On September 1, 1997 the Company entered into employment agreements
with nine other employees holding key positions. The agreements provided for the
issuance of an aggregate of 550,000 shares of Common Stock with a fair value of
$11,000, as payment for services. The semi-monthly compensation under the eight
agreements still in effect is approximately $12,700 in the aggregate. The
agreements continue for an indefinite period of time.
21
<PAGE>
None of the employment agreements which the Company has with any of the
executives, indicated above provides for any specific compensation to such
individuals should their respective employment agreements be terminated prior to
expiration of their respective terms.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as of December 7, 1998, with
respect to the beneficial ownership of the outstanding shares of the Company's
Common Stock and Preferred Stock by (i) each person known by the Company to be
the beneficial owner of more than 5% of the Common Stock or Preferred Stock,
(ii) each director of the Company, (iii) each executive officer of the Company;
and (iv) all directors and executive officers as a group. Unless otherwise
indicated below, such individuals have the sole power to control the vote and
dispose of such shares of capital stock.
<TABLE>
<CAPTION>
Percentage of Common
Stock Assuming
Common Stock Percentage of Preferred Conversion of
Name Owned Common Stock Stock Owned (1) Preferred Stock (2)
----------------------------------- ------------------ ------------------ ----------------- ----------------------
<S> <C> <C> <C> <C>
James K.T. Lu (3) 13,012,785 33.4% 209,287 34.1%
Diamond Entertainment Corporation
16200 Carmenita Road
Cerritos CA 90703
Jeffrey I. Schillen (4) 4,920,750 14.3% 36,282 14.5%
Diamond Entertainment Corporation
4400 Route 9 South
Freehold, NJ 07728
Murray T. Scott (5) 1,300,000 3.9% 75,796 4.3%
Diamond Entertainment Corporation
16200 Carmenita Road
Cerritos, CA 90703
Pacesetter International 2,538,446 7.6% 0 7.6%
Corporation
301 E. Colorado Blvd., Suite 514
Pasadena, CA 91101
UC Financial, Ltd. 3,933,440 11.8% 0 11.8%
c/o Universal Finanz Holding A.G.
Drescheweg 2, Postfach 828
FL-9490 Vaduz, Liechtenstein
All directors and officers as a 19,233,535 47.7% 321,365 48.5%
group (3 persons) (6)
</TABLE>
(1) The Preferred Stock entitles the holder to 1.95 votes for each share owned
and each share may be converted into 1.95 shares of Common Stock.
(2) Assumes conversion of shares of Preferred Stock beneficially owned.
(3) Mr. Lu is President, Chief Executive Officer, Secretary and a director
of the Company. Includes 5,600,000 shares of Common Stock issuable upon
exercise of warrants or options. Does not include 3,800,000 shares of
Common Stock owned of record by Mr. Lu for the benefit of other
directors of the Company; Mr. Lu disclaims any ownership of such shares.
See footnotes below and "Certain Relationships and Related Transactions."
(4) Mr. Schillen is the Executive Vice President and a director of the Company.
Mr. Schillen may be deemed a "parent" or "promoter" of the Company as such
terms are defined in the Exchange Act.
22
<PAGE>
Includes 3,000,000 shares owned of record by Mr. Lu and 1,150,000 shares of
Common Stock issuable upon exercise of warrants or options. See "Certain
Relationships and Related Transactions."
(5) Mr. Scott is a director of the Company. Includes 800,000 shares owned of
record by Mr. Lu and 250,000 shares issuable upon exercise of warrants or
options. See "Certain Relationships and Related Transactions."
(6) Represents 12,233,535 shares of Common Stock outstanding and 7,000,000
shares of Common Stock issuable upon exercise of warrants or options.
Item 12. Certain Relationships and Related Transactions
At March 31, 1998, the Company was owed approximately $69,200 from the
President of the Company for advances and loans. Simple interest is accrued
monthly at an annual rate of 10% on the outstanding balance. For the years ended
March 31, 1998 and 1997, the Company recorded interest income of $6,607 and
$3,403, respectively. This loan amount is due in December 2001. For the year
ended March 31, 1998, the Company borrowed $607,687 and repaid $545,100 to the
President of the Company.
In May 1995, James Lu, the Company's Chairman, Chief Executive Officer
and President, personally assumed obligations of the Company to three services
providers in the aggregate amount of approximately $1,131,000. The obligations
are secured by all shares of the Company's Common Stock owned or to be owned by
Mr. Lu. In June 1995, Mr. Lu converted such obligations into 8,212,785 shares of
Common Stock. In September 1995 Jeffrey I. Schillen and Murray T. Scott, each a
director of the Company, agreed to assume $413,400 and $110,240, respectively,
of the obligations assumed by Mr. Lu. In consideration for the reassignment of
such obligations, Mr. Lu agreed to assign 3,000,000 and 800,000 of shares of
Common Stock, respectively, to Messrs. Schillen and Scott. To date, all of such
shares of Common Stock remain beneficially owned by the respective directors.
During the quarter ended June 30, 1996 the Company issued 10%
convertible debentures ("10% Debentures") in the original principal amount of
$1,257,988. The principal was convertible into shares of the Company's Common
Stock at a conversion price equal to 65% of the average closing bid price for
the Common Stock for five trading days immediately prior to the conversion.
Through March 31, 1998, 10% Debentures in the aggregate amount of $519,848
(including $39,848 in accrued interest and $37,650 in extension bonuses) had
been converted into 7,487,668 shares of the Company's Common Stock at conversion
prices ranging from $0.026 to $0.20 per share. One of the purchasers of 10%
Debentures was UC Financial, Ltd., which, upon purchasing 10% Debentures, became
the beneficial holder of more than 5% of the Company's Common Stock. Subsequent
to March 31, 1998, an additional $91,750 in 10% Debentures had been converted
into 2,823,077 additional shares of Common Stock.
On August 30, 1996, the Company established a line of credit up to
$2,500,000, whereby, $2,000,000 was backed by pledged receivables and inventory
and $500,000 was guaranteed by the Company's President. In December 1997, the
Company repaid its borrowings under this line of credit and terminated it.
On August 25, 1997 the Company executed a consulting agreement with
Murray T. Scott, a director of the Company, for long term strategic planning
including development of marketing strategies and development and acquisition of
new products. Mr. Scott's consulting agreement has a term of two years. As
compensation under the agreement, Mr. Scott was issued 250,000 shares of
23
<PAGE>
Common Stock, and warrants to purchase an additional 250,000 shares of Common
Stock at an exercise price of $0.10 per share. Such warrants expire on August
25, 1999.
On September 1, 1997 each of Messrs. Lu and Schillen were issued shares
and granted warrants as consideration for agreeing to defer payment of their
salaries. Mr. Lu was issued 3,000,000 shares of Common Stock and granted
warrants to purchase an additional 3,000,000 shares of Common Stock at $0.10 per
share through September 1, 2002, Mr. Schillen was issued 750,000 shares of
Common Stock and granted warrants to purchase an additional 750,000 shares of
Common Stock at $0.10 per share through September 1, 2002.
On September 24, 1997 the Company renegotiated and extended the
outstanding 10% Debentures. UC Financial, Ltd., one of the 10% Note holders, is
deemed to be a greater-than-five-percent shareholder of the Company. As an
inducement to agreeing to the amended terms of the 10% Debentures, the principal
amount of UC Financial, Ltd.'s 10% Note was increased by 15% from $245,000 to
$281,750, and the conversion terms of the 10% Note were revised. All other
holders of 10% Debentures agreed to similar amendments made to their respective
debentures.
In November and December 1997 Messrs. Lu and Schillen each guaranteed
the obligations of the Company under a new line of credit established with a
financial institution.
On July 9, 1998, options to be issued to each of Messrs. Lu and Benz
were approved by the Board of Directors for the purchase of shares of Common
Stock for $0.10 per share, as follows: (i) 4,000,000 options to be issued to Mr.
Lu contingent on certain events; (ii) 2,000,000 options to be issued to Mr.
Schillen contingent on certain other events; and (iii) 2,000,000 options to be
issued to each of Messrs. Lu and Schillen upon the first closing of a joint
private offering of securities of the Company and another issuer, which offering
was subsequently terminated without closing. To date, none of the contingent
events have occurred. Such options, if issued, will expire July 9, 2003.
On July 9, 1998 Mr. Lu was granted additional options to purchase
2,000,000 shares of Common Stock for $0.10 per share in consideration of (i) his
personal guaranty of the Company's bank line of credit and (ii) his loan to the
Company of $607,687. Such options expire July 9, 2003.
On July 30, 1998, the Company and Mr. Lu, President of the Company, on
the one hand, and The EMCO/Hanover Group, Inc. and three individuals
(collectively, the "Consultants") on the other hand, entered into a settlement
agreement ("Settlement Agreement"). The parties were in dispute arising out of
the Company's August 1997 engagement letter ("Engagement Letter") with
Consultants and the agreed-upon payments to Consultants thereunder of cash fees
and a right ("Right") to receive a five percent non-dilutive equity interest in
the Company. In September 1997 an accounting firm issued a valuation letter
stating that the Right entitled the Consultants to purchase 1,499,523 shares of
Common Stock for $0.01 per share. On October 6, 1997 pursuant to an assignment
agreement, 1,499,523 shares of Common Stock owned of record by Mr. Lu (the
"Assigned Shares") were assigned and transferred to the Consultants and the
Consultants agreed to remit all of the Assigned Shares to Mr. Lu and to exercise
the Right no later than October 15, 1997, whereupon Mr. Lu would tender the
Assigned Shares back to the Consultants. Consultants never remitted the Assigned
Shares to Mr. Lu nor did they exercise their Right. Pursuant to the Settlement
Agreement the parties terminated the Engagement Letter and the Right, and
Consultants agreed they would have no further right or claim to receive any
shares of Common Stock pursuant either to the Right or the Engagement Letter, or
to receive any further fee or compensation under the Engagement Letter. Further,
the Company agreed to issue to Mr. Lu 1,499,523 shares of Common Stock, for no
consideration, in order to reimburse him
24
<PAGE>
for his assignment and transfer of the Assigned Shares to Consultants. The
Settlement Agreement contained releases of the Consultants and Mr. Lu.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following is a list of exhibits filed as part of this filing. Where
so indicated by footnote, the exhibits have been previously filed and are hereby
incorporated by reference.
Exhibit No.
3.1 (3) Certificate of Incorporation, as amended.
3.2 (3) By-laws, as amended.
4.1 (3) Certificate for shares of Common Stock.
10.1 (1)(2) Employment Agreement effective as of January 1, 1991 between
the Company and James K.T. Lu, and Amendment No. 1 to Employment
Agreement, dated September 1, 1997.
10.2 (1)(2) Employment Agreement effective as of August 16, 1991 between
the Company and Jeffrey I. Schillen, and Amendment No. 1 to
Employment Agreement, dated September 1, 1997.
10.3 (4) Agreement of Merger dated May 13, 1997, between BDC
Acquisition Corp. and Beyond Design Corporation.
10.4 (5) Consulting Agreement dated August 25, 1997 between the Company
and Peter Benz.
10.5 (5) Consulting Agreement dated August 25, 1997 between the Company
and George Furla.
10.6 (5) Consulting Agreement dated August 25, 1997 between the Company
and Al Davis.
10.7 (2)(5) Consulting Agreement dated August 25, 1997 between the Company
and Murray T. Scott.
10.8 (5) Consulting Agreement dated August 25, 1997 among the
Company and Bruce W. Barren and the EMCO/Hanover Group.
10.9 (5) Employment Agreements dated as of September 1, 1997, between the
Company and various employees.
10.10 (1) Standard Sublease Agreement, dated as of July 30, 1998, between
the Company and Shinho Electronics & Communication, Inc., for
executive offices on Carmenita Road, Cerritos, California.
10.11 (1) Standard Industrial/Commercial Multi-Tenant Lease Agreement,
dated as of November 1, 1995, between the Company and Marquardt
Associates, for offices on Marquardt Avenue, Cerritos,
California.
10.12 (1) Office Lease Agreement dated October 31, 1997, between the
Company and Freehold-Craig Road Partnership, for offices in
Freehold, New Jersey.
10.13 (1) Form of Sublease Agreement between the Company as sublessor and
Vigor Sports, Inc. as subtenant, for offices on Marquardt
Avenue, Cerritos, California.
21 (1) Subsidiaries of the registrant.
27 (1) Financial data schedule.
- --------------
(1) Filed herewith.
(2) Indicates a management contract or compensatory plan or arrangement
required to be filed.
(3) Incorporated by reference to Registrant's Registration Statement on Form
S-18, File No. 33-33997.
(4) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed May 16, 1997, File No. 0-17953.
25
<PAGE>
(5) Incorporated by reference to the Registrant's Registration Statement on
Form S-8, filed September 15, 1997, File No. 333-35623.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K in the last quarter of the
fiscal year ended March 31, 1998. Subsequent to year end, the Company filed a
report on Form 8-K on July 15, 1998. Such report covered the Company's
incorporation of GalaxyNet International, Inc., a Delaware corporation to engage
in the business of Internet gaming in certain Asian countries. Also, on July 23,
1998, the Company filed a report on Form 8-K reporting the commencement of a
joint private placement of securities of the Company and GalaxyNet
International, Inc.
26
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financials Statements
The following consolidated financial statements are included in Item 7:
<TABLE>
<S> <C>
Independent Auditor's Report..............................................................................F-2
Consolidated Balance Sheet as of March 31, 1998 .................................................F-3......F-4
Consolidated Statements of Operations for the years ended
March 31, 1998 and 1997...................................................................................F-5
Consolidated Statements of Stockholders' Equity [Deficit] for the
years ended March 31, 1998 and 1997.......................................................................F-6
Consolidated Statements of Cash Flows for years ended
March 31, 1998 and 1997..........................................................................F-7......F-9
Notes to Consolidated Financial Statements...................................................... F-10.....F-24
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Diamond Entertainment Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of
Diamond Entertainment Corporation and subsidiaries as of March 31, 1998, and the
related consolidated statements of operations, stockholders' equity [deficit],
and cash flows for each of the two fiscal years in the period ended March 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Diamond Entertainment Corporation and subsidiaries as of March 31,
1998, and the results of their operations and their cash flows for each of the
two fiscal years in the period ended March 31, 1998, 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 15 to the consolidated financial statements, the Company has
suffered recurring losses from operations, has a significant working capital
deficiency and has encountered difficulties in paying its creditors on a timely
basis. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 15. The consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
August 7, 1998
F-2
<PAGE>
Item 7: Financials
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998
<TABLE>
<S> <C>
Assets:
Current Assets:
Cash $ 5,530
Accounts Receivable - Net 1,181,508
Inventory 3,783,672
Prepaid Expenses 37,491
Other Receivable 105,774
-------------
Total Current Assets 5,113,975
-------------
Property and Equipment:
Leasehold Improvements 28,258
Furniture, Fixtures and Equipment 945,925
-------------
Total - At Cost 974,183
Less: Accumulated Depreciation 672,677
-------------
Property and Equipment - Net 301,506
-------------
Film Masters and Artwork 3,790,308
Less: Accumulated Amortization 3,428,958
-------------
Total Film Masters and Artwork - Net 361,350
-------------
Other Assets:
Due from ATRE - Net 500,000
Related Party Receivable 69,194
Other Assets 90,420
Note Receivable - Other 30,701
-------------
Total Other Assets 690,315
-------------
Total Assets $ 6,467,146
-------------
-------------
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-3
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998
<TABLE>
<S> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 4,589,752
Notes Payable 1,684,090
Convertible Debentures - Net 848,861
Lease Obligations Payable 4,398
Accrued Expenses 523,905
---------------
Total Current Liabilities 7,651,006
Long-Term Liabilities:
Lease Obligations Payable 9,957
---------------
Total Liabilities 7,660,963
---------------
Commitments and Contingencies [5] [6] --
---------------
Stockholders' Equity [Deficit]:
Convertible Preferred Stock - No Par Value, 5,000,000 Shares Authorized,
483,251 Issued [of which 172,923 are held in Treasury] 376,593
Common Stock - No Par Value, 100,000,000 Shares
Authorized; 28,753,250 Shares Issued and Outstanding 10,417,647
Additional Paid-in Capital (1,210,231)
Retained Deficit (10,634,843)
---------------
Sub-Total (1,050,834)
Less: Treasury Stock [Preferred] - At Cost (48,803)
Deferred Costs [5D] [5G] (94,180)
---------------
Total Stockholders' Equity [Deficit] (1,193,817)
---------------
Total Liabilities and Stockholders' Equity [Deficit] $ 6,467,146
---------------
---------------
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-4
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended
March 31,
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Sales - Net $ 8,724,149 $ 6,444,586
Cost of Sales 5,696,810 3,761,175
--------------- ---------------
Gross Profit 3,027,339 2,683,411
--------------- ---------------
Operating Expenses:
Selling Expenses 1,527,856 1,676,506
General and Administrative Expenses 1,443,033 1,837,450
Factoring Fees 96,950 236,119
Bad Debt Expense 152,440 119,808
--------------- ---------------
Total Operating Expenses 3,220,279 3,869,883
--------------- ---------------
Operating Loss (192,940) (1,186,472)
--------------- ---------------
Other Expenses [Income]:
Interest Expense 420,583 267,798
Interest Income - Related Party (129,047) (106,391)
Other Income (96,822) (44,333)
Valuation Adjustment for ATRE [4B] 1,117,788 --
--------------- ---------------
Other Expenses - Net 1,312,502 117,074
--------------- ---------------
Net Loss $ (1,505,442) $ (1,303,546)
--------------- ---------------
--------------- ---------------
Net Loss Per Share $ (.08) $ (.08)
--------------- ---------------
--------------- ---------------
Weighted Average Number of Shares Outstanding 20,028,914 16,287,280
--------------- ---------------
--------------- ---------------
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-5
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
----------------------- ------------------------ Additional Retained
Number of Number of Paid-in Earnings
Shares Amount Shares Amount Capital [Deficit]
----------- ---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance - April 1, 1996 483,251 $ 376,593 12,894,941 $ 9,611,834 $(1,410,231) $ (7,825,855)
Stock Options Issued [5G][7D][13B][13C] -- -- -- -- 100,000 --
Stock Options Exercised [13D] -- -- 1,000,000 100,000 -- --
Financing Expense [7D][13C] -- -- -- -- -- --
Consulting Expense [5G] -- -- -- -- -- --
Stock Subscription Canceled -- -- -- -- -- --
Exercise of Options [7D][13C] -- -- 46,000 11,500 -- --
Debt Converted to Shares of
Common Stock [7D] -- -- 1,450,000 290,000 -- --
Net [Loss] for the year ended
March 31, 1997 -- -- -- -- -- (1,303,546)
----------- ----------- ----------- ----------- ----------- ---------------
Balance - April 1, 1997 - 483,251 376,593 15,390,941 10,013,334 (1,310,231) (9,129,401)
Stock Issued for Acquisition of BDC -- -- 2,427,273 17,465 -- --
Stock Warrants Issued [5G][13F] -- -- -- -- 100,000 --
Shares Issued to Two Officers for
Deferral of Salary [5D] -- -- 3,750,000 75,000 -- --
Shares Issued to Employees for Past
Services [5D] -- -- 550,000 11,000 -- --
Shares Issued to Consultant - Signing
Bonus [5G] -- -- 250,000 5,000 -- --
Shares Issued in Lieu of Commission [10I] -- -- 347,368 66,000 -- --
Consulting Expense [5G][13F] -- -- -- -- -- --
Compensation Expense [5D] -- -- -- -- -- --
Debt Converted [7D] -- -- 6,037,668 229,848 -- --
Net [Loss] for the year ended
March 31, 1998 -- -- -- -- -- (1,505,442)
----------- ----------- ----------- ----------- ----------- -------------
Balance - March 31, 1998 483,251 $ 376,593 28,753,250 $10,417,647 $(1,210,231) $(10,634,843)
----------- ----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- ----------- -------------
<CAPTION>
Treasury Total
Stock Stock Stockholders'
Subscription [Preferred] Deferred Equity
Receivable At Cost Costs [Deficit]
------------ ------------ -------- -------------
<S> <C> <C> <C> <C>
Balance - April 1, 1996 $ (86,636) $ (48,803) $ -- $ 616,902
Stock Options Issued [5G][7D][13B][13C] -- -- (100,000) --
Stock Options Exercised [13D] -- -- -- 100,000
Financing Expense [7D][13C] -- -- 50,000 50,000
Consulting Expense [5G] -- -- 35,142 35,142
Stock Subscription Canceled 86,636 -- -- 86,636
Exercise of Options [7D][13C] -- -- -- 11,500
Debt Converted to Shares of
Common Stock [7D] -- -- -- 290,000
Net [Loss] for the year ended
March 31, 1997 -- -- -- (1,303,546)
---------- ----------- ----------- ---------------
Balance - April 1, 1997 - -- (48,803) (14,858) (113,366)
Stock Issued for Acquisition of BDC -- -- --
17,465
Stock Warrants Issued [5G][13F] -- -- (100,000) --
Shares Issued to Two Officers for
Deferral of Salary [5D] -- -- (75,000) --
Shares Issued to Employees for Past
Services [5D] -- -- -- 11,000
Shares Issued to Consultant - Signing
Bonus [5G] -- -- -- 5,000
Shares Issued in Lieu of Commission [10I] -- -- -- 66,000
Consulting Expense [5G][13F] -- -- 45,678 45,678
Compensation Expense [5D] -- -- 50,000 50,000
Debt Converted [7D] -- -- -- 229,848
Net [Loss] for the year ended
March 31, 1998 -- -- -- (1,505,442)
----------- ----------- ----------- --------------
Balance - March 31, 1998 $ -- $ (48,803) $ (94,180) $ (1,193,817)
----------- ----------- ----------- --------------
----------- ----------- ----------- --------------
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-6
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
March 31,
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Operating Activities:
Net Loss $ (1,505,442) $ (1,303,546)
--------------- ---------------
Net Cash Adjustments to Reconcile Net [Loss] to Net Cash
[Used for] Provided by Operating Activities:
Depreciation 105,029 64,872
Amortization of Film Masters and Artwork 274,762 269,420
Provision for Doubtful Accounts 68,440 119,808
Losses Resulting from Write-off of Fixed Assets,
Film Masters and Artwork and Security Deposits 328,416 --
Cancellation of Stock Subscription Receivable -- 86,636
Increase in Inventory Valuation Allowance -- 90,931
Amortization of Deferred Compensation 95,678 85,142
Amortization of Extension Cost for Convertible Debentures 46,134 --
Fair Value of Shares Issued for Acquisition of BDC 17,465 --
Fair Value of Shares Issued to Employees 11,000 --
Fair Value of Shares Issued to Consultant 5,000 --
Fair Value of Shares Issued for Commissions 66,000 --
Interest Income Accrual - ATRE (120,000) --
Write-down of ATRE Investment 1,117,788
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable - Trade 871,631 (661,654)
Inventory (1,925,252) (505,807)
Prepaid Expenses and Deposits (28,935) 6,190
Other Assets -- (24,217)
Accounts Receivable - Related Party -- (18,801)
Other Receivables --
Increase [Decrease] in:
Accounts Payable 1,481,090 648,328
Related Party Payable (20,688) 20,688
Deposits (322,450) 258,054
Accrued Expenses 76,271 (210,071)
--------------- ---------------
Total Adjustments 2,147,379 229,519
--------------- ---------------
Net Cash - Operating Activities - Forward 641,937 (1,074,027)
--------------- ---------------
Investing Activities:
Advances to ATRE (80,320) (189,830)
Repayments by ATRE 220,600 121,600
Payment of Officers' Loans Receivable (607,687) (48,426)
Repayments of Officers' Loan Receivable 538,493 --
Payment of Employee Loans Receivable (11,137) --
Payment of Entertainmax Receivable (19,564) --
Capital Expenditures (184,645) (47,638)
Masters and Artwork (137,059) (531,277)
--------------- ---------------
Net Cash - Investing Activities - Forward $ (281,319) $ (695,571)
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-7
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
March 31,
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Net Cash - Operating Activities - Forwarded $ 641,937 $ (1,074,027)
--------------- ---------------
Net Cash - Investing Activities - Forwarded (281,319) (695,571)
--------------- ---------------
Financing Activities:
Proceeds from Notes Payable 7,590,459 6,204,232
Payments of Notes Payable (8,039,541) (4,695,401)
Payments of Lease Payable (14,770) (8,479)
Cash Overdraft 108,764 157,746
Exercise of Options and Warrants -- 111,500
--------------- ---------------
Net Cash - Financing Activities (355,088) 1,769,598
--------------- ---------------
Net Increase in Cash 5,530 --
Cash - Beginning of Years -- --
--------------- ---------------
Cash - End of Years $ 5,530 $ --
--------------- ---------------
--------------- ---------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 477,105 $ 259,247
Income Taxes $ -- $ 1,900
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities:
On April 13, 1995, the Company's former President surrendered his employment
contract and returned 146,654 shares of the Company's preferred stock back to
the Company as treasury stock. Equipment with a carrying value of approximately
$170,000 was transferred from the Company and the Company's former President
assumed all remaining obligations on these assets of approximately $75,000.
On May 8, 1995, the Company closed the sales agreement with an unaffiliated
company for $750,000 by allowing credit to the Company for future duplication
services. The Company received $750,000 of duplication services and surrendered
equipment having a book value of approximately $630,000.
In May of 1995, three debt obligations totaling $1,131,434 were assigned to
the Company's Chief Executive Officer. In July of 1995, 8,212,785 shares of the
Company's common stock were issued to the officer for this obligation.
Pursuant to the June 15, 1995 assignment of debt agreement, the Company's
$658,750 obligation to its former underwriter was purchased by an unaffiliated
Company. On July 19, 1995, an agreement was reached to issue 2,538,446 shares of
the Company's common stock to the underwriter for this obligation.
In December 1995, the Company settled a debt with a creditor for $390,000
less than the carrying amount.
During the year ended March 31, 1997, the Company entered into a capital
lease agreements for equipment totaling $25,900.
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-8
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental Schedule of Non-Cash Investing and Financing Activities
[Continued]:
During fiscal 1997, $290,000 in convertible debentures were converted into
1,450,000 shares of common stock. During fiscal 1998, $229,848 of convertible
debentures were converted into 6,037,668 shares of common stock.
In August 1997, the Company granted warrants in connection with consulting
agreements and recorded $100,000 in deferred consulting costs and expensed
$30,820 for the year ended March 31, 1998.
In September 1997, the two officers agreed to defer 90% of their salaries
until further notice, but not beyond March 31, 1998. As consideration, the
Company granted a total of 3,750,000 shares of common stock and warrants to
purchase 3,750,000 shares of the Company's common stock at an exercise price of
$.10 per share. The common shares granted will be fully vested on December 31,
1997 and the warrants are exercisable over a two year period beginning March 31,
1997. The Company recorded $75,000 in deferred costs for the fair value of the
shares granted and amortized $50,000 for the year ended March 31, 1998. No
deferred costs were recorded for the warrants granted as the fair market value
of the underlying common shares was approximately equal to the exercise price.
In September of 1997, the Company negotiated a one year extension agreement
for the convertible debentures and agreed to add 15% to the debentures as a
deferred financing cost of $110,721, which will be amortized over one year as
interest expense [See Note 20D]
During fiscal 1998, there were retirements of film masters and artwork for
approximately $625,000.
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-9
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] Summary of Significant Accounting Policies
Nature of Business - On April 13, 1995, the Board of Directors approved the
spin-off of its custom duplication business. The Company is engaged in the
distribution of video tapes and CD-ROMS for the home market including children's
cartoons, educational programs, motion picture, television programs,
instructional computer videos, as well as computer software and principally
markets its products to national and regional chain stores, department stores,
drug stores, supermarkets and similar types of retail outlets. Its products are
sold through national retail chains primarily in the northeast, the south and
the east coast. The Company has licensing agreements with numerous entities and
in addition maintains products without licensing agreements. The licensing
agreements grant the Company the right to manufacture, duplicate, distribute and
advertise the video or computer software. As a result of its merger with Beyond
Design Corporation ["BDC"] in 1997, the Company is also engaged in the marketing
and distribution of children's toys to mass merchandisers through sales
representatives and distributors.
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries all of which are
wholly-owned. Intercompany transactions and balances have been eliminated in
consolidation.
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
Revenue Recognition - Sales are recorded by the Company when products are
shipped to customers and are shown net of returns and allowances.
Inventories - Inventories are stated at the lower of cost [under the first-in,
first-out method] or market.
Depreciation - Property and equipment are presented at cost less accumulated
depreciation. Depreciation is computed by the straight-line method for all
furniture, fixtures, and equipment over 5-10 years, which represents the
estimated useful lives of the respective asset.
Leasehold improvements are being amortized over the lesser of their estimated
useful lives or the remaining term of the lease.
Depreciation expense for the years ended March 31, 1998 and 1997 is $105,029 and
$64,872, respectively.
On sale or retirement, the asset cost and related accumulated depreciation are
removed from the respective accounts, and any related gain or loss is reflected
in income. Repairs and maintenance are charged to expense when incurred.
Film Masters and Artwork - The cost of film masters and related artwork is
capitalized and amortized using the straight-line method over a three year
period. The Company periodically reviews its estimates of future revenues for
each master and if necessary a revision is made to amortization rates and a
writedown to net realizable value may occur. The net film masters and artwork
are presented on the balance sheet at the net realizable value for each master.
Film masters consist of original "masters" which are purchased for the purpose
of reproduction and sale.
Amortization expense for the years ended March 31, 1998 and 1997 is $274,762 and
$269,420, respectively.
F-10
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[1] Summary of Significant Accounting Policies [Continued]
Advertising Costs - Adverting cost are expensed as incurred. Advertising costs
of $108,904 and $65,000 were expensed for the years ended March 31, 1998 and
1997, respectively.
Bad Debts - An allowance for doubtful accounts is computed based on a review of
each individual account receivable and its respective collectibility. The
allowance for doubtful accounts is $467,146 at March 31, 1998.
Net [Loss] Per Share -The FASB issued SFAS No. 128, "Earnings Per Share," in
February 1997. SFAS No. 128 simplifies the earnings per share ["EPS"]
calculations required by Accounting Principles Board ["APB"] Opinion No. 15, and
related interpretations, by replacing the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and
diluted EPS by entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of an entity, similar to the fully diluted EPS of APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. The Company has adopted SFAS No. 128, prior period EPS data have been
restated. Basic EPS is based on average common shares outstanding and diluted
EPS include the effects of potential common stock, such as, options and
warrants, if dilutive. The Company has potentially dilutive securities that were
not included in the computation of diluted earnings per share because to do so
would have been anti-dilutive for the periods presented. Such securities may
dilute EPS in future years.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock Options Issued to Employees - The Company adopted Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation"
on April 1, 1996 for financial note disclosure purposes and will continue to
apply the intrinsic value method of Accounting Principles Board ["APB"] Opinion
No. 25, "Accounting for Stock Issued to Employees" for financial reporting
purposes.
Deferred Taxes - There are no material temporary differences that will result in
taxable amounts in future years. The Company has sustained losses in recent
years and has a large net operating loss carryforward. No deferred taxes are
reflected in these financial statements [See Note 9].
Concentrations of Credit Risk - Financial instruments that potentially subject
the Company to concentrations of credit risk are cash and cash equivalents and
accounts receivable arising from its normal business activities. The Company
routinely assesses the financial strength of its customers and, based upon
factors surrounding the credit risk, establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowance is limited. The Company places its cash and
cash equivalents with high credit quality financial institutions. The amount on
deposit in any one institution that exceeds federally insured limits is subject
to credit risk. The Company had no deposits as of March 31, 1998, with financial
institutions subject to a credit risk beyond the insured amount.
[2] Accounts Receivable
Accounts receivable at March 31, 1998 net of allowance for doubtful accounts
were $1,181,508. Substantially all of the accounts receivable at March 31, 1998,
have been pledged as collateral for the line of credit [See Note 7A].
F-11
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[3] Inventory
Inventory as of March 31, 1998 consists of:
<TABLE>
<S> <C>
Raw Materials $ 756,733
Finished Goods 3,026,939
--------------
Totals $ 3,783,672
------ --------------
--------------
</TABLE>
An allowance has been established for idle inventory of approximately $280,577.
[4A] Related Parties Receivables
At March 31, 1998, the Company was owed $69,194 from the President of the
Company for advances and loans. Simple interest is accrued monthly at an annual
rate of 10% on the outstanding balance. For the years ended March 31, 1998 and
1997, the Company recorded interest income of $6,607 and $3,430, respectively.
This loan amount is due in December 2001. For the year ended March 31, 1998, the
Company borrowed $607,687 and repaid $545,100 to the President of the Company.
[4B] American Top Real Estate ["ATRE"]
The Company paid $50,000 for a 50% interest in ATRE. This investment is
accounted for on the equity method.
In September 1996, a parcel of land was sold and proceeds were retained for
future sewage construction needed for a 20 acre property. The Company received
$121,600 from ATRE for this parcel of land in fiscal 1997.
During the year ended March 31, 1998, ATRE sold approximately 11 acres. The
Company advanced an additional $80,320 to ATRE and received $220,600 from the
proceeds of the parcel of 10 acres as repayment of the advances to ATRE in
fiscal 1998. The Company also received approximately $400,000 from ATRE during
the period April 1, 1998 through August of 1998 and anticipates another $100,000
by March 31, 1999.
At March 31, 1998, ATRE had binding sales contracts for the remaining parcels of
commercial real estate owned by ATRE as these parcels of land were under
development. In addition, the Company was advised by ATRE that proceeds realized
by ATRE during fiscal 1998 were reinvested into other parcels to improve the
ability to list and sell the remaining parcels. ATRE continues to list these
properties. Management of the Company received communication from a real estate
development specialist advising the Company that an aggregate approximate value
of $5,200,000 is calculated for the remaining ATRE parcels. Although the Company
believes that final sales contracts will be able to be consummated, at this time
it is not possible to predict with any certainty when the closing of these sales
contracts of real estate may occur or whether the proceeds expected by the
Company for their share in this real estate could be significantly less than
anticipated. Therefore, the ultimate realizable value of the receivable for
advances from ATRE could be substantially less than the preadjusted carrying
value of $1,600,000. At March 31, 1998, the Company setup a valuation allowance
of $1,117,788 and accordingly, charged operations for that amount so that the
amount due from ATRE at March 31, 1998 is presented at the amount of the 1998
subsequent receipts of approximately $500,000. Based upon the above
circumstances at March 31, 1998 the likelihood is that $1,117,788 from future
proceeds from the sale of the ATRE parcels will not be realized with any
certainty.
F-12
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[5] Commitments
[A] Royalty Commitments - The Company has entered into various royalty
agreements for licensing of titles for terms of one to seven years. Certain
agreements include minimum guaranteed payments. For the years ended March 31,
1998 and 1997, royalty expense was $79,631 and $135,141, respectively, pursuant
to these agreements.
[B] Video Agreements - The Company has entered into various agreements to
manufacture, duplicate and distribute videos. Commissions are paid based upon
the number of videos sold.
[C] Accounts Payable - The Company is currently delinquent on a significant
amount of its accounts payable.
[D] Employment Agreements - In 1991, two employment agreements were executed for
two officers for annual compensation totaling $240,000. These agreements
terminate in the year 2001 and are adjusted annually in accordance with the
Consumer Price Index. The Board of Directors agreed on April 23, 1996 to reserve
1,000,000 shares of common stock for distribution to two officers of the
Company. The common stock can be purchased in installment payments with a five
year promissory note with interest at 6% per annum. As of March 31, 1998, the
officers did not purchase these shares.
In September 1997, the two officers agreed to defer 90% of their salaries until
further notice, but not beyond March 31, 1998. As consideration, the Company
granted a total of 3,750,000 shares of common stock and warrants to purchase
3,750,000 shares of the Company's common stock at an exercise price of $.10 per
share. The common shares granted vested during fiscal 1997 and the warrants are
exercisable over a two year period beginning March 31, 1997. The Company
recorded $75,000 in deferred costs for the fair value of the shares granted and
amortized $50,000 in the year ended March 31, 1998. No deferred costs were
recorded for the warrants granted as the fair market value of the underlying
common shares was approximately equal to the exercise price [See Note 10F].
In September 1997, the Company entered into employment agreements with nine
employees holding key positions. The agreements provide for an aggregate of
550,000 shares of common stock with a fair value of $11,000 for past services
and semi-monthly compensation of approximately $14,000. The agreements will
continue for an indefinite period of time.
[E] Sale of Multi Media Assets - On May 8, 1995, the Company closed a sales
agreement with a Mexican company, Central Video, for $750,000 by allowing credit
to the Company for future duplication services. The general manager of Central
Video is the former President of the Company. The Company received $750,000 of
duplication services and surrendered equipment having a book value of
approximately $630,000. The Company guaranteed Central Video's general manager a
minimum of $2,500,000 a year of production orders for three years and agreed to
pay Central Video's general manager a 3% commission on orders the Company places
with Central Video. The Company satisfied this obligation in fiscal 1996,
however, in 1997, the Company did not fulfill this obligation and was delinquent
in payments to Central Video. The Company settled this contract with Central
Video in September of 1997. The Company agreed to pay Central Video $12,500 a
week until the total obligation of $740,000 is paid. This settlement dissolved
the production contract and all outstanding payable obligation. As of March 31,
1998, the balance owed to Central Video was $288,701.
[F] Termination of Employment - On December 21, 1995, an officer and director of
the Company resigned and terminated his employment agreement with the Company as
part of a settlement agreement. Effective January 1, 1996 and ending December
31, 1996, the Company entered into a monthly $10,000 consulting agreement with
this individual. The individual agreed to surrender 30,769 shares of preferred
stock and 10,000 shares of common stock upon execution of the settlement
agreement in consideration for 5% of the net profits of the Company for the
fiscal years ended March 31, 1997 and 1996.
F-13
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[5] Commitments [Continued]
[G] Financial Consultant Commitments - In June of 1996, the Company engaged
three consultants for a period of two years. The Company will reimburse the
consultants' business expenses not to exceed $750 per month. The financial
consultants received a total of 1,000,000 warrants with an exercise price of
$.25 per share in exchange for services to be rendered. The Company recorded
deferred consulting costs of $50,000 for the fair value of the warrants to
purchase the 1,000,000 shares of common stock and expensed $14,858 and $35,142
for the years ended March 31, 1998 and 1997, respectively. The fair value of the
warrants was determined based upon the fair value of services to be rendered by
the consultant [See Note 13B].
In August of 1997, the Company engaged a consulting firm to provide financial
advice for a period of six months. The fee for services included a $7,500 cash
payment, a two percent cash fee on refinancing commitments and a five percent,
non-dilutive equity interest in the Company. The consulting firm was also
entitled to a five percent fee based on the transaction value of any concluded
merger or acquisition introduced by the consulting firm. As of March 31, 1998,
the consulting firm had not concluded any merger or refinancing commitment and
received only the $7,500 cash payment from the Company.
In August of 1997, the Company engaged four consultants for a period of two
years to provide assistance in restructuring and designing the Company's
operations and long-term strategic plan. The consultants received warrants to
purchase an aggregate 2,050,000 shares of the Company's common stock at an
exercise price of $.10 per share. The warrants expire at the end of the two year
consulting period. The Company recorded deferred consulting costs of $100,000
for the fair value of the warrants and expensed approximately $31,000 for the
year ended March 31, 1998. The fair value of the warrants was determined based
upon the fair value of services to be rendered by the consultant [See Note 13F].
In addition, the Company also issued 250,000 shares of stock to one of the
consultants in consideration of entering into a two year consulting agreement
and recorded $5,000 as a signing bonus [See Notes 10H and 19E].
[H] Transfer of Custom Duplication Business - On April 13, 1995, the Board of
Directors approved the transfer of its custom duplication business. Pursuant to
this transaction, the Company's former President surrendered his employment
contract and returned 146,654 shares of the Company's preferred stock back to
the Company as treasury stock. Equipment with a carrying value of approximately
$170,000 was transferred from the Company and the Company's former President
assumed all remaining obligations on these assets of approximately $75,000. The
Company agreed to a non competition agreement with this new custom duplication
venture by the Company's former President.
[I] Joint Venture Agreement - In October 1996, the Company entered into a joint
venture agreement with an unrelated party whereby the parties distribute each
others' catalogues of products and share in the profits of any such distribution
equally. The agreement expired in October 1997.
In connection with the joint venture agreement, the Company loaned $18,000 at a
6% interest rate. The loan receivable was due in January 1997 and remains unpaid
as of March 31, 1998. This amount is included in other receivables on the
balance sheet. The joint venture partner has never performed on the agreement.
In January of 1998, the Company commenced collection procedures to collect the
outstanding obligation owed to the Company.
F-14
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[6] Lease Commitments
[A] Operating Leases - The Company leases various office and storage facilities,
automobiles and equipment under operating leases expiring between 1998 and 2002.
The Company leases sales office space for $1,950 monthly which expires in
October 2001. It also leases for $9,274 per month office and warehousing space
which expires March 2001. [See Note 20E]
The following schedules shows the composition of total rental expense for all
operating leases except those with terms of a month or less that were not
renewed:
<TABLE>
<CAPTION>
Years ended
March 31,
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Minimum Rentals $ 200,005 $ 151,983
Less: Sublease Rentals 15,000 15,000
-------------- --------------
Totals $ 215,005 $ 136,983
------ -------------- --------------
-------------- --------------
</TABLE>
The following is the approximate aggregate future minimum rentals for the next
five years for operating leases:
<TABLE>
<CAPTION>
March 31,
- ---------
<S> <C>
1999 $ 222,813
2000 221,227
2001 142,702
2002 11,700
2003 --
--------------
Total Future Minimum Lease Payments $ 598,442
- ----------------------------------- --------------
--------------
</TABLE>
The operating leases also provide for cost escalation payments.
[B] The Company leases office space in Freehold, New Jersey for $1,950 per
month. This lease expires on October 31, 2001.
[7] Debt Obligations
Notes payable consist of the following:
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------------------------------------
Type of Loan Amount Current Long-Term Rate Due Date
------------ ------ ------- --------- ---- --------
<S> <C> <C> <C> <C> <C>
Installment Loan (B) $ 125,970 $ 125,970 $ -- 10% November 14, 1999
Notes Payable (C) 288,701 288,701 -- 8% September 30, 1998
Lines of Credit (A) 1,044,211 1,044,211 -- Various Revolving Line of Credit
Convertible Debenture (D) 848,861 848,861 -- 10% September 1998
Acquired Debt 40,000 40,000 -- Demand
Loan Payable (E) 185,208 185,208 -- 10% September 30, 1998
----------- ----------- ----------
Totals $ 2,532,951 $ 2,532,951 $ --
------ ----------- ----------- ----------
----------- ----------- ----------
</TABLE>
F-15
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[7] Notes Payable [Continued]
[A] Lines of Credit - On August 30, 1996, the Company established a line of
credit up to $2,500,000, whereby, $2,000,000 was backed by pledged receivables
and inventory and $500,000 was guaranteed by the Company's President. Interest
was at a prime rate plus 3%. Interest expense from April 1, 1997 through
December 31, 1997 was approximately $148,500. In December 1997, the Company
repaid $469,221 on this line of credit and engaged another financial institution
for a $2,500,000 financing arrangement. This arrangement is also backed by
pledged receivables and inventory. Cost is 1.5% discounted from pledged invoices
for every 30 days for the accounts receivable portion of the line of credit. The
portion of the line of credit backed by inventory is determined by the lesser of
$800,000, 25% of the clients finished toy inventory or 55% of the clients
finished videotape inventory. Interest is charged at 16.l8% per annum on this
portion of the debt. This was formalized with the Company in June of 1998.
Interest expense from December 1997 through March 31, 1998 was approximately
$27,500.
[B] Installment Loan - In March 1993 a loan was renegotiated for the sum of
$292,058 with principal payments of $5,000 per month with an interest rate of
10% per annum due November 14, 1999. This note was paid in full on July 15,1998
for approximately $60,000. As a result, the Company recorded forgiveness of debt
of approximately $66,000 in July 1998. During the year ended March 31, 1998,
interest expense of approximately $12,500 was recorded.
[C] Note Payable for Equipment - On May 8, 1995, the Company closed a sales
agreement with a Mexican Company, for $750,000 by allowing credit to the Company
for duplication services and received $750,000 of duplication services in
exchange for equipment having a book value of approximately $630,000 [See Note
5E]. The Company classifies the outstanding obligation of $288,701 at March 31,
1998 as notes payable. This note was repaid in weekly installments of $12,500
with the final payment made in September of 1998. Interest expense of
approximately $40,000 was recorded for the year ended March 31, 1998.
[D] Convertible Debentures Payable - During the quarter ended June 30, 1996, the
Company issued convertible debentures of $1,257,988 with 10% interest per annum
and a 7% commission. The principle amount is convertible in whole or in part
into shares of the common stock of the Company at a conversion price equal to
65% of the average closing bid price for the common stock for five trading days
immediately prior to the conversion. In no event shall the conversion price be
less than $.20 per share or more than $.75 per share. In conjunction with the
debentures, the Company granted 1,000,000 warrants exercisable at $.25 per share
to two consultants [See Note 13C]. Warrants for 46,000 shares were exercised for
$11,500 during the year ended March 31, 1997 [See Note 10E]. The Company
recorded a financing expense of $25,000 for the fair value of the warrants
granted. The fair value of the warrants was determined based upon the fair value
of services received by the Company in May and June of 1996.
As of March 31, 1997, convertible debentures of $290,000 were converted into
1,450,000 shares of the Company's common stock by several off shore companies
under Regulation S and $967,988 of convertible promissory notes payable were
outstanding and in default by the Company. Interest expense of $97,000 and
$24,702 was recorded for the years ended March 31, 1998 and 1997 [See Note 10E].
Subsequent to September 30, 1997, the Company negotiated a one year extension
agreement and agreed to add 15% to the note as a deferred financing cost of
$110,724.
During fiscal March of 1998, convertible debentures of $229,848 were converted
into 6,037,668 shares of the Company's common stock [See Notes 9B, 10E and 20C].
This brought the total conversion of $519,848 of debentures into 7,487,668
shares as of March 31, 1998. For the five months ended March 31, 1998, the
Company amortized $46,134 as a non-cash financing cost, which is classified as
interest expense. The convertible notes are secured by the Company's entitlement
to any net cash proceeds derived from its interest in ATRE property [See Note
4B].
F-16
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[7] Notes Payable [Continued]
[E] Loan Payable - In October 1997, the Company borrowed $360,000 from an
unaffiliated entity with interest at 10% per year. At March 31, 1998, $185,208
is outstanding on this obligation. This note was repaid in September of 1998 by
weekly payments of $7,500. Interest expense for the year ended March 31, 1998
was $12,708.
[8] Capital Leases
The Company is the lessee of equipment under capital leases expiring in various
years through 2002. The assets and liabilities under capital leases are recorded
at the lower of the present value of the minimum lease payments or the fair
value of the assets. The assets are depreciated over the lower of their related
lease terms or their estimated productive lives. Depreciation of assets under
capital leases is included in depreciation expense for 1997 and 1998.
Following is a summary of property held under capital leases as of March 31,
1998:
<TABLE>
<CAPTION>
<S> <C>
Furniture, Fixtures and Equipment $60,150
Less: Accumulated Depreciation 41,831
-------
Totals $18,319
-------
-------
</TABLE>
Minimum future lease payments under capital leases as of March 31,1998 for each
of the next five years and in the aggregate are:
<TABLE>
<CAPTION>
Year Ending March 31,
<S> <C>
1999 $ 3,875
2000 3,598
2001 3,837
2002 3,044
2003 --
----------
Total Minimum Lease Payments 14,354
Less: Amount Representing Interest 1,876
Present Value of Net Minimum Lease Payments $ 12,478
------------------------------------------- ----------
----------
</TABLE>
[9] Income Taxes
The Company has net operating loss carryforwards of approximately $7,763,000
which expire through the year 2012. As a result of these carryforwards, the
Company has a deferred tax asset of approximately $2,701,800, which has been
offset by a valuation allowance of $2,701,800 resulting in a deferred asset of
$-0-. Future tax benefits related to this loss have not been recognized because
its realization is not assured. No current or deferred federal or state income
taxes have been provided for.
F-17
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
[9] Income Taxes [Continued]
As of March 31, 1998, the approximate amount of the net operating loss income
tax carryforwards and their expiration dates are as follows:
<TABLE>
<CAPTION>
Expiration
in Years ending Net Operating Loss
March 31, Carryforwards
--------- -------------
<S> <C>
2007 $ 1,317,000
2008 2,693,000
2009 2,015,000
2010 288,000
2011 1,300,000
2012 150,000
--------------
Total $ 7,763,000
----- --------------
--------------
</TABLE>
[10] Capital Stock
[A] Stock Subscription Receivable - On April 23, 1996, the Board of Directors
agreed to cancel the existing $86,636 stock subscription receivable from
officers of the Company. The Company accepted services performed by the officers
of the Company in lieu of cash in collection of the stock subscription and,
therefore, recorded the $86,636 as compensation expense for the year ended March
31, 1997.
[B] Authorized Shares - The Board of Directors agreed on April 23, 1996 to
increase its authorized shares to 100,000,000 shares of common stock and
5,000,000 shares of preferred stock, which was approved at the August 23, 1996
annual shareholders meeting.
[C] Preferred Stock - The preferred stock has no (i) dividend rights, (ii)
sinking fund provisions, (iii) rights of redemption, (iv) classification
provisions for voting, (vi) preemptive rights, (vi) liability to further calls
or to assessments by the Company, or (vii) any provision discriminating against
any existing or prospective holder. Holders of shares of preferred stock are not
entitled to any dividend preference. In the event of liquidation, holders of
shares of preferred stock shall be entitled to a preference of $.01 per share,
and any other remaining proceeds of liquidation shall be distributed shares and
shares alike to holders of all capital stock. The issued and outstanding
preferred stock are restricted and have not been registered.
[D] Shares Issued for BDC Acquisition - In May of 1997, the Company entered into
an agreement and plan of merger between BDC Acquisition, Inc., a newly formed
wholly-owned subsidiary of the Company, and Beyond Design Corporation ["BDC"].
The Company's subsidiary has acquired all of the issued and outstanding stock of
BDC for the issuance of an aggregate of 2,427,273 shares of the Company's common
stock and the assumption of certain outstanding obligations of BDC. The book
value of the net assets acquired approximates the fair value of the shares
issued in connection with the acquisition. This acquisition was deemed
immaterial for accounting purposes.
F-18
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
[10] Capital Stock [Continued]
[E] Conversion of Debentures Payable - During the quarter ended June 30, 1996,
the Company issued convertible debentures of $1,257,988 with 10% interest per
annum and a 7% commission. The principal amount is convertible in whole or in
part into shares of the common stock of the Company at a conversion formula
based upon average closing bid prices. In conjunction with the debentures, the
Company granted 1,000,000 warrants exercisable at $.25 per share to two
consultants. Warrants for 46,000 shares were exercised for $11,500 during the
year ended March 31, 1997 [See Notes 7D and 13C]. The Company recorded a
financing cost of $25,000 for the fair value of the warrants granted. The fair
value of the warrants was determined based upon the fair value of services
received by the Company in May and June of 1996.
As of March 31, 1997, convertible debentures of $290,000 were converted into
1,450,000 shares of the Company's common stock by several off shore companies
under Regulation S and $967,988 of convertible promissory notes payable were
outstanding and in default by the Company. Interest expense of $97,000 and
$24,702 was recorded for the years ended March 31, 1998 and 1997 [See Note 7D].
Subsequent to September 30, 1997, the Company negotiated a one year extension
agreement and agreed to add 15% to the note as a deferred financing cost of
approximately $110,000.
During fiscal March of 1998, convertible debentures of $229,848 were converted
into 6,037,668 shares of the Company's common stock. For the five months ended
March 31, 1998, the Company amortized $46,134 as a non-cash financing cost,
which is classified as interest expense [See Notes 7D and 20C].
[F] Employment Agreements - In September 1997, two officers agreed to defer 90%
of their salaries until further notice, but not beyond March 31, 1998. As
consideration, the Company granted a total of 3,750,000 shares of common stock
and warrants to purchase 3,750,000 shares of the Company's common stock at an
exercise price of $.10 per share. The common shares granted vested during fiscal
1997 and the warrants are exercisable over a two year period beginning March 31,
1997. The Company recorded $75,000 in deferred costs for the fair value of the
shares granted and amortized $50,000 in the year ended March 31, 1998. No
deferred costs were recorded for the warrants granted as the fair market value
of the underlying common shares was approximately equal to the exercise price
[See Note 5D].
In September 1997, the Company entered into employment agreements with nine
employees holding key positions. The agreements provide for an aggregate of
550,000 shares of common stock with a fair value of $11,000 for past services
and semi-monthly compensation of approximately $14,000. The agreements will
continue for an indefinite period of time.
[G] Consulting Agreement - Fiscal 1997 - On April 23, 1996, the Company engaged
an entity to arrange either debt or equity financing for the Company and agreed
to grant a total of 1,000,000 options exercisable within three years of grant at
$.10 per share. The Company recorded a financing cost of $25,000 in June of 1996
for the fair value of the options granted. The fair value of the options was
determined based upon the fair value of services received by the Company in May
and June of 1996.
These options were exercised in June of 1996 for a total of 1,000,000 shares of
common stock as a result of consulting services performed in 1996 by the
consultant [See Note 13D].
[H] Financial Consultants - The Company issued 250,000 shares of stock to one of
its consultants in consideration of entering into a two year consulting
agreement [See Note 5G].
[J] Stock in Lieu of Commissions - On March 11, 1998, the Company issued 347,368
shares of common stock to a salesman in lieu of commissions owed of $66,000.
F-19
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
[11] Earnings Per Share
Earnings per share is based on the weighted average number of common shares
outstanding as restated to include the number of shares issued in the business
combination with TAV reflecting conversion for a preferred share of stock into
1.95 shares of common stock. The effect of warrants and options is included when
dilutive. Exercise of the options and warrants could potentially dilute basic
EPS in the future.
[12] Major Supplier
For the year ended March 31, 1998, the Company had purchases from three
suppliers that amounted to approximately $4,622,849 or 83% of net purchases.
These suppliers accounted for 52%, 20% and 11% of net purchases. For the year
ended March 31, 1997, the Company had purchases from three suppliers that
amounted to approximately $2,940,211 or 83% of net purchases.
Loss of these suppliers would not significantly adversely affect the company
because sufficient replacement vendors exist in the open market.
[13] Stock Options and Warrants
[A] 1988 Stock Option Plan Approved - On October 12, 1988, the Company's
directors and stockholders approved the Company's 1988 Stock Option Plan [the
"Option Plan"] authorizing the granting of incentive options and non-qualified
options. The incentive options are intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended. Pursuant to the Option Plan, options
to purchase up to 10,000 shares of common stock may be granted to officers,
directors and key employees of the Company. The Stock Option Committee,
consisting of Messrs. Lu and Schillen, is responsible for determining the
individuals who will be granted options, the number of shares to be subject to
each option, the option price per share, and the exercise period of each option.
The option price will not be less than the fair market value of the Company's
common stock on the date the option is granted. Options may be exercised by
payment of cash. No option will have a term in excess of ten years.
[B] Consulting Agreement - Fiscal 1997 - In June 1996, the Company issued
1,000,000 common stock warrants at an exercise price of $.25 per share as part
of a consulting agreement entered into, which term ends June 1998. As of March
31, 1997, 925,000 of those warrants are vested. Deferred compensation of $50,000
resulting from this transaction was recorded at the fair market value of the
services rendered [See Note 5G].
[C] Convertible Debentures - Fiscal 1997 and 1998 - In April 1996, in connection
with the convertible debentures, the Company entered into two separate
consulting agreements. As per the terms of both contracts, the Company issued
1,000,000 common stock warrants [500,000 warrants per contract] at an exercise
price of $.25 per share of which 46,000 shares were issued as a result of the
exercise of warrants during the year ended March 31, 1997 [See Notes 7D, 10E and
20C].
[D] Consulting Agreement - Fiscal 1997 - On April 23, 1996, the Company engaged
an entity to arrange either debt or equity financing for the Company and agreed
to grant a total of 1,000,000 options exercisable within three years of grant at
$.10 per share. The Company recorded a financing cost of $25,000 in June of 1996
for the fair value of the options granted. The fair value of the options was
determined based upon the fair value of services received by the Company in May
and June of 1996.
These options were exercised in June of 1996 for a total of 1,000,000 shares of
common stock as a result of consulting services performed in 1996 by the
consultant [See Note 10G].
F-20
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
[13] Stock Options and Warrants [Continued]
[E] Fiscal 1997 Summary - During fiscal year ended March 31, 1997, the Company
issued 3,000,000 stock warrants to nonemployees at exercise prices below market
prices at the date of grant, ranging from $.10 to $.25, and having a weighted
average exercise price of $.20. Of these options, 1,000,000 options have a 2
year vesting period and 2,000,000 options vested at date of grant. The total
cost of issuing these stock options to nonemployees during 1997 was
approximately $100,000. The entire amount is being amortized over the
aforementioned respective vesting periods, resulting in a $85,142 and $14,858
charge to operations for the years ended March 31, 1998 and 1997. The weighted
average fair value of stock options granted to consultants during 1997 was
estimated at $.04 using the fair value of services at date of grant.
[F] Consulting Agreement - Fiscal 1998 - In August 1997, the Company issued
2,050,000 common stock warrants at an exercise price of $.10 per share as part
of a consulting agreement entered into, whose term ends August 1999. Deferred
consulting costs of $100,000 resulting from this transaction was recorded at the
fair market value of the services rendered and approximately $31,000 was
expensed for the year ended March 31, 1998 [See Notes 5G and 19E].
[14] Litigation
The Company has been named as defendant and co-defendant in various legal
actions filed against the Company in the normal course of business. The Company
believes that it has adequate legal defenses and intends to vigorously defend
itself in these actions. The Company believes after consulting with counsel that
an adverse decision in any one lawsuit would not have a material adverse impact
on the Company, however, the aggregate affect of an adverse decision in a
majority of the lawsuits outstanding could have a material adverse impact on the
Company.
[15] Going Concern
The Company's financial statements are prepared in conformity with generally
accepted accounting principles, which contemplates the realization of assets and
settlements of liabilities in the normal course of business and continuation of
the Company as a going concern. The Company has incurred net losses of
$1,505,442 and $1,303,546 for the years ended March 31, 1998 and 1997,
respectively, and has a working capital deficit at March 31, 1998 of $2,486,662.
The Company has also been experiencing difficulties in paying its vendors on a
timely basis. These factors create uncertainty whether the Company can continue
as a going concern. The Company's plans to mitigate the effects of the
uncertainties are (i) to collect the sales proceeds from parcels of property
owned by ATRE [50% owned by the Co.] located in Vancouver, WA, (ii) to continue
to acquire new licensed titles to improve sales and profit margin , (iii) to
create new products with better gross profits, (iv) to continue to negotiate
with several reliable investors to provide the Company with debt and equity
financing for working capital purposes, (v) to convert debt to equity and (vi)
to continue to negotiate with major vendors for discounts.
Management believes that these plans can be effectively implemented in the next
twelve months. The Company will continue to seek additional financing from
private sources to supplement its cash needs for the next twelve months during
the implementation of these plans to achieve profitability. The Company's
ability to continue as a going concern is dependent on the implementation and
success of these plans. The financial statements do not include any adjustments
in the event the Company is unable to continue as a going concern. There can be
no assurance that management's plans to reduce operating losses or obtain
additional financing to fund operations will be successful. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
F-21
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
[16] Major Customers
For the years ended March 31, 1998 and 1997, the Company had net sales to one
customer that amounted to approximately $3,140,000 or 36.0% and $2,477,797 or
30.5% of net sales, respectively.
[17] New Authoritative Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. SFAS No. 131 is not expected to have a material impact on the
Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it its designated, for
example, gain or losses related to changes in the fair value of a derivative not
designated as a hedging instrument is recognized in earnings in the period of
the change, while certain types of hedges may be initially reported as a
component of other comprehensive income [outside earnings] until the
consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.
[18] Financial Instruments
The following table summarizes the carrying amount and estimated fair value of
the company's significant financial instruments all of which are held for
nontrading purposes:
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------
Carrying Estimated
Amount Fair Value
----------- -------------
<S> <C> <C>
Other Receivable $ 500,000 $ 500,000
Long-Term Debt $ 9,957 $ 9,957
</TABLE>
F-22
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
[18] Financial Instruments [Continued]
In assessing the fair value of other receivables, it was estimated that the
carrying amount approximated fair value because of the interest rate and risk
factor. The fair value of long-term debt is based on current rates at which the
Company could borrow funds with similar remaining maturities.
[19] Subsequent Events
[A] Exclusive Distribution Agreement - In April of 1998, the Company entered
into an agreement with S4C Corporation for the exclusive rights to distribute a
home video tape through December 31, 2003 with total advance payments
aggregating approximately $200,000 and additional royalties due as a percentage
of wholesale prices.
[B] Conversion of Debt to Equity - In June of 1998, a convertible debenture
holder converted a note payable with a balance of $91,750 into 2,823,077 shares
of the Company's common stock [See Note 7D].
[C] New Subsidiary - On July 15,1998, the Company incorporated Galaxynet
International, Inc. ["Galaxy Net"] in the State of Delaware, as a majority-owned
subsidiary of the Company. GalaxyNet is in the business of developing and
selling internet gaming software and intends to offer its software to internet
gaming companies and provide internet gaming web sites to solicit gambling
wagers from primarily, Asian players. The Company also issued 4,000,000 options
exercisable at $.10 per share to an investor and 6,000,000 options to the Chief
Executive Officer exercisable at $.10 in connection with this project. Such
options will expire July 9, 2003.
[D] Potential Additional Equity Financing - On July 17, 1998, the Company, along
with GalaxyNet, entered into a memorandum of understanding regarding the raising
of capital in a private offering to raise gross proceeds in the aggregate of
between and $3,000,000 and $10,000,000 with an enterprise who will be paid the
sum of 15% of the aggregate proceeds and receive finders options for up to
3,750,000 shares of common stock at exercise prices of between $.10 and $.20 per
share [See Note 20A].
[E] Exercise of Warrants - In July of 1998, the Company raised $20,000 from the
exercise of warrants for 200,000 shares of the Company's common stock [See Note
13F].
[F] Additional Options Issued - On July 9, 1998, the Company granted options to
purchase 1,000,000 shares of common stock to the chief executive officer of a
potential customer and in consideration of certain fulfillment orders submitted
to the Company. These options may be exercised for $0.10 per share.
[20] Subsequent Events - Unaudited
[A] Refunding of Potential Equity Financing - The private offering period ended
September 30, 1998, and was extended until October 31, 1998. The private
offering resulted in raising funding proceeds of only $250,000. The Company
subsequently refunded the $250,000 to the investor [See Note 19D].
[B] Additional Options Issued - In August of 1998, the Company issued 2,000,000
options to the Chief Executive Officer at an exercise price of $.10 per share
for his personal guarantee on the Company's loan agreements and loans made to
the Company.
[C] Convertible Debentures - On November 2, 1998, convertible debentures with a
balance of $848,861 were reinvested into a new note for approximately $925,000
for a new two year term expiring October 31, 2000 with interest of 10%. The
repayment term is a weekly amount of $6,250 in 1998 and $12,500 in the years
1999 and 2000. In addition, there is an acceleration clause of repayments for
certain events and a 5% late charge for any delinquent payments. The notes
contain an option to convert the principal and interest balance into the common
stock of the Company subject to certain pricing calculations. Collateral
security includes all the assets of the Company and a personal collection
guarantee as additional security to holder after subordination to primary lender
[See Notes 7D and 10E].
F-23
<PAGE>
DIAMOND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
[20] Subsequent Events - Unaudited [Continued]
[D] Additional Stock Issuances - On October 24, 1998, the Company issued
1,499,523 shares of common stock to the Company's president pursuant to a
settlement agreement.
[E] Lease - Beginning in October 1998, the Company entered into a four-year
lease expiring in June 2002, for use as executive offices and manufacturing and
warehouse facilities for $21,500 monthly. In addition, the Company has entered
into a sublease with a subtenant beginning January 1, 1999 which requires the
subtenant to pay approximately $9,494 per month from March 1, 1999 through
February 2000, and $9,936 per month from March 1, 2000 through March 31, 2001,
for an existing lease which requires the Company to make monthly payments of
$9,274.
. . . . . . . . . . . . . .
F-24
<PAGE>
SIGNATURES
In accordance with Section 13 of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, hereunto
duly authorized.
DIAMOND ENTERTAINMENT CORPORATION
Dated: December 23, 1998 By:/s/ James K.T. Lu
-----------------
James K.T. Lu
President, Chief Executive Officer, Principal
Executive Officer and Director
Dated: December 23, 1998 By:/s/ Fred U. Odaka
-----------------
Fred U. Odaka
Chief Financial Officer, Principal Financial
Officer and Principal Accounting Officer
In accordance with the Exchange Act, this report has been signed by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
------------ ------- -------
/s/ James K.T. Lu President, Chief Executive December 23, 1998
- ------------------------- Officer, Secretary
James K.T. Lu and Director
/s/ Jeffrey I. Schillen Executive Vice President December 23, 1998
- ------------------------- and Director
Jeffrey I. Schillen
/s/ Murray T. Scott Director December 23, 1998
- -------------------------
Murray T. Scott
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
This Agreement, made and is effective as of the 1st day of January,
1991, by and between ATI MARK V PRODUCTS, INC., a California corporation
("Employer"), and JAMES LU ("Employee").
RECITAL
WHEREAS, Employer desires to secure the services of Employee as
President, to make use of Employee's knowledge in the international business,
business and political connection both domestic and international, and to be
benefited from the potential business to be brought in by Employee;
WHEREAS, Employee has agreed to serve as President of Employer on the
terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein, it is agreed as follows:
1. Employment.
Employer agrees to employ Employee to serve in the capacity of
President and Chief Executive Officer at the direction of the Board of Directors
of Employer and Employee agrees to accept such employment. Such employment shall
commence on January 1, 1991, and shall conclude ten (10) years from such date
unless terminated in accordance with paragraph 4 herein. This agreement may be
extended on yearly basis so long as such extension is agreed to in writing by
both parties.
2. Exclusivity.
Employee warrants that there are no agreements or arrangements, whether
written or oral, in effect which would prevent Employee from rendering exclusive
services to the Employer during the term of this Agreement hereof, and Employee
warrants that he has not made and will not make any commitment or do any act in
conflict with this Agreement.
3. Compensation.
As full compensation for all services to be rendered by Employee to
Employer during the first year of the term of this Agreement, Employer shall:
(a) pay Employee a salary of One Hundred Fifty Thousand Dollars ($150,000) per
annum ("Salary"); (b) pay a bonus as set forth on Schedule A hereto; (c) procure
term life insurance on behalf of Employee in an amount of One Million Five
Hundred Thousand Dollars ($1,500,000.00) for the duration of Employee's
employment with Employer; (d) procure a term life insurance for Employee the
beneficiary to be designated by the Employee; (e) provide medical insurance for
Employee; (f) provide an allowance of Fifteen Hundred Dollars ($1,500) per month
for expenses associated with automobile use and maintenance; and (g) grant
Employee options to purchase stock in ATI Mark V Products, Inc. as set forth in
the Stock Option Agreement attached hereto marked Schedule B. The Salary shall
be increased every year in accordance with the increase of the Consumer Price
Index for All Urban Customers (base year 1967 = 100) for Los Angeles-Long
Beach-Anaheim, California, published by the United States Department of Labor,
Bureau of Labor Statistics.
<PAGE>
4. Vacation.
In addition to the regular employee benefit policy of Employer,
Employee shall be entitled to Four (4) weeks paid vacation during each year of
employment for the first Five (5) years, and Six (6) weeks each year for each
year of employment after Five (5) years.
5. Termination.
This Agreement shall terminate on the earlier of:
(a) Ten (10) years, unless renewed per the conditions of paragraph
1 hereof;
(b) The death or retirement of Employee;
(c) Upon thirty (30) day written notice to Employee, if Employer
shall cease conducting its business, take any action looking
toward its dissolution or liquidation, or be subject of any
state insolvency proceeding;
(d) Upon thirty (30) day written notice to Employee upon the
disability of Employee, whereby Employee is unable to perform
his duties hereunder for a period of six (6) consecutive
weeks. Any determination of such inability to perform shall be
made only by the Board of Directors of Employer with such
professional advice as it may deem appropriate. Any
determination of disability made by the Employer's Board of
Directors shall be final and conclusive;
(e) The discharge of Employee for good cause, upon thirty (30) day
written notice to Employee by Employer, including but not
limited to, chronic inattention to duties, dishonesty, the
commission of a willful act or omission intended to injure the
business of Employer, or other breach of this Agreement by the
Employee.
(f) Upon thirty (30) day written notice from Employee to Employer
for any reason.
6. Assignment.
This Agreement shall not be assignable by either party hereto without
the prior written consent of the other party.
7. Confidentiality.
Any information acquired by Employee during his performance of this
Agreement shall be regarded as confidential and solely for the benefit of
Employer. Employee shall not use or disclose such information either directly or
indirectly during the term of the Agreement or at any time thereafter. All
documents prepared by Employee and confidential information given to Employee in
the course of his Employment hereunder shall be the exclusive property of
Employer.
8. Non-Competition.
Employee agrees that for a period of three years after termination of
employment hereunder, Employee will not, on behalf of himself or on behalf of
any other person, firm or corporation, solicit or divert customers of Employer.
However, this Section shall not apply to the situation where a customer comes to
Employee by his or her own will and without Employee's direct or indirect
solicitation or encouragement.
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<PAGE>
9. Entire Agreement.
This Agreement supersedes all prior agreements between the parties
concerning the subject matter hereof and this Agreement constitutes the entire
agreement between the parties. This Agreement may be amended only with a written
instrument duly executed by each party. No waiver by any party of any breach of
this Agreement shall be deemed to be a waiver of any preceding or succeeding
breach.
10. Notices.
Any notice, request, demand or other communication hereunder shall be
in writing and shall be deemed to be duly given when personally delivered to
Employer or Employee or when delivered by first class postage prepaid mail to
the home address of Employee and Chairman of the Board of Directors of Employer.
11. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
12. Arbitration.
In the event that a dispute arises concerning any term or condition of
this Agreement, the matter shall be resolved by arbitration and such arbitration
shall be governed by the provisions of the California Arbitration Act, Sections
1280 through 1294.2 of the Code of Civil Procedure. If a dispute should arise
under this Agreement, either party may within ten (10) days make a demand for
arbitration by filing a demand in writing with the other. The parties may agree
upon one arbitrator, but in the event that they cannot agree, there shall be
three, one named in writing by each of the parties within ten (10) days after
demand for arbitration is given and a third chosen by the two appointed. Should
either party refuse or neglect to join in the appointment of the arbitrator(s)
or to furnish the arbitrator(s) with any papers or information demanded, the
arbitrator(s) are empowered by both parties to proceed ex parte. Arbitration
shall take place in the City of Los Angeles, County of Los Angeles, State of
California, and the hearing before the arbitrator(s) of the matter to be
arbitrated shall be at the time and place within said city as is selected by the
arbitrator(s). The arbitrator(s) shall select such time and place promptly after
his (or her) appointment and shall give written notice thereof to each party at
least 20 days prior to the date so fixed. At the hearing any relevant evidence
may be presented by either party, and the formal rules of evidence applicable to
judicial proceedings shall not govern. Evidence may be admitted or excluded in
the sole discretion of the arbitrator(s). Said arbitrator(s) shall hear and
determine the matter and shall execute and acknowledge their award in writing
and cause a copy thereof to be delivered to each of the parties. If there is
only one arbitrator, his decision shall be final, binding and conclusive upon
all the parties, and if there are three arbitrators the decision of any two
shall be binding and conclusive. The submission of a dispute to the
arbitrator(s) may be rendered by any Superior Court having jurisdiction; or such
Court may vacate, modify, or correct the ward in accordance with the prevailing
sections of the California Arbitration Act. If three arbitrators are selected
under the foregoing procedure but two of the three fail to reach an agreement in
the determination of the matter in question, the matter shall be decided by
three new arbitrators who shall be appointed and shall proceed in the same
manner, and the process shall be repeated until a decision is finally reached by
two of the three arbitrators selected. The costs of such arbitration shall be
borne equally by the parties or in such proportions as the arbitrator(s) shall
determine.
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<PAGE>
13. Severability.
If any provision of this Agreement is declared or found to be illegal,
unenforceable or void by any administrative agency, regulatory body, or court of
competent jurisdiction, such finding shall not affect the remaining provisions
of this Agreement, and all other provisions hereof shall remain in full force
and effect.
14. Attorney's Fees.
Should action be filed to enforce any or all of the terms of this
Agreement, or to declare any rights, duties and obligations hereunder, the
prevailing party shall be awarded his costs of suit including reasonable
attorney's fees to be fixed by the Court.
IN WITNESS WHEREOF, the parties hereto have hereunto set their
hands on the 23rd of June, 1989.
EMPLOYER: EMPLOYEE:
ATI MARK V PRODUCTS, INC.
By: /s/ By: /s James K.T. Lu
------------------------- ----------------
Title: Secretary James K.T. Lu
4
<PAGE>
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 dated as of September 1, 1997, to that certain
Employment Agreement (this "Agreement"), dated as of January 1, 1991, by and
between DIAMOND ENTERTAINMENT CORPORATION (f/k/a ATI MARK V PRODUCTS, INC.) a
California corporation (the "Company"), and JAMES LU (the "Employee").
WITNESSETH
WHEREAS, the Corporation and the Employee entered into that certain
Employment Agreement dated as of January 1, 1991 (the "Agreement"); and
WHEREAS, the Corporation and the Employee desire to amend the Agreement
to effect the changes provided for herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the receipt and sufficiency of which is hereby acknowledged,
the parties hereto agree as follows:
1. Effective as of the date hereof, the Agreement is hereby amended by deleting
the portion (a) of Section 3 and replacing it with the following:
(a) as consideration for Employee's agreement to defer 90% of his
salary of $150,000 per annum, until further notice, the latest
being March 31, 1998, the Company hereby agrees to grant to
the Employee (i) 3,000,000 shares of Company common stock,
which shall vest in equally on a quarterly basis during the
fiscal year 1997; and (ii) 3,000,000 warrants to purchase
3,000,000 shares of Company common stock at a purchase price
of $.10 per share, exercisable over a two year period
beginning on the vesting date, which shall be the last day of
fiscal year 1997;
2. This Amendment shall be governed by and construed in accordance with the laws
of the State of California, without regard to principals of conflicts of law.
3. Except as otherwise specifically set forth herein, all of the terms and
provisions of the Existing Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first above written.
DIAMOND ENTERTAINMENT CORPORATION
By: /s Thomas Sung
--------------
Name: Thomas Sung
Title: Treasurer
/s James K.T. Lu
----------------
James Lu
<PAGE>
Exhibit 10.2
EMPLOYMENT AGREEMENT
This Agreement, made and is effective as of the 16th day of August 1991
by and between Diamond Entertainment Corporation, formerly ATI Mark V Products,
Inc., ("Employer"), and Jeffrey I. Schillen ("Employee").
RECITAL
WHEREAS, Employer desires to secure the services of Employee as Vice
President, to make use of Employee's knowledge in the international business,
business and political connection both domestic and international, and to be
benefited from the potential business to be brought in by Employee;
WHEREAS, Employee has agreed to serve as Vice President of Employer on
the terms and conditions set forth herein;
NOW THEREFORE in consideration of the mutual promises and agreements
contained herein, it is agreed as follows:
1. Employment
Employer agrees to employ Employee to serve in the capacity of
Vice President at the direction of the Board of Directors and the Chief
Executive Officer of Employer and Employee agrees to accept such employment
shall commence on August 16, 1991, and shall be valid until December 31, 2000
unless terminated in accordance with paragraph 4 herein. This agreement may be
extended on yearly basis so long as such extension is agreed to in writing by
both parties.
2. Exclusivity
Employee warrants that there are no agreements or
arrangements, whether written or oral, in effect which would prevent Employee
from rendering exclusive services to the Employer during the term of this
Agreement hereof, and Employee warrants that he has not made and will not make
any commitment or do any act in conflict with this Agreement.
3. Compensation
As full compensation for all services to be rendered by
Employee to Employer during the first year of the term of this Agreement,
Employer shall: (a) pay Employee a salary of Ninety Thousand Dollars
($90,000.00) per annum ("Salary"); (b) pay a bonus as set forth on Schedule A
hereto; (c) procure term life insurance on behalf of Employee in an amount of
Five Hundred Thousand Dollars ($500,000) for the duration of Employee's
employment with Employer; (d) procure a term life insurance for Employee the
beneficiary to be designated by the Employee; (e) provide medical insurance for
Employee; (f) provide an allowance of Twelve Hundred Dollars ($1,200.00) per
month for expenses associated with automobile use and maintenance; and (g) grant
Employee options to purchase stock in Diamond Entertainment Corporation as set
forth in the Stock Option Agreement attached hereto marked Schedule B. The
Salary shall be increased every year in accordance with the increase of the
Consumer Price Index for All Urban Customers (base year 1967 = 100) for Los
<PAGE>
Angeles-Long Beach-Anaheim, California, published by the United States
Department of Labor, Bureau of Labor Statistics.
4. Vacation
In addition to the regular employee benefit policy of
Employer, Employee shall be entitled to Four (4) weeks paid vacation during each
year of employment for the first Five (5) years, and Six (6) weeks each year for
each year of employment after Five (5) years.
5. Termination
This Agreement shall terminate on the earlier of:
(a) December 31st, 2000, unless renewed per the conditions of
paragraph 1 hereof;
(b) The death or retirement of Employee;
(c) Upon thirty (30) day written notice to Employee, if Employer
shall cease conducting its business, take any action looking
toward its dissolution or liquidation, or be subject of any
state insolvency proceeding;
(d) Upon thirty (30) day written notice to Employee upon the
disability of Employee, whereby Employee is unable to perform
his duties hereunder for a period of six consecutive weeks.
Any determination of such inability to perform shall be made
only by the Board of Directors of Employer with such
professional advice as it may deem appropriate. Any
determination of disability made by the Employer's Board of
Directors shall be final and conclusive;
(e) The discharge of Employee for good cause, upon thirty (30) day
written notice to Employee by Employer, including but not
limited to, chronic inattention to duties, dishonesty, the
commission of a willful act or omission intended to injure the
business of Employer, or other breach of this Agreement by the
Employee.
(f) Upon thirty (30) day written notice from Employee to Employer
for any reason.
6. Assignment
This Agreement shall not be assignable by either party hereto
without the prior written consent of the other party.
7. Confidentiality
Any information acquired by Employee during his performance of
this Agreement shall be regarded as confidential and solely for the benefit of
Employer. Employee shall not use or disclose such information either directly or
indirectly during the term of the Agreement or at any time thereafter. All
documents prepared by Employee and confidential information given to Employee in
the course of his Employment hereunder shall be the exclusive property of
Employer.
8. Non-Competition
Employee agrees that for a period of three years after
termination of employment hereunder, Employee will not, on behalf of himself or
on behalf of any other person, firm or corporation, solicit or divert customers
of Employer. However, this section shall not apply to the
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<PAGE>
situation where a customer comes to Employee by his or her own will and without
Employee's direct or indirect solicitation or encouragement.
9. Entire Agreement
This Agreement supersedes all prior agreements between the
parties concerning the subject matter hereof and this Agreement constitutes the
entire agreement between the parties. This Agreement may be amended only with a
written instrument duly executed by each party. No waiver by any party of any
breach of this Agreement shall be deemed to be a waiver of any preceding or
succeeding breach.
10. Notices
Any notice, request, demand or other communication hereunder
shall be in writing and shall be deemed to be duly given when personally
delivered to Employer or Employee or when delivered by first class postage
prepaid mail to the home address of Employee and Chairman of the Board of
Directors of Employer.
11. Governing Law
This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
12. Arbitration
In the event that a dispute arises concerning any term or
condition of this Agreement, the matter shall be resolved by arbitration and
such arbitration shall be governed by the provisions of the California
Arbitration Act, Sections 1280 through 1294.2 of the Code of Civil Procedure. If
a dispute should arise under this Agreement, either party may within ten (10)
days make a demand for arbitration by filing a demand in writing with the other.
The parties may agree upon one arbitrator, but in the event that they cannot
agree, there shall be three, one named in writing by each of the parties within
ten (10) days after demand for arbitration is given and a third chosen by the
two appointed. Should either party refuse or neglect to join in the appointment
of the arbitrator(s) or to furnish the arbitrator(s) with any papers or
information demanded, the arbitrator(s) are empowered by both parties to proceed
ex parte. Arbitration shall take place in the City of Los Angeles, County of Los
Angeles, State of California, and the hearing before the arbitrator(s) of the
matter to be arbitrated shall be at the time and place within said city as is
selected by the arbitrator(s). The arbitrator(s) shall select such time and
place promptly after his (or her) appointment and shall give written notice
thereof to each party at least twenty (20) days prior to the date so fixed. At
the hearing any relevant evidence may be presented by either party, and the
formal rules of evidence applicable to judicial proceedings shall not govern.
Evidence may be admitted or excluded in the sole discretion of the
arbitrator(s). Said arbitrator(s) shall hear and determine the matter and shall
execute and acknowledge their award in writing and cause a copy thereof to be
delivered to each of the parties. If there is only one arbitrator, his decision
shall be final, binding and conclusive upon all the parties, and if there are
three arbitrators the decision of any two shall be binding and conclusive. The
submission of a dispute to the arbitrator(s) may be rendered by any Superior
Court having jurisdiction; or such Court may vacate, modify, or correct the ward
in accordance with the prevailing sections of the California Arbitration Act. If
three arbitrators are selected under the foregoing procedure but two of the
three fail to reach an agreement in the determination of the matter in question,
the matter shall be decided by three new arbitrators who shall
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<PAGE>
be appointed and shall proceed in the same manner, and the process shall be
repeated until a decision is finally reached by two of the three arbitrators
selected. The costs of such arbitration shall be borne equally by the parties or
in such proportions as the arbitrator(s) shall determine.
13. Severability
If any provision of this Agreement is declared or found to be
illegal, unenforceable or void by any administrative agency, regulatory body, or
court of competent jurisdiction, such finding shall not affect the remaining
provisions of this Agreement, and all other provisions hereof shall remain in
full force and effect.
14. Attorney's Fees
Should action be filed to enforce any or all of the terms of
this Agreement, or to declare any rights, duties and obligations hereunder, the
prevailing party shall be awarded his costs of suit including reasonable
attorney's fees to be fixed by the Court.
IN WITNESS WHEREOF, the parties hereto have hereunto set their
hands on August 16, 1991.
EMPLOYER: EMPLOYEE:
By: /s James K.T. Lu By: /s Jeffrey I. Schillen
---------------------------- ----------------------------
Title: CEO Jeffrey I. Schillen
----------------------------
4
<PAGE>
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 dated as of September 1, 1997 to that certain
Employment Agreement (this "Agreement"), dated as of August 16, 1991, by and
between DIAMOND ENTERTAINMENT CORPORATION (f/k/a ATI MARK V PRODUCTS, INC.) a
California corporation (the "Corporation"), and JEFFREY I. SCHILLEN (the
"Employee").
WITNESSETH
WHEREAS, the Corporation and the Employee entered into that certain
Employment Agreement dated as of August 16, 1991 (the "Agreement"); and
WHEREAS, the Corporation and the Employee desire to amend the Agreement
to effect the changes provided for herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the receipt and sufficiency of which is hereby acknowledged,
the parties hereto agree as follows:
1. Effective as of the date hereof, the Agreement is hereby
amended for the year 1997 only by deleting the portion (a) of
Section 3 and replacing it with the following:
(a) as consideration for Employee's agreement to defer
90% of his 1997 salary, until further notice, the
latest being March 31, 1998, the Company hereby
agrees to grant to the Employee (i) 750,000 shares of
Company common stock, which shall vest in equally on
a quarterly basis during the fiscal year 1997; and
(ii) 750,000 warrants to purchase 750,000 shares of
Company common stock at a purchase price of $.10 per
share, exercisable over a two year period beginning
on the vesting date, which shall be the last day of
fiscal year 1997;
2. This Amendment shall be governed by and construed in
accordance with the laws of the State of California, without
regard to principals of conflicts of law.
3. Except as otherwise specifically set forth herein, all of the
terms and provisions of the Existing Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first above written.
DIAMOND ENTERTAINMENT CORPORATION
By: /s James K.T. Lu
-----------------------------
Name: James Lu
Title: President
/s Jeffrey I. Schillen
-----------------------------
Jeffrey I. Schillen
<PAGE>
Exhibit 10.10
STANDARD SUBLEASE
1. Parties. This Sublease, dated, for reference purposes only,
July 30, 1998, is made by and between Shinho Electronics & Communication, Inc.,
a California Corporation ("Sublessor") and Diamond Entertainment Corporation,
Inc., a California Corporation ("Sublessee").
2. Premises. Sublessor hereby subleases to Sublessee and
Sublessee hereby subleases from Sublessor for the term, at the rental, and upon
all of the conditions set forth herein, that certain real property, including
all improvements therein, and commonly known by the street address of 16200-A
Carmenita Road, Cerritos located in the County of Los Angeles, State of
California and generally described as (describe briefly the nature of the
property) an industrial unit of approximately 48,129 SF which is part of a
198,581 SF building ("Premises").
3. Term.
3.1 Term. The term of this Sublease shall be for forty-four
and one half months (44 1/2) commencing on October 1, 1998 and ending on June
14, 2002 unless sooner terminated pursuant to any provision hereof.
3.2 Delay in Commencement. Sublessor agrees to use its best
commercially reasonable efforts to deliver possession of the Premises by the
commencement date.
4. Rent.
4.1 Base Rent. Sublessee shall pay to Sublessor as Base Rent
for the Premises equal monthly payments of $21,786.22 in advance, on the first
(1st) day of each month of the term hereof. Sublessee shall pay Sublessor upon
the execution hereof $21,786.22 as Base Rent for October, 1998. Base Rent for
any period during the term hereof which is for less than one month shall be a
pro rata portion of the monthly installment.
4.2 Rent Defined. All monetary obligations of Sublessee to
Sublessor under the terms of this Sublease (except for the Security Deposit) are
deemed to be rent ("Rent"). Rent shall be payable in lawful money of the United
States to Sublessor at the address stated herein or to such other persons or at
such other places as Sublessor may designate in writing.
5. Security Deposit. Sublessee shall deposit with Sublessor
$43,572.44 as security for Sublessee's faithful performance of Sublessee's
obligations hereunder. The rights and obligations of Sublessor and Sublessee as
to said Security Deposit shall be as set forth in Paragraph 5 of the Master
Lease (as modified by Paragraph 7.3 of this Sublease). Fifty
<PAGE>
percent (50%) of deposit is due upon execution hereof and the remaining fifty
percent (50%) is due prior to Sublessee taking possession.
6. Use.
6.1 Agreed Use. The Premises shall be used and occupied only
for distribution, storage, duplication, marketing and related office uses of
video tape production and other similar products and for no other purpose.
6.2 Compliance. Sublessor warrants that the improvements on
the Premises comply with all applicable covenants or restrictions of record and
applicable building codes, regulations and ordinances ("Applicable
Requirements") in effect on the commencement date. Said warranty does not apply
to the use to which Sublessee will put the Premises or to any alterations or
utility installations made or to be made by Sublessee. NOTE: Sublessee is
responsible for determining whether or not the zoning is appropriate for its
intended use, and acknowledges that past uses of the Premises may no longer be
allowed. If the Premises do not comply with said warranty, or in the event that
the Applicable Requirements are hereafter changed, the rights and obligations of
Sublessor and Sublessee shall be as provided in Paragraph 2.3 of the Master
Lease (as modified by Paragraph 7.3 of this Sublease).
6.3 Acceptance of Premises and Lessee. Sublessee acknowledges
that:
(a) It has been advised by Brokers to satisfy itself
with respect tot he condition of the Premises (including but not limited to the
electrical, HVAC and fire sprinkler systems, security, environmental aspects,
and compliance with Applicable Requirements), and their suitability for
Sublessee's intended use;
(b) Sublessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to its occupancy of the Premises; and
(c) neither Sublessor, Sublessor's agents, nor
any Broker has made any oral or written representations or warranties with
respect to said matters other than as set forth in this Sublease.
In addition, Sublessor acknowledges that:
(a) Broker has made no representations,
promises or warranties concerning Sublessee's ability to honor the Sublease or
suitability to occupy the Premises; and
(b) It is Sublessor's sole responsibility to
investigate the financial capability and/or suitability of all proposed tenants.
7. Master Lease.
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7.1 Sublessor is the lessee of the Premises by virtue of a
lease, hereinafter the "Master Lease", a copy of which is attached hereto marked
Exhibit 1, wherein Mt. Vernon Properties, a California Corporation is the
lessor, hereinafter the "Master Lessor".
7.2 This Sublease is and shall be at all times subject and
subordinate to the Master Lease.
7.3 The Terms, conditions and respective obligations of
Sublessor and Sublessee to each other under this Sublease shall be the terms and
conditions of the Master Lease except for those provisions of the master Lease
which are directly contradicted by this Sublease in which event the terms of
this Sublease document shall control over the Master Lease. Therefore, for the
purposes of this Sublease, wherever in the Master Lease the word "Lessor" is
used it shall be deemed to mean the Sublessor herein and wherever in the Master
Lease the word "Lessee" is used it shall be deemed to mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods
subsequent for obligations which have arisen prior to the termination of this
Sublease, Sublessee does hereby expressly assume and agree to perform and comply
with, for the benefit of Sublessor and Master Lessor, each and every obligations
of Sublessor under the Master Lease except for the following paragraphs which
are excluded therefrom: 1.3, 1.4, 1.5, 1.6, 1.9, 51, Exhibit B in its entirety.
7.5 The obligations that Sublessee has assumed under Paragraph
7.4 hereof are hereinafter referred to as the "Sublessee's Assumed Obligations".
The obligations that Sublessee has not assumed under Paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
7.6 Sublessee shall hold Sublessor free and harmless from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys' fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the
entire term of this Sublease, subject, however, to any earlier termination of
the Master Lease without the fault of the Sublessor, and to comply with or
perform Sublessor's Remaining Obligations and to hold Sublessee free and
harmless from all liability, judgments, costs, damages, claims or demands
arising out of Sublessor's failure to comply with or perform Sublessor's
Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is
in full force and effect and that no default exists on the part of any Party to
the Master Lease.
8. Assignment of Sublease and Default.
8.1 Sublessor hereby assigns and transfers to Master Lessor
the Sublessor's interest in this Sublease, subject, however, to the provisions
of Paragraph 8.2 hereof.
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8.2 Master Lessor, by executing this document, agrees that
until a Default shall occur in the performance of Sublessor's Obligations under
the Master Lease, that Sublessor may receive, collect and enjoy the Rent
accruing under this Sublease. However, if Sublessor shall Default in the
performance of its obligations to Master Lessor then Master Lessor may, at its
option, receive and collect, directly from Sublessee, all Rent owing and to be
owed under this Sublease. Master Lessor shall not, by reason of this assignment
of the Sublease nor by reason of the collection of the Rent from the Sublessee,
be deemed liable to Sublessee for any failure of the Sublessor to perform and
comply with Sublessor's Remaining Obligations.
8.3 Sublessor hereby irrevocably authorizes and directs
Sublessee upon receipt of any written notice from the Master Lessor stating that
a Default exists in the performance of Sublessor's obligations under the Master
Lease, to pay to Master Lessor the Rent due and to become due under the
Sublease. Sublessor agrees that Sublessee shall have the right to rely upon any
such statement and request from Master Lessor, and that Sublessee shall pay such
Rent to Master Lessor without any obligation or right to inquire as to whether
such Default exists and notwithstanding any notice from or claim from Sublessor
to the contrary and Sublesssor shall have no right or claim against Sublessee
for any such Rent so paid by Sublessee.
8.4 No changes or modification shall be made to this Sublease
without the consent of Master Lessor.
9. Consent of Master Lessor.
9.1 In the event that the Master Lease requires that Sublessor
obtain the consent of Master Lessor to any subletting by Sublessor then, this
Sublease shall not be effective unless, within ten days of the date hereof,
Master Lessor signs this Sublease thereby giving its consent to this Subletting.
9.2 In the event that the obligations of the Sublessor under
the Master Lease have been guaranteed by third parties then neither this
Sublease, nor the Master Lessor's consent, shall be effective unless, within 10
days of the date hereof, said guarantors sign this Sublease thereby giving their
consent to this Sublease.
9.3 In the event that Master Lessor does give such consent
then:
(a) Such consent shall not release Sublessor of
its obligations or alter the primary liability of Sublessor to pay the Rent and
perform and comply with all of the obligations of Sublessor to be performed
under the Master Lease.
(b) The acceptance of Rent by Master Lessor from
Sublessee or anyone else liable under the Master Lease shall not be deemed a
waiver by Master Lessor of any provisions of the Master Lease.
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(c) The consent to this Sublease shall not
constitute a consent to any subsequent subletting or assignment.
(d) In the event of any Default of Sublessor under
the Master Lease, Master Lessor may proceed directly against Sublessor, any
guarantors or anyone else liable under the Master Lease or this Sublease without
first exhausting Master Lessor's remedies against any other person or entity
liable thereon to Master Lessor.
(e) Master Lessor may consent to subsequent
sublettings and assignments of the Master Lease or this Sublease or any
amendments or modifications thereto without notifying Sublessor or any one else
liable under the Master Lease and without obtaining their consent and such
action shall not relieve such persons from liability.
(f) In the event that Sublessor shall Default in its
obligations under the Master Lease, then Master Lessor, at its option and
without being obligated to do so, may require Sublessee to attorn to Master
Lessor in which event Master Lessor shall undertake the obligations of Sublessor
under this Sublease from the time of the exercise of said option to termination
of this Sublease but Master Lessor shall not be liable for any prepaid Rent nor
any Security Deposit paid by Sublessee, nor shall Master Lessor be liable for
any other Defaults of the Sublessor under the Sublease.
9.4 The signatures of the Master Lessor and any Guarantors of
Sublessor at the end of this document shall constitute their consent to the
terms of this Sublease.
9.5 Master Lessor acknowledges that, to the best of Master
Lessor's knowledge, no Default presently exists under the Master Lease of
obligations to be performed by Sublessor and that the Master Lease is in full
force and effect.
9.6 In the event that Sublessor Defaults under its obligations
to be performed under the Master Lease by Sublessor, Master Lessor agrees to
deliver to Sublessee a copy of any such notice of default. Sublessee shall have
the right to cure any Default of Sublessor described in any notice of default
within ten days after service of such notice of default on Sublessee. If such
Default is cured by Sublessee then Sublessee shall have the right of
reimbursement and offset from and against Sublessor.
10. Brokers Fee.
10.1 Upon execution hereof by all parties, Sublessor shall pay
to The Seeley Company a licensed real estate broker, ("Broker"), a fee as set
forth in a separate agreement between Sublessor and Broker, or in the event
there is no such separate agreement, the sum of $ per agreement for brokerage
services rendered by Broker to Sublessor in this transaction.
10.2 Sublessor agrees that if Sublessee exercises any option
or right of first refusal as granted by Sublessor herein, or any option or right
substantially similar thereto, either to extend the term of this Sublease, to
renew this Sublease, to purchase the Premises, or
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to lease or purchase adjacent property which Sublessor may own or in which
Sublessor has an interest, then Sublessor shall pay to Broker a fee in
accordance with the schedule of Broker in effect at the time of the execution of
this Sublease. Notwithstanding the foregoing, Sublessor's obligation under this
Paragraph 10.2 is limited to a transaction in which Sublessor is acting as a
Sublessor, lessor or seller.
10.3 Master Lessor agrees that if Sublessee shall exercise any
option or right of first refusal granted to Sublessee by Master Lessor in
connection with this Sublease, or any option or right substantially similar
thereto, either to extend or renew the Master Lease, to purchase the Premises or
any part thereof, or to lease or purchase adjacent property which Master Lessor
may own or in which Master Lessor has an interest, or if Broker is the procuring
cause of any other lease or sale entered into between Sublessee and Master
Lessor pertaining to the Premises, any part thereof, or any adjacent property
which Master Lessor owns or in which it has an interest, then as to any of said
transactions, Master Lessor shall pay to Broker a fee, in cash, in accordance
with the schedule of Broker in effect at the time of the execution of this
Sublease.
10.4 Any fee due from Sublessor or Master Lessor hereunder
shall be due and payable upon the exercise of any option to extend or renew,
upon the execution of any new lease, or, in the event of a purchase, at the
close of escrow.
10.5 Any transferee of Sublessor's interest in this Sublease,
or of Master Lessor's interest in the Master Lease, by accepting an assignment
thereof, shall be deemed to have assumed the respective obligations of Sublessor
or Master Lessor under this Paragraph 10. Broker shall be deemed to be a
third-party beneficiary of this Paragraph 10.
11. Attorney's Fees. If any party or the Broker named herein
brings an action to enforce the terms hereof or to declare rights hereunder, the
prevailing party in any such action, on trial and appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
Court.
12. Additional Provisions. [If there are no additional provisions,
draw a line from this point to the next printed word after the space left here.
If there are additional provisions place the same here.]
13. Tenant Improvements. Sublessor, at Sublessor's cost, shall
accomplish the following prior to lease commencement:
(a) Clean offices;
(b) Broom sweep warehouse area;
(c) Shampoo carpets;
(d) Repair or replace lighting fixtures as needed;
(e) Repair all holes in any wall as needed.
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14. Rent Adjustment. Rent payable for month two (2) of lease term
shall be waived. Net charges during free rent period shall be waived.
15. Notwithstanding, Sublessor shall be responsible for
maintaining the foundation, structural, walls and roof which includes the
membrane.
16. Sublessor agrees to sign "Landlord Waiver" if it is required
by the Sublessee's lender.
17. Sublessee's Agent. Sublessee is being represented by Lee &
Associates, a licensed broker.
18. Phase 1. This Lease is subject to Sublessee securing and
approving a Phase 1. Sublessor shall not deposit check until Sublessee has
approved Phase 1 in writing. Phase 1 shall be completed within 10 days.
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE
TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
SUBLEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION
OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR SUBLESSEES'S INTENDED USE.
WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA,
CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE
LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED.
SHINHO ELECTRONICS &
COMMUNICATIONS, INC.
A CALIFORNIA CORPORATION
Executed at:
--------------------- -----------------------------------
on: By
------------------------------- ---------------------------------
Address: By
------------------------- ---------------------------------
"Sublessor" (Corporate Seal)
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DIAMOND ENTERTAINMENT
CORPORATION, INC.
A CALIFORNIA CORPORATION
Executed at:
---------------------- ------------------------------------
on: 8/6/98 By /s/ James K.T. Lu
-------------------------------- ----------------------------------
Address: By
--------------------------- ----------------------------------
"Sublessee" (Corporate Seal)
MT. VERNON PROPERTIES,
A CALIFORNIA CORPORATION
Executed at:
--------------------- ------------------------------------
on: By
------------------------------- ----------------------------------
Address: By
-------------------------- ----------------------------------
"Master Lessor" (Corporate Seal)
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EXHIBIT I
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-NET
1. Basic Provisions.
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
as of the _____ day of December, 1996, is made by and between Mt. Vernon
Properties, a California corporation ("Landlord"), and Shinho Electronics &
Communications, Inc., a California corporation ("Tenant"), (collectively the
"Parties" or individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or provided by Landlord under the terms of this Lease, and commonly
known by the street address of 16200A Carmenita Road, Cerritos, California, and
containing approximately forty-eight thousand one hundred twenty-nine (48,129)
square feet of floor area (the "Premises"). The Premises is a portion of a
building (the "Building"), approximately as shown on Exhibit A attached hereto
and incorporated herein by this reference. The Premises, the Building, the
Common Areas and the land upon which the same are located are a part of a larger
industrial park, which, inclusive of the other buildings therein and the land
underlying the same, is referred to herein as the "Project". (See Paragraph 2
for further provisions.)
1.3 Term: Sixty-four (64) months, plus any partial month following the
Commencement Date if the Commencement Date is other than the first day of a
calendar month (the "Term"), commencing upon the date (the "Commencement Date")
which is the earlier to occur of (a) the "Substantial Completion" of the "Tenant
Improvements" (as such terms are defined in Exhibit B attached hereto and
incorporated herein by this reference), or (b) February 15, 1997. (See Paragraph
3 for further provisions.)
1.4 Base Rent: $16,363.86 per month, subject to adjustment as provided
in Paragraph 4 below ("Base Rent"), payable in advance on the first (1st) day of
each month commencing upon the Commencement Date. (See Paragraph 4 for further
provisions.)
1.5 Base Rent Paid Upon Execution: $16,363.86 as Base Rent for the
period of the first full calendar month following the Commencement Date during
which Base Rent is due and payable under this Lease.
1.6 Security Deposit: $18,289.02 ("Security Deposit"). (See Paragraph 5
for further provisions.)
1.7 Permitted Use: Storage, distribution and repair of computer
monitors and related peripherals and ancillary use for the storage and
distribution of paper related products and steel related products, and for no
other use or purpose.
1.8 Tenant's Share: 23.85%. (See Paragraph 4 for further provisions.)
<PAGE>
1.9 Real Estate Brokers: Lee & Associates and Century 21 (collectively,
the "Brokers"). (See Paragraph 15 for further provisions.)
1.10 Guarantor: None. (See Paragraph 37 for further provisions.)
2. Premises.
2.1 Letting. Landlord hereby leases to Tenant, and Tenant hereby leases
from Landlord, the Premises, for the Term, of the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which
Landlord and Tenant agree is reasonable and the rental based thereon is not
subject to revision whether or not the actual square footage is more or less.
2.2 Condition of Premises: Acceptance of Premises. Promptly following
the date hereof, Landlord shall cause the Tenant Improvements to be constructed
in the Premises pursuant to Exhibit B attached hereto and incorporated herein by
this reference. Subject to such construction of the Tenant Improvements, Tenant
hereby acknowledges: (a) that it is familiar with and has had the opportunity to
investigate the condition of the Premises (including but not limited to the
mechanical, electrical and fire sprinkler systems, security, environmental
aspects, compliance with "Applicable Law", as defined in Paragraph 6.3), the
present and future suitability of the Premises for Tenant's intended use and
compliance of the Premises with all applicable covenants, conditions or
restrictions of record and applicable building codes, regulations and
ordinances, (b) that Tenant has made such investigation as it deems necessary
with reference to such matters and assumes all responsibility therefor, and
without in any manner derogating from Tenant's obligations set forth herein
including, without limitation, those relating to maintenance and repair, Tenant
accepts the Premises, including all fixtures, furnishings and equipment, in its
present condition, state of repair and operating order and in its present "AS
IS" condition, and (c) that neither Landlord, nor any of Landlord's agents, has
made any oral or written representations or warranties with respect to said
matters. Correction of any non-compliance with respect to any of said matters
shall be the obligation of Tenant at Tenant's sole cost and expense.
2.3 Vehicle Parking. Tenant shall have the non-exclusive right to use a
proportionate share of unreserved and unassigned Project Common Area vehicle
parking spaces. Tenant shall not use more of such parking spaces than its
proportionate share. Such parking spaces shall be used only for parking by
vehicles no larger than full-sized passenger automobiles or pick-up trucks.
Tenant shall not permit or allow any vehicles that belong to or are controlled
by Tenant or Tenant's employees, suppliers, shippers, customers or invitees to
be loaded, unloaded or parked in areas other than those designated by Landlord
for such activities. If Tenant permits or allows any of the prohibited
activities described herein, then Landlord shall have the right, without notice,
in addition to such other rights and remedies that it may have, to remove or tow
away the vehicle involved and charge the cost to Tenant, which cost shall be
immediately payable as additional rent upon demand by Landlord.
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2.4 Common Areas. The term "Common Areas" is defined as all areas and
facilities outside the Premises and within the exterior boundary line of the
Project that are provided and designated by Landlord from time to time for the
general non-exclusive use of Landlord, Tenant and of other occupants of the
Project an their respective employees, suppliers, shippers, customers and
invitees, which may include, without limitation, parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways
and landscaped areas. Landlord hereby grants to Tenant, for the benefit of
Tenant and its employees, suppliers, shippers, customers and invitees, during
the term of this Lease, the non-exclusive right to use, in common with others
entitled to such use, the Common Areas as they exist from time to time, subject
to any rights, powers and privileges reserved by Landlord under the terms of
this Lease or under the terms of any rules or regulations or restrictions
governing the use of the Project. Under no circumstances shall the right herein
granted to use the Common Areas be deemed to include, the right to store any
property, temporarily or permanently, in the Common Areas. In the event that any
such storage shall occur, then Landlord shall have the right, without notice, in
addition to such other rights and remedies that it may have, to remove the
property and charge the cost thereof to Tenant, which cost shall be immediately
payable as additional rent upon demand by Landlord. Landlord or such other
person(s) as Landlord may appoint, shall have the exclusive control and
management of the Common Areas and shall have the right, from time to time, to
establish, modify, amend and enforce reasonable rules and regulations with
respect to the Common Areas. Tenant agrees to abide by and conform to all such
rules and regulations, and to cause its employees, suppliers, shippers,
customers and invitees to so abide and conform. Landlord shall not be
responsible to Tenant for the non-compliance with such rules or regulations by
other tenants and users of the Project. Landlord shall have the right, in its
sole and absolute discretion, from time to time (a) to make changes to the
Common Areas, including, without limitation, changes in the location, size,
shape and number of driveways, entrances, parking spaces, parking areas, loading
and unloading areas, ingress, egress, direction of traffic, landscaped areas and
walkways, so long as reasonable access to the Premises remains available; (b) to
close temporarily any of the Common Areas for maintenance and/or repair purposes
or to prevent the acquisition of rights in the Common Areas by other persons or
entities, so long as reasonable access to the Premises remains available; (c) to
designate other land outside the boundaries of the Project to be a part of the
Common Areas; (d) to add additional buildings and improvements to the Common
Areas; (e) to use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Project, or any portion thereof; and
(f) to do and perform such other acts and make such other changes in, to or with
respect to the Common Areas and/or Project as Landlord may, in the exercise of
commercially reasonable business judgment, deem to be appropriate.
3. Term. This Lease shall be effective and binding upon the parties from and
after the date hereof. The Commencement Date and Term of this Lease shall be as
specified in Paragraph 1.3 above. Tenant acknowledges that the Tenant
Improvements shall be constructed in accordance with Exhibit B, but that such
Tenant Improvements may not be completed by the Commencement Date. Failure to
complete the Tenant Improvements by the Commencement Date shall not subject
Landlord to any damages or liability therefor, nor shall such failure affect the
validity of this Lease, or the obligations of Tenant hereunder, or extend the
Term
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hereof. Tenant shall be entitled to occupancy of the Premises from and after the
execution and delivery of this Lease by the parties and such occupancy prior to
the Commencement Date shall be subject to all terms and conditions of this Lease
(including, without limitation, Tenant's obligation for payment of Tenant's
Share of Operating Expenses), except that Tenant shall not be liable for payment
of Base Rent with respect to the period prior to the Commencement Date. Tenant's
occupancy of the Premises prior to the Commencement Date shall also be subject
to the condition that no such occupancy shall interfere with, delay or increase
the costs of performance of the Tenant Improvements, and the parties shall
reasonably cooperate to avoid any such interference, delay or increase in costs.
Notwithstanding anything to the contrary contained in this Lease, if the
Commencement Date is other than the first day of a calendar month, the initial
Term shall include the partial month until the first calendar day of the first
full calendar month following the Commencement Date, such that the initial Term
shall be for a period from the Commencement Date until the first day of the
sixty-fourth (64th) full calendar month following Commencement Date.
4. Rent.
4.1 Base Rent. Base Rent payable under this Lease shall initially be
the sum of $16,363.86 per month, provided that such Base Rent amount shall be
adjusted upon the commencement of the thirty-first (31st) full calendar month
following the Commencement Date to equal the product obtained by multiplying
such initial Base Rent amount by a fraction, the numerator of which is the
"Index" (as hereinafter defined) for the calendar month which is two (2) months
prior to such adjustment date and the denominator of which is the Index for the
calendar month which is thirty-two (2) months prior to such adjustment date;
provided, however, that in no event shall such adjustment result in an increase
in Base Rent of more than five percent (5%) per annum on a cumulative and
compounding basis, or of less than three percent (3%) per annum on a cumulative
and compounding basis. As used herein, the "Index" shall mean the Consumer Price
Index published by the United States Department of Labor, Bureau of Labor
Statistics (the "Bureau"), "All Items" for All Urban Consumers in the Los
Angeles-Anaheim-Riverside metropolitan area, (1982-84 = 100). Should the Bureau
discontinue the publication of the Index, publish the same less frequently or
alter the same in some other manner, the most nearly comparable index or
procedure as determined by Landlord shall be substituted therefor. Tenant shall
cause payment of Base Rent, "Additional Fixed Rent" (as defined in Exhibit B
attached hereto), Tenant's Share of Operating Expenses and other rent or
charges, as the same may be adjusted from time to time, to be received by
Landlord pursuant to this Lease, in lawful money of the United States, without
offset or deduction, on or before the day on which it is due under the terms of
this Lease; except, however, that Tenant's obligation for payment of Base Rent
shall be conditionally abated for the first (1st), second (2nd), third (3rd) and
fourth (4th) full calendar months of the Term following the Commencement Date.
Should this Lease be terminated due to Tenant's Breach under this Lease, then
the total sum of such Base Rent so conditionally abated shall become immediately
due and payable by Tenant to Landlord. If at the date of the expiration of the
Term of this Lease, Tenant is not in default hereunder, Landlord shall waive any
payment of all Base Rent so conditionally abated. Nothing herein stated shall be
deemed to affect the Commencement Date, the Base Rent payable under the lease
for any period other than the
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period for which Base Rent is so conditionally abated, or the amount of
Tenant's Share of Operating Expenses or other additional rent payable at any
time pursuant to the Lease. Base Rent, Tenant's Share of Operating Expenses
and all other rent and charges for any period during the Term hereof which is
for less than one (1) full calendar month shall be prorated based upon the
actual number of days of the calendar month involved. If the Commencement
Date is not the first calendar day of a calendar month, Base Rent for the
partial calendar month including the Commencement Date shall be paid upon the
Commencement Date and thereafter during the Term, Base Rent shall be payable
on the first calendar day of each calendar month during the Term. Payment of
Base Rent, Additional Fixed Rent, Tenant's Share of Operating Expenses and
other rent and charges shall be made to Landlord at its address stated herein
or to such other persons or at such other addresses as Landlord may from time
to time designate in writing to Tenant.
4.2 Operating Expenses.
(a) For purposes of this Lease, "Operating Expenses" shall
mean the sum of "Common Area Expenses" (as hereinafter defined), costs incurred
by Landlord in performance of obligations with respect to the Building and
improvements therein pursuant to Paragraph 7.2 below and costs of performing
comparable work on other buildings and improvements within the Project, costs
incurred by Landlord in maintaining the insurance described in Paragraph 8.3
below with respect to the Building and other buildings within the Project, the
amount of any insurance deductible pursuant to Paragraph 8.3 in the event of
casualty or comparable insurance deductible in the event of casualty to any
other building in the Project, and costs incurred by Landlord in payment of Real
Property Taxes with respect to the Building pursuant to Paragraph 10.1 below and
for other buildings in the Project. For purposes of this Lease, Tenant's Share
shall mean a fraction, expressed as a percentage, the numerator of which is the
floor area of the Premises and the denominator of which is the total floor area
of buildings within the Project.
(b) For purposes of this Lease, "Common Area Expenses" shall
mean all costs incurred by Landlord for the operation, management, repair,
maintenance and replacement, in neat, clean, good order and condition, of the
Common Areas, including, without limitation, any parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation systems, lighting
facilities, fences and gates, costs of causing the Common Areas to comply with
Applicable Laws, costs incurred by Landlord in maintaining a policy of liability
insurance pursuant to Paragraph 8.2 below, costs incurred by Landlord in payment
of Real Property Taxes with respect to the Common Areas pursuant to Paragraph
10.1 below, and the cost of water, gas and electricity to service the Common
Areas.
(c) Tenant shall pay to Landlord, as additional rent, Tenant's
Share of Operating Expenses, within ten (10) days after a reasonably detailed
statement of Tenant's receipt of a statement therefor from Landlord; provided,
however, that at landlord's option, an amount may be estimated by Landlord from
time to time of Tenant's Share of annual Operating Expenses and the same shall
be payable monthly or quarterly, as Landlord shall designate, in
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advance, during each year of the Lease term, on the same day as the Base Rent is
due hereunder. In the event of payment of Tenant's Share of Operating Expenses
on an estimated basis, Landlord shall have the right to adjust its estimate of
such expenses from time to time during the Lease term upon written notice to
Tenant, based upon reasonably anticipated changes in the amount of such
expenses. For any year during which Tenant's Share of Operating Expenses are so
paid on an estimated basis, within ninety (90) days following the end of such
year or as soon thereafter as information becomes available to Landlord,
Landlord shall deliver to Tenant a statement of actual Operating Expenses for
such year, and if Tenant has overpaid Tenant's Share of Operating Expenses,
Tenant shall be entitled to a credit against Tenant's Share of Operating
Expenses next coming due under this Lease in the amount of such excess (except
that any such overpayment allocable to the final year of the Lease term shall be
refunded to Tenant following the satisfaction of all Tenant obligations under
this Lease), and if the Tenant has underpaid Tenant's Share of Operating
Expenses, Tenant shall pay any such deficiency to Landlord within thirty (30)
days following receipt of such statement. Landlord's obligation to make such
refund and Tenant's obligation to pay such deficiency, as applicable, shall
survive the expiration of the Term or earlier termination of this Lease.
5. Security Deposit. Tenant shall deposit with Landlord upon the execution
hereof, the Security Deposit set forth in Paragraph 1.6 as security for Tenant's
faithful performance of Tenant's obligations under this Lease. If Tenant fails
to pay Base Rent or other rent or charges due hereunder, or otherwise "Defaults"
under this Lease (as defined in Paragraph 13.1), Landlord may use, apply or
retain all or any portion of said Security Deposit for the payment of any amount
due Landlord or to reimburse or compensate Landlord for any liability, cost,
expense, loss or damage (including attorneys' fees) which Landlord may suffer or
incur by reason thereof. If Landlord uses or applies all or any portion of said
Security Deposit, within ten (10) days after Landlord's written request
therefor, Tenant shall deposit with Landlord funds sufficient to restore said
Security Deposit to the full amount required by this Lease. Landlord shall not
be required to keep all or any part of the Security Deposit separate from its
general accounts. If Tenant performs all of Tenant's obligations hereunder,
Landlord shall, at the expiration or earlier termination of the Term hereof and
after Tenant has vacated the Premises, return to Tenant or, at Landlord's
option, to the last assignee, if any, of Tenant's interest herein), that portion
of the Security Deposit not used or applied by Landlord. No part of the Security
Deposit shall be considered to be held in trust, to bear interest or other
increment for its use, or to be prepayment for any moneys to be paid by Tenant
under this Lease.
6. Use.
6.1 Use. Tenant shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.7 and for no other use or purpose. Tenant shall not use
or permit the use of the Premises in a manner that creates waste or a nuisance,
or that disturbs owners and/or occupants of, or causes damage to, neighboring
premises or properties.
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6.2 Hazardous Substances.
(a) Prohibition on Hazardous Substances. The term "Hazardous
Substance" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or effect,
either by itself or in combination with other materials on the Premises or other
portions of the Building and/or Project, is either: (i) potentially injurious to
the public health, safety or welfare, the environment or the Premises and/or
other portions of the Building and/or Project, (ii) regulated or monitored by
any governmental authority, or (iii) a basis for liability of Landlord to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products, by-products or fractions
thereof. Tenant represents and warrants to Landlord that Tenant's business and
all activities to be performed by Tenant in, on or about the Premises, Building
and Project shall comply with all Applicable Laws respecting Hazardous
Substances and Tenant agrees to change any such activity or install any
equipment, safety devices, pollution control systems and/or other installations
as may be required at any time during the Lease Term to comply therewith. Tenant
shall not cause or permit any Hazardous Substance to be brought upon, kept, or
used in or about the Premises, Building or Project by Tenant, its agents,
employees, contractors or invitees, without the prior written consent of
Landlord, and if any such Hazardous Substances use is approved by Landlord,
Tenant shall comply with any reasonable requirements imposed by Landlord as to
Hazardous Substances handling, storage, use and disposal upon the Premises or
Project. If tenant breaches the obligations stated in the preceding sentence, or
if the presence of Hazardous Substance on the Premises, Building or Project
caused or permitted by Tenant or otherwise caused to be located upon the
Premises, Building or Project during the Lease Term results in contamination of
the Premises, Building, Project or any adjacent property, then Tenant shall
indemnify, defend and hold Landlord harmless from any and all claims, judgments,
damages, penalties, fines, costs, liabilities or losses (including, without
limitation, diminution in value of the Premises, Building, Project and/or
adjacent property, damages for the loss or restriction on use of rentable or
usable space or of any amenity of the Premises, Building, Project and/or
adjacent property, damages arising from any adverse impact on marketing of the
Premises, Building, project an/or adjacent property, and sums paid in settlement
of claims, attorneys' fees, consultant fees and expert fees) which arise during
or after the Lease Term as a result of such contamination. This indemnification
of Landlord by Tenant includes, without limitation, costs incurred in connection
with any investigation of site conditions or any cleanup, remedial, removal or
restoration work required by any federal, state or local governmental agency or
political subdivision because of Hazardous Substance present in the soil or
ground water on or under the Premises, Building, Project and/or adjacent
property. Without limiting the foregoing, if the presence of any Hazardous
Substance on the Premises, Building and/or Project caused or permitted by Tenant
results in any contamination of the Premises, Building, Project and/or adjacent
property, Tenant shall promptly take all actions at its sole expense as are
necessary to return the Premises, Building, Project and/or adjacent property to
the conditions existing prior to the introduction of any such Hazardous
Substance to the Premises, Building, Project and/or adjacent property; provided
that Landlord's approval of such actions shall first be obtained,
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which approval shall not be unreasonably withheld so long as such actions would
not potentially have any material adverse long-term or short-term effect on the
Premises, Building, Project or adjacent property.
(b) Duty to Inform Landlord. If Tenant knows, or has
reasonable cause to believe, that a Hazardous Substance, or a condition
involving or resulting from same, has come to be located in, on, under or about
the Premises, Building and/or Project other than as previously consented to by
Landlord, Tenant shall immediately give written notice of such fact to Landlord.
Tenant shall also immediately give Landlord a copy of any statement, report,
notice, registration, application, permit, business plan, license, claim, action
or proceeding given to, or received from, any governmental authority or private
party, or persons entering or occupying the Premises, concerning the presence,
spill, release, discharge of, or exposure to, any Hazardous Substance or
contamination in, on, or about the Premises, Building and/or Project.
(c) Indemnification. Tenant shall indemnify, protect, defend
and hold Landlord, its agents, representatives, employees, lenders and ground
landlord, if any, and the Premises, Building and Project harmless from and
against any and all loss of rents, and/or damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance or storage
tank. Tenant's obligations under this Paragraph 6 shall include, but not be
limited to, the effects of any contamination or injury to person, property or
the environment created or suffered by Tenant, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Landlord and
Tenant shall release Tenant from its obligations under this Lease with respect
to Hazardous Substances or storage tanks, unless specifically so agreed by
Landlord in writing at the time of such agreement. Notwithstanding anything to
the contrary contained in this Lease, Tenant shall not be obligated to
indemnify, defend or hold harmless Landlord with respect to, and Tenant shall
not be required to take remediation actions necessary to comply with Applicable
Laws with respect to, any Hazardous Substances which may be existing at the
Premises as of the delivery of possession by Landlord to Tenant (except to the
extent the requirement for indemnification, defense, holding harmless, remedial
action and/or compliance work is necessitated by Tenant's particular use of the
Premises or alterations or improvements to the Premises (other than the Tenant
improvements to be made pursuant to Exhibit B) following the delivery of
possession).
6.3 Tenant's Compliance with Law. Tenant shall, at Tenant's sole cost
and expense, fully, diligently and in a timely manner, comply with all
"Applicable Law," which term is used in this Lease to include all laws, rules,
codes, regulations, ordinances, directives, covenants, easements, restrictions,
permits, the requirements of any applicable fire insurance underwriter or rating
bureau, and the recommendations of Landlord's engineers and/or consultants,
relating in any manner to the Premises, and to the extent such compliance is
necessitated as a result of Tenant's particular use of or alterations or
improvements to the Premises, the Building and/or Common Areas. Tenant's
obligation for compliance with
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Applicable Law pursuant hereto shall include, without limitation, matters
pertaining to (i) industrial hygiene, (ii) accessibility or usability of the
Premises by disabled persons, (iii) environmental conditions on, in, under or
about the Premises, including soil and groundwater conditions, and (iv) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. Tenant shall,
within five (5) days after receipt of Landlord's written request, provide
Landlord with copies of all documents and information, including, but not
limited to, permits, registrations, manifests, applications, reports and
certificates, evidencing Tenant's compliance with any Applicable Law specified
by Landlord, and shall immediately upon receipt, notify Landlord in writing
(with copies of any documents involved) of any threatened or actual claim,
notice, citation, warning, complaint or report pertaining to or involving
failure by Tenant or the Premises to comply with any Applicable Law.
6.4 Inspection; Compliance. Landlord and Landlord's "Lender(s)" (as
defined in Paragraph 8.3(a)), agents and representatives shall have the right to
enter the Premises at any time, in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the conditions of the Premises
and for verifying compliance by Tenant with this Lease and all Applicable Laws,
and to employ experts and/or consultants in connection therewith and/or to
advise Landlord with respect to Tenant's activities, including but not limited
to the installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination is found to exist or be imminent, or unless the inspection is
requested or ordered by a governmental authority as the result of any such
existing or imminent violation or contamination. In any such case, Tenant shall
upon request reimburse Landlord or Landlord's Lender, as the case may be, for
the costs and expenses of such inspections. If Tenant is not in compliance with
the requirements of the provisions of this Lease (including, without limitation,
the provisions of this Lease relating to Hazardous Substances), Landlord shall
have the right, but not the obligation, to immediately enter upon the Premises
to remedy any condition caused by Tenant's failure to comply with the
requirements of this Lease. Landlord shall use reasonable efforts to minimize
unreasonable interference with Tenant's business as a result of any such entry
by Landlord but shall not be liable for any interference caused thereby.
7. Maintenance; Repairs; Utility Installations; Trade Fixtures and
Alterations.
7.1 Tenant's Obligations.
(a) Except for items which are the responsibility of Landlord
pursuant to Paragraph 7.2 below, Tenant shall, at Tenant's sole cost and expense
and at all times, keep the Premises and every part thereof in good order,
condition and repair (whether or not such portion of the Premises requiring
repair, or the means of repairing the same, are reasonably or readily accessible
to Tenant, and whether or not the need for such repairs occurs as a result of
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Tenant's use, any prior use, the elements or the age of such portion of the
Premises), including, without limiting the generality of the foregoing, all
equipment or facilities within the Premises, such as plumbing, heating, air
conditioning, ventilating, electrical, lighting facilities, boilers, fired or
unfired pressure vessels, fire sprinkler and/or standpipe and hose or other
automatic fire extinguishing system, including fire alarm and/or smoke detection
systems and equipment, fire hydrants, fixtures, walls, ceilings, floors,
windows, doors, plate glass and skylights. Tenant shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Tenant's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of, the Premises, the elements surrounding same, or neighboring
properties, or pertaining to or involving any Hazardous Substance and/or storage
tank. Tenant, in keeping the Premises in good order, condition and repair, shall
exercise and perform good maintenance practices. Tenant's obligations shall
include restorations, replacements or renewals when necessary to keep the
premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(b) Tenant shall, at Tenant's sole cost and expense, procure
and maintain contracts, with copies to Landlord, in customary form and substance
for, and with contractors specializing and experienced in and complying with
industry standards for, the inspection, maintenance and service of the following
equipment and improvements, if any, located on the Premises: (i) heating, air
conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure
vessels, and (iii) fire sprinkler and/or standpipe and hose or other automatic
fire extinguishing systems, including fire alarm and/or smoke detection.
7.2 Landlord's Obligations. Subject to the foregoing, Landlord shall
keep and maintain in good order, condition and repair the Common Areas, roof,
exterior walls, structural parts and structural floor of the building and pipes
and conduits outside the Premises for the furnishing to the Premises of various
utilities (except to the extent that the same are the obligation of the
appropriate public utility company). However, any such repairs or maintenance
which is necessitated by the negligence or willful misconduct of the Tenant, its
servants, agents, employees or contractors or anyone claiming under Tenant, or
by reason of the failure of Tenant to perform or observe any condition or
agreement contained in this Lease, or caused by alterations, additions or
improvements made by Tenant or anyone claiming under Tenant, shall be made by
Tenant or, at Landlord's option, by Landlord at Tenant's sole cost and expense.
Except to the extent the same is Tenant's responsibility pursuant to Paragraph
6.3 above, Landlord shall cause the Building to be in compliance with the
requirements of Applicable Laws. Notwithstanding anything to the contrary
contained in this Lease, Landlord shall not be liable to Tenant for failure to
make repairs as herein specifically required of it unless Tenant has previously
notified Landlord, in writing, of the need for such repairs and Landlord has
failed to commence and complete said repairs within a reasonable time following
receipt of Tenant's written notification. It is the intention of the parties
that the terms of this Lease govern the respective obligations of the parties as
to maintenance and repair of the Premises. Tenant and Landlord expressly waive
the benefit of any statute now or hereafter in
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effect to the extent it is inconsistent with the terms of this Lease with
respect to, or which affords Tenant the right to make repairs at the expense of
Landlord or to terminate this Lease by reason of, any needed repairs.
7.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility
Installations" is used in this Lease to refer to all carpeting, window
coverings, air lines, power panels, electrical distribution, security, fire
protection systems, communication systems, lighting systems and fixtures,
heating, ventilating, and air conditioning equipment, plumbing, and fencing in,
on or about the Premises. The term "Trade Fixtures" shall mean Tenant's
machinery and equipment that can be removed without doing material damage to the
Premises. The term "Alterations" shall mean any modification of the improvements
on the Premises from that which are provided by Landlord under the terms of this
Lease, other than Utility Installations or Trade Fixtures, whether by addition
or deletion. "Tenant Owned Alterations and/or Utility Installations" are defined
as Alterations and/or Utility Installations made by Tenant that are not yet
owned by Landlord as defined in Paragraph 7.4(a). Tenant shall not make any
Alterations or Utility Installations in, on, under or about the Premises without
Landlord's prior written consent. Tenant may, however, make non-structural
Utility Installations to the interior of the Premises (excluding the roof), as
long as they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, and the cumulative cost
thereof during the term of this Lease does not exceed $25,000. Notwithstanding
anything to the contrary contained herein, no addition, alteration, change,
installation or improvement shall be made which will weaken the structural
strength, lessen the value of, interfere or make inoperable any portion of the
Premises or change the architectural appearance of the Premises.
(b) Consent. Any Alterations or Utility Installations that
Tenant shall desire to make and which require the consent of the Landlord shall
be presented to Landlord in written form with proposed detailed plans. All
consents given by Landlord, whether by virtue of Paragraph 7.3(a) or by
subsequent specific consent, shall be deemed conditioned upon: (i) Tenant's
acquiring all applicable permits required by governmental authorities, (ii) the
furnishing of copies of such permits together with a copy of the plans and
specifications for the Alteration or Utility Installation to Landlord prior to
commencement of the work thereon, and (iii) the compliance by Tenant with all
conditions of said permits in a prompt and expeditious manner. Any Alterations
or Utility Installations by Tenant during the term of this Lease shall be done
in a good and workmanlike manner, with good and sufficient materials, and in
compliance with all Applicable Law. Tenant shall promptly upon completion
thereof furnish Landlord with as-built plans and specifications therefor.
Landlord may (but without obligation to do so) condition its consent to any
requested Alteration or Utility Installation upon Tenant's providing Landlord
with a lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation and/or upon Tenant's
posting an additional Security Deposit with Landlord under Paragraph 36 hereof.
(c) Indemnification. Tenant shall pay, when due, all claims
for labor or materials furnished or alleged to have been furnished to or for
Tenant at or for use on the
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Premises, which claims are or may be secured by any mechanics' or materialmen's
lien against the Premises or any interest therein. Tenant shall give Landlord
not less than ten (10) days' notice prior to the commencement of any work in, on
or about the Premises, and Landlord shall have the right to post notices of
non-responsibility in or on the Premises as provided by law. If Tenant shall, in
good faith, contest the validity of any such lien, claim or demand, then Tenant
shall, at it sole expense defend and protect itself, Landlord and the Premises
against the same and shall pay and satisfy any such adverse judgment that may be
rendered thereon before the enforcement thereof against the Landlord or the
Premises. If Landlord shall require, Tenant shall furnish to Landlord a surety
bond satisfactory to Landlord in an amount equal to one and one-half times the
amount of such contested lien claim or demand, indemnifying Landlord against
liability for the same, as required by law for the holding of the Premises free
from the effect of such lien or claim. In addition, Landlord may require Tenant
to pay Landlord's attorneys' fees and costs in participating in such action if
Landlord shall decide it is to its best interest to do so.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Landlord's right to require their
removal or become the owner thereof as hereinafter provided in this Paragraph
7.4, all Alterations and Utility Installations made to the Premises by Tenant
shall be the property of and owned by Tenant, but considered a part of the
Premises. Landlord may, at any time and at its option, elect in writing to
Tenant to be the owner of all or any specified part of the Tenant Owned
Alterations and Utility Installations. Unless otherwise instructed per Paragraph
7.4(b) hereof, all Tenant Owned Alterations and Utility Installations shall, at
the expiration or earlier termination of this Lease, become the property of
Landlord and remain upon and be surrendered by Tenant with the Premises.
(b) Removal. Unless otherwise expressly agreed in writing,
Landlord may require that any or all Tenant Owned Alterations or Utility
Installations be removed by the expiration or earlier termination of this Lease,
notwithstanding their installation may have been consented to by Landlord.
Landlord may require the removal at any time of all or any part of any Tenant
Owned Alterations or Utility Installations made without the required consent of
Landlord. Notwithstanding anything to the contrary contained in this Lease,
Tenant shall not be required to remove the initial Tenant Improvements made to
the Premises pursuant to Exhibit B attached hereto.
(c) Surrender/Restoration. Tenant shall surrender the Premises
by the end of the last day of the Lease term or any earlier termination date,
with all of the improvements, parts and surfaces thereof clean and free of
debris and in good operating order, condition and state of repair, ordinary wear
and tear excepted. "Ordinary wear and tear" shall not include any damage or
deterioration that would have been prevented by good maintenance practice or by
Tenant performing all of its obligations under this Lease. Except as otherwise
agreed or specified in writing by Landlord, the Premises, as surrendered, shall
include the Utility Installations. The obligation of Tenant shall include the
repair of any damage occasioned by the installation, maintenance or removal of
Tenant's Trade Fixtures, furnishings, equipment,
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and Alterations and/or Utility Installations, as well as the removal of any
storage tank and the removal, replacement, or remediation of any contaminated
soil, material or groundwater, all as may then be required by Applicable Law
and/or good practice. Tenant's Trade Fixtures shall remain the property of
Tenant and shall be removed by Tenant subject to its obligation to repair and
restore the Premises per this Lease. Nothing contained in this Paragraph 7.4(c)
shall be deemed to limit Tenant's repair and maintenance obligations pursuant to
this Lease.
8. Insurance; Indemnity.
8.1 Liability Insurance - Tenant. Tenant shall obtain and keep in force
during the Term of this Lease a Commercial General Liability policy of insurance
protecting Tenant and Landlord, Landlord's Lender(s), if any, and TDA, Inc.
(each as an additional insured) against claims for bodily injury, personal
injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $2,000,000 per occurrence with
an "Additional Insured-Managers or Landlords of Premises" Endorsement and
contain the "Amendment of the Pollution Exclusion" for damage caused by heat,
smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "insured contract"
for the performance of Tenant's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Tenant shall
not, however, limit the liability of Tenant nor relieve Tenant of any obligation
hereunder. All insurance to be carried by Tenant shall be primary to and not
contributory with any similar insurance carried by Landlord, whose insurance
shall be considered excess insurance only.
8.2 Liability Insurance - Landlord. In addition to, and not in lieu of,
the insurance maintained by Tenant pursuant to Paragraph 8.1 above, Landlord
shall obtain and keep in force during the Term of this Lease, as an item of
Common Area Expenses, such policies of Commercial General Liability insurance
protecting Landlord, Landlord's Lender(s), if any, and TDA, Inc. against claims
for bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Project and
all areas appurtenant thereto, in such form and amounts and including such
coverages as Landlord deems appropriate. Tenant shall not be named as an
additional insured under such policies.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. Landlord shall obtain and keep
in force during the Term of this Lease, as an item of Operating Expenses, a
policy or policies in the name of Landlord, with loss payable to Landlord and to
the holders of any mortgages, deeds of trust or ground leases on the Premises
("Lender(s)"), insuring loss or damage to the Building, including all
improvements, fixtures, furnishings and equipment. However, Tenant Owned
Alterations and Utility Installations shall be insured by Tenant under Paragraph
8.4 rather than by Landlord. The amount of such insurance shall be equal to the
full replacement cost of the
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Building, including all improvements, fixtures, furnishings and equipment as the
same shall exist from time to time, or the amount required by Lenders. At
Landlord's option, such policy or policies shall insure against all risks of
direct physical loss or damage (including, without limitation, the perils of
flood and earthquake), including coverage for any additional costs resulting
from debris removal and reasonable amounts of coverage for the enforcement of
any ordinance or law regulating the reconstruction or replacement of any
undamaged sections of the Building required to be demolished or removed by
reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause or loss. Said policy or policies shall also
contain an agreed valuation provision in lieu of any coinsurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
Index. If such insurance coverage has a deductible clause, the deductible shall
not exceed commercially reasonable amounts, and in the event of any casualty,
the amount of such deductible shall be an item of Operating Expenses.
(b) Rental Value. Landlord shall, in addition, obtain and keep
in force during the term of this Lease, as an item of Operating Expenses, a
policy or policies in the name of Landlord, with loss payable to Landlord and
Lender(s), insuring the loss of the full rental and other charges payable to
Landlord by Tenant under this Lease and by other occupants of the Building under
their respective leases for one (1) year (including all real estate taxes,
insurance costs, and any scheduled rental increases). Said insurance shall
provide that in the event any applicable lease is terminated by reason of an
insured loss, the period of indemnity for such coverage shall be extended beyond
the date of the completion of repairs or replacement of the Building, to provide
for one full year's loss of rental revenues from the date of any such loss. Said
insurance shall contain an agreed valuation provision in lieu of any coinsurance
clause, and the amount of coverage shall be adjusted annually to reflect the
projected rental income, property taxes, insurance premium costs and other
expenses, if any, otherwise payable to Landlord, for the next twelve (12) month
period. Any deductible amount in the event of such loss shall be an item of
Operating Expenses.
(c) Adjacent Premises. Notwithstanding anything to the
contrary contained herein, to the extent the cost of maintaining insurance with
respect to the Building and/or any other buildings within the Project is
increased as a result of Tenant's acts, omissions, use or occupancy of the
Premises, Tenant shall pay for such increase.
8.4 Tenant's Property Insurance. Subject to the requirements of
Paragraph 8.5, Tenant at its cost shall either by separate policy or, at
Landlord's option, by endorsement to a policy already carried, maintain
insurance coverage on all personal property, Tenant Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by the Landlord under Paragraph 8.3(a). Such insurance shall be full
replacement cost coverage with a deductible of not to exceed commercially
reasonable amounts. The proceeds from any such insurance shall be used by Tenant
for the replacement of personal property or the restoration of Tenant Owned
Alterations and Utility Installations. Tenant shall be the Insuring Party with
respect to the insurance required by this Paragraph 8.4 and shall provide
Landlord with written evidence that such insurance is in force.
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8.5 Insurance Policies. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintained during the policy term a "General Policyholders Rating"
of at least B+, X or such other rating as may be required by a Lender having a
lien on the Premises, as set forth in the most current issue of "Best's
Insurance Guide." Tenant shall not do or permit to be done anything which shall
invalidate the insurance policies referred to in this Paragraph 8. Tenant shall
cause to be delivered to Landlord certified copies of policies of such insurance
or certificates evidencing the existence and amounts of insurance required to be
maintained by Tenant pursuant to this Article 8 with the insureds and loss
payable clauses as required by this Lease. No such policy maintained by Tenant
shall be cancelable or subject to modification except after thirty (30) days
prior written notice to Landlord. Tenant shall at least thirty (30) days prior
to the expiration of such policies, furnish Landlord with evidence of renewals
or "insurance binders" evidencing renewal thereof, or Landlord may order such
insurance and charge the cost thereof to Tenant, which amount shall be payable
by Tenant to Landlord upon demand. If Tenant shall fail to procure and maintain
the insurance required to be carried by Tenant under this Paragraph 8, Landlord
may, but shall not be required to, procure and maintain the same, but at
Tenant's expense.
8.6 Waiver of Subrogation. Landlord and Tenant hereby mutually release
each other from liability and waive all right of recovery against each other for
any loss in or about the Premises, from perils insured against under the
respective property damage insurance policies required to be carried hereunder,
whether due to negligence or any other cause; provided that this Paragraph 8.6
shall be inapplicable if it would have the effect, but only to the extent it
would have the effect, or invalidating any insurance coverage of Landlord or
Tenant. If the waiver of subrogation pursuant hereto results in an additional
premium charge to Landlord, Tenant agrees to promptly pay Landlord such
additional charge upon receiving a written billing therefor. However, if such
insurance policies cannot be obtained with a waiver of subrogation, the parties
are relieved of the obligation to obtain such a waiver hereunder.
8.7 Indemnity. Tenant shall indemnify, protect, defend and hold
harmless the Premises, Building, Project, Landlord and its agents and
representatives, TDA, Inc., Landlord's master or ground landlord, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorneys' and consultants' fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Tenant, the conduct of Tenant's business, any act,
omission or neglect of Tenant, its agents, contractors, employees or invitees,
and out of any Default or Breach by Tenant in the performance in a timely manner
of any obligation on Tenant's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Landlord) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought against
Landlord by reason of any of the foregoing matters, Tenant upon notice from
Landlord shall defend the same at Tenant's expense by counsel reasonably
satisfactory to Landlord and Landlord shall cooperate with Tenant in such
defense. Landlord need not have first paid any such claim in order to be so
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indemnified. Tenant, as a material part of the consideration to Landlord, hereby
assumes all risk of damage to property or injury to persons in, upon or about
the Premises and Common Areas arising from any cause and Tenant hereby waives
all claims in respect thereof against Landlord.
8.8 Exemption of Landlord from Liability. Landlord shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Tenant, Tenant's employees, contractors, invitees, customers, or any
other person in or about the Premises or Project, whether such damage or injury
is caused by or results from fire, steam, electricity, gas, water or rain, or
from the breakage, leakage, obstruction or other defects of pipes, fire
sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures,
or from any other cause, whether the said injury or damage results from
conditions arising upon the Premises, Building or Project, or from other sources
or places, and regardless of whether the cause of such damage or injury or the
means of repairing the same is accessible or not. Landlord shall not be liable
for any damages arising from any act or neglect of any other tenant of Landlord.
Notwithstanding Landlord's negligence or breach of this Lease, Landlord shall
under no circumstances be liable for injury to Tenant's business or for any loss
of income or profit therefrom.
9. Damage or Destruction.
9.1 Insured Casualty. If the Premises is partially or totally destroyed
by fire or any other peril covered by insurance maintained pursuant to Paragraph
8.3, except as otherwise provided in this Paragraph 9, Landlord shall, within
120 days after the occurrence of such destruction, but only to the extent that
proceeds of such insurance are available to Landlord for such purpose, commence
reconstruction and restoration of the Premises (but not Tenant's Trade Fixtures,
Tenant Owned Alterations and Utility Installations, furnishings, equipment and
personal property) and prosecute the same diligently to completion, in which
event this Lease shall continue in full force and effect. If, however, insurance
proceeds are not sufficient to pay the full cost of such reconstruction, if the
damage or destruction is due to the acts or omissions of Tenant, its agents,
employees or contractors, or if Landlord is restricted by any governmental
authority, Landlord may elect to either terminate this Lease or pay the cost of
such reconstruction. In the event of the repair and/or restoration of the
Premises following casualty pursuant to this Paragraph 9, following the
completion of such repair and/or restoration, Tenant shall promptly commence and
diligently prosecute to completion the repair and restoration of Tenant's Trade
Fixtures, Tenant Owned Alterations and Utility Installations, furnishings,
equipment and personal property.
9.2 Uninsured Casualty. If the Premises are damaged or destroyed to any
extent whatever as a result of any casualty or peril not covered by the
insurance maintained pursuant to Paragraph 8.3, Landlord may within 120 days
after the occurrence of such destruction: (a) commence reconstruction and
restoration of the Premises and prosecute the same diligently to completion, in
which event this Lease shall continue in full force and effect; or (b) notify
Tenant in writing that it elects not to reconstruct or restore the Premises, in
which event this Lease shall cease and terminate as of the date of service of
such notice. If Landlord elects to
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reconstruct the Premises following destruction as a result of any casualty or
peril not covered by such insurance, Landlord's and Tenant's obligations with
respect to the reconstruction of the Premises shall be as described and limited
in Paragraph 9.1 above.
9.3 Damage Near End of Term. Notwithstanding anything to the contrary
contained in Paragraphs 9.1 and 9.2 above, if the Premises is damaged by
casualty during the last twelve (12) months of the Term to an extent whereby
repairs and/or restoration cannot be completed within the shorter of (i) 90 days
or (ii) the remaining Term of this Lease, then Landlord and Tenant each shall
have the option to terminate this Lease by giving written notice to the other of
the exercise of such option within 60 days after such casualty, in which event
this Lease shall cease and terminate as of the date of service of such notice.
9.4 Abatement of Rent. During the period following the casualty until
the completion of Landlord's repair and/or restoration of casualty damage to the
Premises, Tenant's obligation for payment of Base Rent and Operating Expenses,
shall be abated in proportion to the degree to which Tenant's use of the
Premises is impaired but only to the extent to which Landlord receives
reimbursement (or would have received reimbursement had Landlord maintained the
insurance required to be maintained by Landlord under this Lease) for such
abatement pursuant to the rental value insurance maintained under Paragraph
8.3(b) above. Except for abatement of Base Rent and Operating Expenses, as
aforesaid, all other obligations of Tenant hereunder shall be preformed by
Tenant, and Tenant shall have no claim against Landlord for any damage suffered
by reason of any such damage, repair or restoration.
9.5 Termination-Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Tenant to Landlord.
Landlord shall, in addition, return to Tenant so much of Tenant's Security
Deposit as has not been, or is not then required to be, used by Landlord under
the terms of this Lease.
9.6 Waive Statutes. Landlord and Tenant agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statue to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 Payment of Taxes. During the Term of this Lease, Landlord shall
pay the "Real Property Taxes", as defined in Paragraph 10.2 below, applicable to
the Building (as an item of Operating Expenses), and applicable to the Common
Areas (as an item of Common Area Expenses).
10.2 Definition of "Real Property Taxes." As used herein, the term
"Real Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any
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authority having the direct or indirect power to tax, including any city, state
or federal government, or any school, agricultural, sanitary, fire, street,
drainage or other improvement district thereof, levied against any legal or
equitable interest of Landlord in the Premises, Building and/or Project,
Landlord's right to rent or other income therefrom, and/or Landlord's business
of leasing the Premises, Building and/or Project. The term "Real Property Taxes"
shall also include any tax, fee, levy, assessment or charge, or any increase
therein, imposed by reason of events occurring, or changes in applicable law
taking effect, during the term of this Lease, including but not limited to a
change in the ownership of the Premises, Building and/or Project or in the
improvements thereon, the execution of this Lease, or any modification,
amendment or transfer thereof, and whether or not contemplated by the Parties.
10.3 Personal Property Taxes. Tenant shall pay prior to delinquency all
taxes assessed against and levied upon Tenant Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
contained in the Premises or elsewhere. When possible, Tenant shall cause its
Trade Fixtures, furnishings, equipment and all other personal property to be
assessed and billed separately from the real property of Landlord. If any of
Tenant's said personal property shall be assessed with Landlord's real property,
Tenant shall pay Landlord the taxes attributable to Tenant within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Tenant's property or, at Landlord's option, as provided in Paragraph 10.1(b).
11. Utilities. Tenant shall contract for, in Tenant's name, and shall pay for
all water, gas, heat, light, power, telephone, trash disposal and other
utilities and services supplied to the Premises, together with any taxes
thereon. If any such services are not separately metered to Tenant, Tenant shall
pay a reasonable proportion, to be determined by Landlord, of all charges
jointly metered with other premises. Landlord shall not be liable in damages or
otherwise for any failure or interruption for any utility service being
furnished to the Premises, and no such failure or interruption shall be deemed
to constitute an actual or constructive eviction or entitle Tenant to terminate
this Lease or withhold any rent or any other sum due under this Lease.
12. Assignment and Subletting.
12.1 Landlord's Consent Required.
(a) Tenant shall not voluntarily or by operation of law
assign, transfer, mortgage or otherwise transfer or encumber or enter into a
concession, license, management or operating agreement with respect to
(collectively, "assignment") or sublet all or any part of Tenant's interest in
this Lease or in the Premises without Landlord's prior written consent given
under and subject to the terms of Paragraph 36. Notwithstanding anything to the
contrary contained in this Paragraph 12, Tenant shall have the right to permit
occupancy of portions of the Premises for the permitted use under this Lease by
entities controlling, controlled by or under majority common control with Tenant
(collectively, "Tenant's Affiliates") without Landlord's prior consent (but upon
fifteen (15) days prior written notice to Landlord), and Tenant shall have the
right to assign this lease (without being subject to the provisions of
Paragraphs 12.2(e), (h) or (i) below), to any of Tenant's Affiliates assuming
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Tenant's obligations under this Lease in writing, without Landlord's prior
consent (but upon fifteen (15) days prior written notice to Landlord) provided
that such assignee has a net worth at lease equal to the greater of (i) Tenant's
net worth as of the execution of this Lease, or (ii) Tenant's net worth
immediately prior to such assignment.
(b) A change in the control of Tenant shall constitute an
assignment requiring Landlord's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Tenant or of the
beneficial ownership of Tenant shall constitute a change in control for this
purpose.
(c) The involvement of Tenant or its assets in any
transaction, or series of transactions (by way of merger, sale, acquisition,
financing, refinancing, transfer, leveraged buy-out or otherwise), whether or
not a formal assignment or hypothecation of this Lease or Tenant's assets
occurs, which results or will result in a reduction of the Net Worth of Tenant,
as hereinafter defined, by an amount equal to or greater than twenty-five
percent (25%) of such Net Worth of Tenant as it was represented to Landlord at
the time of the execution by Landlord of this Lease or at the time of the most
recent assignment to which Landlord has consented, or as it exists immediately
prior to said transaction or transactions constituting such reduction, at
whichever time said Net Worth of Tenant was or is greater, shall be considered
an assignment of this Lease by Tenant to which Landlord may reasonably withhold
its consent. "Net Worth of Tenant" for purposes of this Lease shall be the net
worth of Tenant (excluding any guarantors) established under generally accepted
accounting principles consistently applied.
(d) An assignment or subletting of Tenant's interest in this
Lease without Landlord's specific prior written consent shall, at Landlord's
option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable
Breach without the necessity of any notice and grace period.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Landlord's consent, any assignment or
subletting shall not: (i) be effective without the express written assumption by
such assignee or subtenant of the obligations of Tenant under this Lease, (ii)
release Tenant of any obligations hereunder, or (iii) alter the primary
liability of Tenant for the payment of Base Rent and other sums due Landlord
hereunder or for the performance of any other obligations to be performed by
Tenant under this Lease.
(b) Landlord may accept any rent or performance of Tenant's
obligations from any person other than Tenant pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Landlord's right to exercise its remedies for the Default or Breach
by Tenant of any of the terms, covenants or conditions of this Lease.
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(c) The consent of Landlord to any assignment or subletting
shall not constitute a consent to any subsequent assignment or subletting by
Tenant or to any subsequent or successive assignment or subletting by the
subtenant. However, Landlord may consent to subsequent sublettings and
assignments of the sublease or any amendment or modifications thereto without
notifying Tenant or anyone else liable on the Lease or sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or sublease.
(d) In the event of any Default or Breach of Tenant's
obligations under this Lease, Landlord may proceed directly against Tenant, any
Guarantors or anyone else responsible for the performance of the Tenant's
obligations under this Lease, including any subtenant, without first exhausting
Landlord's remedies against any other person or entity responsible therefor to
Landlord, or any security held by Landlord or Tenant.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to the Landlord's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or subtenant, including but not limited
to the intended use and/or required modification of the Premises, if any,
together with a non-refundable deposit of $1,000 as reasonable consideration for
Landlord's considering and processing the request for consent. Tenant agrees to
provide Landlord with such other or additional information and/or documentation
as may be reasonably requested by Landlord, in determining whether to reasonably
consent to a proposed assignment or subletting, (i) it shall not be unreasonable
for Landlord to withhold its consent to any such assignment or subletting if a
proposed assignee's or subtenant's anticipated or proposed use of the Premises
involves the generation, storage, use, treatment or disposal of any Hazardous
Substance; and (ii) Landlord may consider, among other things, any or all of the
following factors: (1) the reputation of the proposed assignee or subtenant
(including any principals, partners or shareholders of such assignee or
subtenant), including, without limitation, the reputation of the proposed
assignee or subtenant for dishonesty, criminal conduct and unethical business
practices; (2) whether the business experience and quality of business
operations of the proposed assignee or subtenant is comparable to that of
Tenant; (3) the credit history of the proposed assignee or subtenant; (4) the
intended use of the Premises by the proposed assignee or subtenant; and/or (5)
whether the use of the Premises by the proposed assignee or subtenant will
involve the generation, storage, use, treatment or disposal of any Hazardous
Substances, or will in any way increase any potential risk or liability to
Landlord arising out of or relating to Hazardous Substances. Should Tenant
desire to enter into an assignment or subletting, Tenant shall provide not less
than ninety (90) days prior written notice thereof to Landlord setting forth the
name of the proposed assignee or subtenant, the term, use, rental rate and other
relevant particulars of the proposed assignment or subletting, including,
without limitation, evidence satisfactory to Landlord that the proposed assignee
or subtenant will not use, store or dispose of any Hazardous Substances in or on
the Premises, and that the proposed assignee or subtenant will immediately
occupy and thereafter use the Premises for the entire term of the Lease or the
sublease (as the case may be). Such notice shall be accompanied by a copy of the
proposed assignment or sublease agreement and any documents or financial
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information Landlord may require in order to make a determination as to the
suitability of the assignee or subtenant.
(f) Any assignee of, or subtenant under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Landlord, to have assumed and agreed to conform and comply
with each and every term, covenant, condition and obligation herein to be
observed or performed by Tenant during the term of said assignment or sublease.
(g) The occurrence of a transaction described in Paragraph
12.1(c) shall give Landlord the right (but not the obligation) to require that
the Security Deposit be increased to an amount equal to six (6) times the then
monthly Base Rent, and Landlord may make the actual receipt by Landlord of the
amount required to establish such Security Deposit a condition to Landlord's
consent to such transaction.
(h) In the event of any assignment or sublease, Landlord shall
receive as additional rent hereunder fifty percent (50%) of Tenant's "Excess
Consideration" derived from such assignment or sublease. If Tenant shall elect
to assign or sublet, Tenant shall use reasonable and good faith efforts to
secure consideration from any such assignee or subtenant which would be
generally equivalent to then-current market rent, but in no event shall Tenant's
monetary obligations to Landlord, as set forth in this Lease, be reduced. In the
event of a sublease, "Excess Consideration" shall mean all rent, additional rent
or other consideration actually received by Tenant from such subtenant and/or
actually paid by such subtenant on behalf of Tenant in connection with the
subletting in excess of the rent, additional rent and other sums payable by
Tenant under this Lease during the term of the sublease on a per square foot
basis if less than all of the Premises is subleased, less marketing costs,
attorneys' fees and brokerage commissions, if any, reasonably incurred by Tenant
to procure the sublease, and the cost of any alterations made by Tenant
specifically for the benefit of such subtenant. In the event of an assignment,
"Excess Consideration" shall mean key money, bonus money or other consideration
paid by the assignee to Tenant in connection with such assignment, and any
payment in excess of fair market value for services rendered by Tenant to
assignee or for assets, fixtures, inventory, equipment, or furniture transferred
by Tenant to assignee in connection with such assignment, less marketing costs,
attorneys' fees and brokerage commissions, if any, reasonably incurred by Tenant
to procure the assignment, and the cost of any alterations made by Tenant
specifically for the benefit of such assignee. If part of the Excess
Consideration shall be payable by the assignee or subtenant other than in cash,
then Landlord's share of such non-cash consideration shall be in such form as is
reasonably satisfactory to Landlord.
(i) In addition to Landlord's right of approval of any
proposed assignment or subletting and without limiting the other provisions of
this Paragraph 12, Landlord shall have the option, in the event of any proposed
assignment or subletting, to terminate the Lease as to the affected portion of
the Premises as of the proposed effective date of the proposed assignment or
subletting set forth in Tenant's notice. Such option to terminate shall be
exercised, if at all, by Landlord giving Tenant written notice thereof within
sixty (60) days
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following Landlord's receipt of Tenant's written request. In the event of such
termination by Landlord, from and after the effective date of such termination,
Landlord and Tenant shall have no further obligations or liabilities to each
other with respect to the affected portion of the Premises, except with respect
to obligations or liabilities which have accrued as of, or survive, such
termination (in the same manner as if such termination date were the date
originally fixed for the expiration of the Lease Term). Without in any manner
limiting the rights of Landlord, following any such termination by Landlord,
Landlord may lease the affected portion of the Premises to the prospective
assignee or subtenant proposed by Tenant, without liability to the Tenant.
Landlord's failure to exercise such termination right as herein provided shall
not be construed as Landlord's consent to the proposed assignment or subletting.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Tenant of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein.
(a) Tenant hereby assigns and transfers to Landlord all of
Tenant's interest in all rentals and income arising from any sublease of all or
a portion of the Premises heretofore or hereafter made by Tenant, and Landlord
may collect such rent and income and apply same toward Tenant's obligations
under this Lease, provided, however, that until a Breach (as defined in
Paragraph 13.1) shall occur in the performance of Tenant's obligations under
this Lease, Tenant may, except as otherwise provided in this Lease, receive,
collect and enjoy the rents accruing under such sublease. Landlord shall not, by
reason of this or any other assignment of such sublease to Landlord, nor by
reason of the collection of the rents from a subtenant, be deemed liable to the
subtenant for any failure of Tenant to perform and comply with any of Tenant's
obligations to such subtenant under such sublease. Tenant hereby irrevocably
authorizes and directs any such subtenant, upon receipt of a written notice from
Landlord stating that a Breach exists in the performance of Tenant's obligations
under this Lease, to pay to Landlord the rents and other charges due and to
become due under the sublease. Subtenant shall rely upon any such statement and
request from Landlord and shall pay such rents and other charges to Landlord
without any obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Tenant to the contrary. Tenant
shall have no right or claim against said subtenant, or, until the Breach has
been cured, against Landlord, for any such rents and other charges so paid by
said subtenant to Landlord.
(b) In the event of a Breach by tenant in the performance of
its obligations under this Lease, Landlord, at its option and without any
obligation to do so, may require any subtenant to attorn to Landlord, in which
event Landlord shall undertake the obligations of the sublandlord under such
sublease from the time of the exercise of said option to the expiration of such
sublease; provided, however, Landlord shall not be liable for any prepaid rents
or security deposit paid by such subtenant to such sublandlord or for any other
prior Defaults or Breaches of such sublandlord under such sublease.
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(c) Any matter or thing requiring the consent of the
sublandlord under a sublease shall also require the consent of Landlord herein.
(d) No subtenant shall further assign or sublet all or any
part of the Premises without Landlord's prior written consent.
(e) If Landlord delivers a copy of any notice of Default or
Breach by Tenant to the subtenant, such subtenant shall have the right to cure
the Default of Tenant within the grace period, if any, specified in such notice.
In such event, the subtenant shall have a right of reimbursement and offset from
and against Tenant for any such Defaults cured by the subtenant.
13. Default; Breach; Remedies.
13.1 Default; Breach. A "Default" is defined as a failure by the Tenant
to observe, comply with or perform any of the terms, covenants, conditions or
rules applicable to Tenant under this Lease. A "Breach" is defined as the
occurrence of any one or more of the following Defaults, and, where a grace
period for cure after notice is specified herein, the failure by Tenant to cure
such Default prior to the expiration of the applicable grace period, and shall
entitle Landlord to pursue the remedies set forth in Paragraphs 13.2 and/or
13.3:
(a) The vacating or abandonment of the Premises.
(b) The failure by Tenant to make any payment of Base Rent or
any other monetary payment required to be made by Tenant hereunder, whether to
Landlord or to a third party, as and when due, the failure by Tenant to provide
Landlord with reasonable evidence of insurance or surety bond required under
this Lease, or the failure of Tenant to fulfill any obligation under this Lease
which endangers or threatens life or property, where such failure continues for
a period of three (3) days following written notice thereof by or on behalf of
Landlord to Tenant.
(c) Except as expressly otherwise provided in this Lease, the
failure by Tenant to provide Landlord with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable Law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Tenant's obligations under this Lease if
required under Paragraphs 1.10 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Landlord may reasonably require of Tenant under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Landlord to Tenant.
(d) A Default by Tenant as to the terms, covenants, conditions
or provisions of this Lease, one of the rules adopted under Paragraph 40 hereof,
that are to be observed,
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complied with or performed by Tenant, other than those described in
subparagraphs (a), (b) or (c), above, where such Default continues for a period
of thirty (30) days after written notice thereof by or on behalf of Landlord to
Tenant; provided, however, that if the nature of Tenant's Default is such that
more then thirty (30) days are reasonably required for its cure, then it shall
not be deemed to be a Breach of this Lease by Tenant if Tenant commences such
cure within said thirty (30) day period and thereafter diligently prosecutes
such cure to completion.
(e) The occurrence of any of the following events: (i) the
making by Tenant of any general arrangement or assignment for the benefit of
creditors; (ii) tenant's becoming a "debtor" as defined in 11 U.S.C. Sections
101 or any successor statute thereto (unless, in the case of a petition filed
against Tenant, the same is dismissed within sixty (60) days), (iii) the
appointment of a trustee or receiver to take possession of substantially all
of Tenant's assets located at the Premises or of Tenant's interest in this
Lease, where possession is not restored to Tenant within thirty (30) days; or
(iv) the attachment, execution or other judicial seizure of substantially all
of Tenant's assets located at the Premises or of Tenant's interest in this
Lease, where such seizure is not discharged within thirty (30) days,
provided, however, in the event that any provision of this subparagraph (e)
is contrary to any applicable law, such provision shall be of no force or
effect, and not affect the validity of the remaining provisions.
(f) The discovery by Landlord that any financial statement
given to Landlord by Tenant or any Guarantor of Tenant's obligations hereunder
was materially false.
(g) If the performance of Tenant's obligations under this
Lease is guaranteed: (i) the death of a guarantor, (ii) the termination of a
guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the
guaranty, or (v) a guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Tenant's failure, within sixty (60) days
following written notice by or on behalf of Landlord to Tenant of any such
event, to provide Landlord with written alternative assurance or security,
which, when coupled with the then existing resources of Tenant, equals or
exceeds the combined financial resources of Tenant and the guarantors that
existed at the time such guaranty was furnished.
13.2 Remedies. If Tenant fails to perform any affirmative duty or
obligation of Tenant under this Lease, within ten (10) days after written notice
to Tenant (or in case of an emergency, without notice), Landlord may at its
option (but without obligation to do so), perform such duty or obligation on
Tenant's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Landlord shall be
due and payable by Tenant to Landlord upon invoice therefor. If any check given
to Landlord by Tenant shall not be honored by the bank upon which it is drawn,
Landlord, at its option, may require all future payments to be made under this
Lease by Tenant to be made only by cashier's check. In the event of a Breach of
this Lease by Tenant, as defined in Paragraph
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13.1, with or without further notice or demand, and without limiting Landlord in
the exercise of any right or remedy which Landlord may have by reason of such
Breach, Landlord may:
(a) Terminate Tenant's right to possession of the Premises by
any lawful means, in which case this Lease and the term hereof shall terminate
and Tenant shall immediately surrender possession of the Premises to Landlord.
In such event Landlord shall be entitled to recover from Tenant: (i) the worth
at the time of the award of the unpaid rent which had been earned at the time of
termination, (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Tenant proves could have
been reasonably avoided, (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Tenant proves could be
reasonably avoided, and (iv) any other amount necessary to compensate Landlord
for all the detriment proximately caused by the Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost to recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Landlord applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent. Efforts by Landlord to mitigate damages caused
by Tenant's Default or Breach of this Lease shall not waive Landlord's right to
recover damages under this Paragraph. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Landlord shall have the
right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Landlord may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under Subparagraphs 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Tenant under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by Subparagraphs 13.1(b), (c) or (d). In such
case, the applicable grace period under Subparagraphs 13.1(b), (c) or (d) and
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Tenant to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful detainer
and a Breach of this Lease entitling Landlord to the remedies provided for in
this Lease and/or by said statute.
(b) Continue the Lease and Tenant's right to possession in
effect (under California Civil Code Section 1951.4) after Tenant's Breach and
abandonment and recover the rent as it becomes due, provided Tenant has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Tenant and Landlord agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Landlord's interest under the Lease, shall not constitute a
termination of the Tenant's right to possession.
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(c) Pursue any other remedy now or hereafter available to
Landlord under the laws or judicial decisions of the state wherein the Premises
are located.
(d) The expiration or termination of this Lease and/or the
termination of Tenant's right to possession shall not relieve Tenant from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Tenant's occupancy of the
Premises.
13.3 Late Charges. Tenant hereby acknowledges that late payment by
Tenant to Landlord of rent and 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. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Landlord by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Tenant shall not be received by Landlord or Landlord's designee within ten (10)
days after such amount shall be due, then, without any requirement for notice to
Tenant, Tenant shall pay to Landlord a late charge equal to six percent (6%) of
such overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Landlord will incur by reason of late
payment by Tenant. Acceptance of such late charge by Landlord shall in no event
constitute a waiver of Tenant's Default or Breach with respect to such overdue
amount, nor prevent Landlord from exercising any of the other rights and
remedies granted hereunder. In the event that a late charge is payable
hereunder, whether or not collected, for three (3) consecutive installments of
Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this
Lease to the contrary, Base Rent shall, at Landlord's option, become due and
payable quarterly in advance.
13.4 Breach by Landlord. Landlord shall not be deemed in breach of this
Lease unless Landlord fails within a reasonable time to perform an obligation
required to be performed by Landlord. For purposes of this Paragraph 13.4, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Landlord, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Tenant in
writing for such purpose, of written notice specifying wherein such obligation
of Landlord has not been performed; provided, however, that if the nature of
Landlord's obligation is such that more than thirty (30) days after such notice
are reasonably required for its performance, then Landlord shall not be in
Breach of this Lease if performance is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or a material portion of the Common Areas, is taken by
condemnation and such taking materially interferes with Tenant's use of the
Premises,
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Tenant may, at Tenant's option, to be exercised in writing within ten (10) days
after Landlord shall have given Tenant written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Tenant does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the Base Rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises prior to such taking (and
Tenant's Share, for purposes of calculation of Operating Expenses, shall be
adjusted as appropriate to reflect the new proportion of Premises floor area to
total Project floor area). No reduction of Base Rent shall occur with respect to
any taking of Common Areas. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Landlord, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Tenant
shall be entitled to any compensation separately awarded to Tenant for Tenant's
relocation expenses and/or loss of Tenant's Trade Fixtures. In the event that
this Lease has not terminated by reason of such condemnation, Landlord shall to
the extent of its net severance damages received, over and above the legal and
other expenses incurred by Landlord in the condemnation matter, repair any
damage to the Premises caused by such condemnation, except to the extent that
Tenant has been reimbursed therefor by the condemning authority. Tenant shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. Brokers.
15.1 The Brokers named in Paragraph 1.9 are the procuring causes of
this Lease.
15.2 Upon execution of this Lease by both Parties, Landlord shall pay
to said Brokers jointly, or in such separate shares as they may mutually
designate in writing, a fee as set forth in a separate written agreement between
Landlord and said Brokers.
15.3 Landlord and Tenant each represent and warrant to the other that
it has had no dealings with any person, firm, broker or finder (other than the
Brokers, if any, named in Paragraph 1.9) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said transaction.
Landlord and Tenant do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the Indemnifying Party, including any
costs, expenses and attorneys' fees reasonably incurred with respect thereto.
15.4 Landlord and Tenant hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.9.
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16. Tenancy Statement.
16.1 Each Party (as "Responding Party") shall within ten (10) days
after written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing (a)
certifying that this Lease is unmodified and in full force and effect (or, if
modified, stating the nature of such modification and certifying that this Lease
as so modified is in full force and effect), and the date to which rental and
other charges are paid in advance, if any, (b) acknowledging that there are not,
to the Responding Party's knowledge, any uncured defaults on the part of
Landlord or Tenant, or specifying such defaults if any are claimed, plus such
additional information, confirmation and/or statements as may be reasonably
requested by the Requesting Party.
16.2 If Landlord desires to finance, refinance, or sell the Premises,
Building and/or Project or any part thereof, Tenant and all Guarantors of
Tenant's performance hereunder shall deliver to any potential lender or
purchaser designated by Landlord such financial statements of Tenant and such
Guarantors as may be reasonably required by such lender or purchaser, including
but not limited to Tenant's financial statements of the past three (3) years.
All such financial statements shall be received by Landlord and such lender or
purchaser in confidence and shall be used only for the purposes herein set
forth.
17. Landlord's Liability. The Term "Landlord" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Tenant's interest in the prior lease. In the event of
a transfer of Landlord's title or interest in the Premises or in this Lease,
Landlord shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Landlord at the time of such transfer or
assignment. Upon such transfer or assignment, the prior Landlord shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the "Landlord." The obligations and/or
covenants in this Lease to be performed by the Landlord shall be binding only
upon the Landlord as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Landlord
hereunder not received by Landlord on the date on which it was due, shall
thereafter bear interest at the rate of 12% per annum, but not exceeding the
maximum rate allowed by law, in addition to the late charge provided for in
Paragraph 13.3.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Tenant to Landlord under the terms
of this Lease are deemed to be rent.
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22. No Prior or Other Agreements. This Lease contains all agreements
between the Parties with respect to the leasing of the Premises from Landlord to
Tenant, and no other prior or contemporaneous agreement or understanding shall
be effective.
23. Notices.
23.1 All notices required or permitted by this Lease shall be in
writing and may be delivered in person (by hand or by messenger or courier
service) or may be sent by regular, certified or registered mail or U.S. Postal
Service Express Mail or other reputable overnight courier service, with postage
prepaid, and shall be deemed sufficiently given if served in a manner specified
in this Paragraph 23. The addresses noted adjacent to Landlord's signature on
this Lease shall be Landlord's address for delivery or mailing of notice
purposes, unless Landlord by written notice to Tenant, specifies a different
address for notice purposes. The Premises shall constitute Tenant's address for
the purpose of mailing or delivering notices to Tenant. A copy of all notices
required or permitted to be given to Landlord hereunder shall be concurrently
transmitted to such party or parties at such addresses as Landlord may from time
to time hereafter designate by written notice to Tenant.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If notice is received on a
Sunday or legal holiday, it shall be deemed received on the next business day.
24. Waivers. No waiver by Landlord of the Default or Breach of any term,
covenant or condition hereof by Tenant, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Tenant of the same or of any other term, covenant or condition hereof.
Landlord's consent to, or approval of, any act shall not be deemed to render
unnecessary the obtaining of Landlord's consent to, or approval of, any
subsequent or similar act by Tenant, or be construed as the basis of an estoppel
to enforce the provision or provisions of this Lease requiring such consent.
Regardless of Landlord's knowledge of a Default or Breach at the time of
accepting rent, the acceptance of rent by Landlord shall not be a waiver of any
preceding Default or Breach by Tenant of any provision hereof, other than the
failure of Tenant to pay the particular rent so accepted. Any payment given
Landlord by Tenant may be accepted by Landlord on account of moneys or damages
due Landlord, notwithstanding any qualifying statements or conditions made by
Tenant in connection therewith, which such statements and/or conditions shall be
of no force or effect whatsoever.
25. Recording. Neither this Lease nor any memorandum hereof shall be
recorded by either Landlord or Tenant.
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26. No Right to Holdover. Tenant has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. Any holding over by Tenant after the expiration or earlier
termination of this Lease shall be construed to be a tenancy at sufferance on
all of the terms and conditions set forth herein to the extent not inconsistent
with a tenancy at sufferance, provided that the Base Rent for such holdover
period shall be an amount equal to two (2) times the monthly Base Rent due for
the last full month of the Term. Acceptance by Landlord of rent or any other sum
payable hereunder after such expiration or earlier termination shall not result
in an extension or renewal of this Lease. If Tenant fails to surrender the
Premises upon the expiration or earlier termination of this Lease, Tenant shall
indemnify, defend and hold harmless Landlord from and against all loss, damage,
cost, liability or expense (including, without limitation, attorneys' fees and
expenses) resulting from or relating to such failure to surrender the Premises
including, without limitation, any claim made by any succeeding tenant.
27. Cumulative Remedies. No remedy or election of Landlord hereunder shall
be deemed exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed
or performed by Tenant are both covenants and conditions.
29. Binding Effect; Choice of Law. Except as otherwise provided herein,
this Lease shall be binding upon the Parties, their personal representatives,
successors and assigns and be governed by the laws of the State in which the
Premises are located. Any litigation between the Parties hereto concerning this
Lease shall be initiated in the county in which the Premises are located.
30. Subordination; Attornment.
30.1 Subordination. This Lease and Tenant's rights hereunder shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Landlord upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Tenant
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Landlord under this
Lease, but that in the event of Landlord's default with respect to any such
obligation, Tenant will give any Lender whose name and address have been
furnished Tenant in writing for such purpose notice of Landlord's default and
allow such Lender thirty (30) days (or if more than thirty (30) days is required
to effect such cure, such additional time as may be necessary) following receipt
of such notice for the cure of said default before invoking any remedies Tenant
may have by reason thereof. If any Lender shall elect to have this Lease and/or
Tenant's rights hereunder superior to the lien of its Security Device and shall
give written notice thereof to Tenant, this Lease and such rights shall be
deemed prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
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30.2 Attornment. Notwithstanding any such subordination, and at the
election of a Lender or any other party who acquires ownership of the Premises
by reason of a foreclosure of a Security Device, Tenant agrees to attorn to such
Lender or other party, and in the event of such foreclosure and such election,
such new owner shall not: (i) be liable for any act or omission of any prior
lessor or with respect to events occurring prior to acquisition of ownership,
(ii) be subject to any offsets or defenses which Tenant might have against any
prior lessor, or (iii) be bound by prepayment of more than one month's rent.
30.3 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents and shall
survive the foreclosure of a Security Device; provided, however, that, upon
written request from Landlord or a Lender, Tenant and Landlord shall execute
such further writings as may be reasonably required to separately document any
of the matters provided for herein.
31. Attorneys' Fee. If any Party brings an action or proceeding to enforce
the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter
defined) in any such proceeding, action, or appeal thereon, shall be entitled to
reasonable attorneys' fees. Such fees may be awarded in the same suit or
recovered in a separate suit, whether or not such action or proceeding is
pursued to decision or judgment. The term "Prevailing Party" shall include,
without limitation, a Party who substantially obtains or defeats the relief
sought, as the case may be, whether by compromise, settlement, judgment, or the
abandonment by the other Party of its claim or defense. The attorneys' fee award
shall not be computed in accordance with any court fee schedule, but shall be
such as to fully reimburse all attorneys' fees reasonably incurred. In addition
to the foregoing award of attorneys' fees to the Prevailing Party, the
Prevailing Party shall be entitled to its attorneys' fees incurred in any
post-judgment proceedings to collect or enforce the judgment. This provision is
separate and several and shall survive the merger of this Lease into any
judgment on this Lease. Landlord shall be entitled to attorneys' fees, costs and
expenses incurred in the preparation and service of notices of Default and
consultations in connection therewith, whether or not a legal action is
subsequently commenced in connection with such Default or resulting Breach.
32. Landlord's Access; Showing Premises; Repairs. Landlord and Landlord's
agents shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of inspection,
showing the same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part, as Landlord may reasonably deem necessary.
Landlord may at any time place on or about the Premises or building any ordinary
"For Sale" signs and landlord may at any time during the last one hundred twenty
(120) days of the term hereof place on or about the Premises any ordinary "For
Lease" signs. All such activities of Landlord shall be without abatement of rent
or liability to Tenant.
33. Auctions. Tenant shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Landlord's prior written consent. Notwithstanding anything the contrary
in this Lease, Landlord shall not be
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obligated to exercise any standard of reasonableness in determining whether to
grant such consent.
34. Signs. Subject to compliance with Applicable Laws and Landlord's
reasonable approval as to design, materials and manner of installation, Tenant
may install Building front signage over the Premises identifying Tenant. Other
than such sign, Tenant shall not place any sign upon the Premises, except that
Tenant may, with Landlord's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Tenant's own business. The
installation of any sign on the Premises by or for Tenant shall be subject to
the provisions of Paragraph 7.
35. Termination; Merger. The voluntary or other surrender of this Lease by
Tenant, the mutual termination or cancellation hereof, or a termination hereof
by Landlord for Breach by Tenant, shall automatically terminate any sublease or
lesser estate in the Premises; provided, however, Landlord shall, in the event
of any such surrender, termination or cancellation, have the option to continue
any one or all of any existing subtenancies. Landlord's failure within ten (10)
days following any such event to make a written election to the contrary by
written notice to the holder of any such lesser interest, shall constitute
Landlord's election to have such event constitute the termination of such
interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be unreasonably withheld
or delayed. Landlord's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Tenant for any
Landlord consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance or storage tank, shall be paid by Tenant to Landlord upon
receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2(e) (applicable to assignment or subletting), Landlord may, as a
condition to considering any such request by Tenant, require that Tenant deposit
with Landlord an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Landlord to represent the cost Landlord
will incur in considering and responding to Tenant's request. Except as
otherwise provided, any unused portion of said deposit shall be refunded to
Tenant without interest. Landlord's consent to any act, assignment of this Lease
or subletting of the Premises by Tenant shall not constitute an acknowledgment
that no Default or Breach by Tenant of this Lease exists, nor shall such consent
be deemed a waiver of any then existing Default or Breach.
(b) All conditions to Landlord's consent authorized by this
Lease are acknowledged by Tenant as being reasonable. The failure to specify
herein any particular condition to Landlord's consent shall not preclude the
imposition by Landlord at the time of consent of such further or other
conditions as are then reasonable with reference to the particular matter for
which consent is being given.
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37. Guarantor.
37.1 If there are to be any Guarantors of this Lease per Paragraph
1.10, each such Guarantor shall execute the form of Guaranty provided by
Landlord, and each said Guarantor shall have the same obligations as Tenant
under this Lease, including but not limited to the obligation to provide the
Tenancy Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Tenant under this Lease if
any such Guarantor fails or refuses, upon reasonable request by Landlord to
give: (a) evidence of the due execution of the guaranty called for by this
Lease, including the authority of the Guarantor (and of the party signing on
Guarantor's behalf to obligate such Guarantor on said guaranty, and including in
the case of a corporate Guarantor, a certified copy of a resolution of its board
of directors authorizing the making of such a guaranty, together with a
certificate of incumbency showing the signatures of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Landlord, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. Quiet Possession. Upon payment by Tenant of the rent for the Premises
and the observance and performance of all of the covenants, conditions and
provisions on Tenant's part to be observed and performed under this Lease,
Tenant shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease and all matters of record against
the Premises.
39. Options.
39.1 Definition. As used in this Paragraph 39 the word "Option" has the
following meaning: (a) the right to extend the Term of this Lease or to renew
this Lease or to extend or renew any lease that Tenant has on other property of
Landlord, (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Landlord or the right of first offer to lease other property of
Landlord, (c) the right to purchase the Premises, or the right of first refusal
to purchase the Premises, or the right of first offer to purchase the Premises,
or the right to purchase other property of Landlord, or the right of first
refusal to purchase other property of Landlord, or the right of first offer to
purchase other property of Landlord.
39.2 Options Personal to Original Tenant. Each Option granted to Tenant
in this Lease is personal to the original Tenant named in Paragraph 1.1 hereof,
and cannot be voluntarily or involuntarily assigned or exercised by any person
or entity other than said original Tenant while the original Tenant is in full
and actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Tenant are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
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39.3 Multiple Options. In the event that Tenant has any multiple
Options to extend or renew this Lease, a later option cannot be exercised unless
the prior Options to extend or renew this Lease have been validly exercised.
39.4. Effect of Default.
(a) Tenant shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Landlord from Tenant is unpaid
(without regard to whether notice thereof is given Tenant), or (iii) during the
time Tenant is in Breach of this Lease, or (iv) in the event that Landlord has
given to Tenant three (3) or more notices of Default under Paragraph 13.1,
whether or not the Defaults are cured, during the twelve (12) month period
immediately preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Tenant's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Tenant under the provisions of an Option
shall, at Landlord's option, terminate and be of no further force or effect,
notwithstanding Tenant's due and timely exercise of the Option, if, after such
exercise and during the Term of this Lease, (i) Tenant fails to pay to Landlord
a monetary obligation of Tenant for a period of thirty (30) days after such
obligation becomes due (without any necessity of Landlord to give notice thereof
to Tenant), or (ii) Landlord gives to Tenant three or more notices of Default
under Paragraph 13.1 during any twelve month period, whether or not the Defaults
are cured, or (iii) if Tenant commits a Breach of this Lease.
40. Rules and Regulations. Tenant agrees that it will abide by, keep and
observe all reasonable rules and regulations which Landlord may make from time
to time for the management, safety, care, and cleanliness of the grounds, the
parking and unloading of vehicles and the preservation of good order within the
Project, as well as for the convenience of occupants or tenants of the Project
and their invitees.
41. Security Measures. Tenant hereby acknowledges that the rental payable
to Landlord hereunder does not include the cost of guard service or other
security measures, and that Landlord shall nave no obligation whatsoever to
provide same (provided that Landlord has the right, in its sole and absolute
discretion, to provide security services and include the cost thereof as an item
of Common Area Expenses). Tenant assumes all responsibility for the protection
of the Premises, Tenant, its agents and invitees and their property from the
acts of third parties.
42. Reservations. Landlord reserves to itself the right, from time to time,
to grant, without the consent or joinder of Tenant, such easements, rights and
dedications that Landlord deems necessary, and to cause the recordation of
parcel maps and restrictions, so long as such
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easements, rights, dedications, maps and restrictions do not unreasonably
interfere with the use of the Premises by Tenant. Tenant agrees to sign any
documents reasonably requested by Landlord to effectuate any such easement
rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recover of such sum. If it shall
be adjudged that there was no legal obligation on the part of said Party to pay
such sum or any part thereof, said Party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions of
this Lease.
44. Authority. If either Party hereto is a corporation, trust, or general
or limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Tenant is a corporation, trust or
partnership, Tenant shall, within thirty (30) days after request by Landlord,
deliver to Landlord evidence satisfactory to Landlord of such authority.
45. Offer. Preparation of this Lease by Landlord or Landlord's agent and
submission of same to Tenant shall not be deemed an offer to lease to Tenant.
This Lease is not intended to be binding until executed by all Parties hereto.
46. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. Tenant agrees to make such
reasonable modifications to this Lease as may be reasonably required by a Lender
in connection with the obtaining of financing or refinancing of the property of
which the Premises are a part.
47. Multiple Parties. Except as otherwise expressly provided herein, if
more than one person or entity is named herein as either Landlord or Tenant, the
obligations of such multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Landlord or
Tenant.
48. Non-Discrimination. Tenant herein covenants by and for himself, his
heirs, executors, administrators and assigns, and all persons claiming under or
through him, and this Lease is made and accepted upon and subject to the
following conditions: That there shall be no discrimination against or
segregation of any person or group of persons on account of race, color, creed,
religion, national origin, ancestry, sex, handicaps, age or marital status in
the leasing, subleasing, transferring, use or enjoyment of the land herein
leased nor shall the lessee himself, or any person claiming under or through
him, establish or permit any such practice or practices of discrimination or
segregation with reference to the selection, location, number, use or occupancy
of tenants, lessees, sublessees, subtenants or vendees in the land herein
leased.
49. ERISA. Neither Tenant or any of its affiliates, partners or fiduciaries
in respect to the Lease (collectively, the "Tenant Group") is a Disqualified
Person under Section 4975(e) of the
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Internal Revenue Code (the "Code") or a Party in Interest within the meaning of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), with
respect to Landlord or any investor therein disclosed to Tenant during the term
of this Lease, and the Tenant Group shall not enter into any subleases or other
agreements respecting the Premises with any party which is a Disqualified Person
as defined in the Code or a Party in Interest within the meaning of ERISA, with
respect to Landlord. Following the date hereof and thereafter, as reasonably
required during the term of the Lease, Tenant shall furnish Landlord with all
such certifications of the Tenant Group or other information which Landlord
reasonably requests in order to insure compliance with the Code and ERISA.
Without limiting the foregoing, Tenant acknowledges that ERISA prohibits the
lease, directly or indirectly, of any property between a pension plan and a
Party in Interest or a Disqualified Person as to that plan, as such terms are
defined in ERISA and the Code, respectively.
50. Exculpation. It is expressly understood and agreed that notwithstanding
anything in the Lease to the contrary, and notwithstanding any Applicable Law to
the contrary, the liability of Landlord hereunder (including any successor to
Landlord) and any recourse by Tenant against Landlord shall be limited solely
and exclusively to the equity interest of Landlord in and to the Premises,
Landlord shall not have any personal liability therefor, and Tenant hereby
expressly waives and releases such personal liability on behalf of itself and
all persons claiming by, through or under Tenant. If the Lease is being executed
by TDA, Inc. ("TDA"), on behalf of Landlord, no present or future officer,
director, employee, trustee, member, investment manager or agent of TDA shall
have any personal liability, directly or indirectly, and recourse shall not be
had against any such officer, director, employee, trustee, member, investment
manager or agent under or in connection with the Lease or any other document or
instrument heretofore or hereafter executed in connection with the Lease. Tenant
hereby waives and releases any and all such personal liability and recourse. The
limitations of liability provided in this Paragraph are in addition to, and not
in limitation of, any limitation on liability applicable to Landlord provided by
law or in any other contract, agreement or instrument.
51. Option to Extend.
51.1 Grant of Option to Extend. Subject to the provisions of Paragraph
39 above, Landlord hereby grants to Tenant the option to extend (the "Option to
Extend") the Term of the Lease for an additional consecutive term of sixty (60)
months (the "Option Term"), on the same terms and conditions as set forth in the
Lease, except that Base Rent during the Option Term be the amount determined as
set forth below. The Option to Extend shall be exercised only by written notice
delivered to Landlord at least one hundred eighty (180) days before the
expiration of the Initial Term of this Lease. If Tenant fails to deliver to
Landlord written notice of the exercise of the Option to Extend within the time
period prescribed above, the Option to Extend shall lapse and there shall be no
further right to extend the Term of the Lease. If Tenant properly exercises the
Option to Extend, all references in this Lease to the "Term" of this Lease shall
mean the initial term of this Lease as extended by the Option Term, as
applicable.
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51.2 Base Rent During Option Term. Base Rent shall be adjusted as of
the commencement of the Option Term (the "Base Rent Adjustment Date") to equal
the then "Fair Market Rental Value" of the Premises determined in the following
manner: Not later than one hundred fifty (150) days prior to the Base Rent
Adjustment Date, Landlord and Tenant shall meet in an effort to negotiate in
good faith the Fair Market Rental Value of the Premises as of the Base Rent
Adjustment Date. If Landlord and Tenant have not agreed upon the Fair Market
Rental Value of the Premises at lease one hundred twenty (120) days prior to the
Base Rent Adjustment Date, the Fair Market Rental Value shall be determined by
the following appraisal method:
(a) If Landlord and Tenant are not able to agree upon the Fair
Market Rental Value of the Premises within the time period prescribed above,
then Landlord and Tenant shall attempt to agree in good faith upon a single
appraiser not later than one hundred five (105) days prior to the Base Rent
Adjustment Date. If Landlord and Tenant are unable to agree upon a single
appraiser within such time period, then Landlord and Tenant shall each appoint
one appraiser not later than ninety-five (95) days prior the Base Rent
Adjustment Date, and Landlord and Tenant shall each give notice to the other of
such appointment at the time of such appointment. Within ten (10) days
thereafter, the two appointed appraisers shall appoint a third appraiser. If
either Landlord or Tenant fails to appoint its appraiser and to give written
notice thereof to the other party within the prescribed time period, the single
appraiser appointed shall determine the Fair Market Rental Value of the
Premises. If both parties fail to appoint appraisers within the prescribed time
periods, then an appraiser shall be selected by the presiding judge of the Los
Angeles Superior Court upon application by either party, which appraiser shall
determine the Fair Market Rental Value of the Premises. Each party shall bear
the costs of its own appraiser and the parties shall share equally the cost of
the single or third appraiser if applicable. All appraisers shall have at least
five (5) years' experience in the appraisal of commercial/industrial real
property in the area in which the Premises is located and shall be members of
professional organizations such as MAI or its equivalent.
(b) For the purpose of such appraisal, the term "Fair Market
Rental Value" shall mean the price that a ready and willing tenant would pay, as
of the Base Rent Adjustment Date, as monthly base rent, to a ready and willing
landlord of property comparable to the Premises if such property were exposed
for lease on the open market for a reasonable period of time and taking into
account all of the purposes for which such property may be used. Such
determination of Fair Market Rental Value shall be based upon the rental of
space of comparable age, construction, size and location as the Premises with
the improvements then existing in the Premises and shall take into account
Tenant's obligation to pay additional rent under this Lease and the then
prevailing market for rental increases during the Option Term. If a single
appraiser is chosen, then such appraiser shall determine the Fair Market Rental
Value of the Premises. Otherwise, the Fair Market Rental Value of the Premises
shall be the arithmetic average of the three appraisals, provided that any
appraisal which is more then ten percent (10%) above or below the middle
appraisal shall be disregarded. Landlord and Tenant shall instruct the
appraiser(s) to complete their determination of Fair Market Rental Value not
later than sixty (60) days prior to the Base Rent Adjustment Date. If the Fair
Market Rental Value is not determined prior to the Base Rent Adjustment Date,
then Tenant shall continue to
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pay to Landlord the monthly Base Rent applicable to the Premises immediately
prior to the Base Rent Adjustment Date until the Fair Market Rental Value is
determined. When the Fair Market Rental Value is determined, Landlord shall
deliver notice thereof to Tenant, and Tenant shall pay to Landlord within ten
(10) days after receipt of such notice, the difference between the monthly
Base Rent actually paid by Tenant to Landlord for the period from and after
the Base Rent Adjustment Date and the new monthly Base Rent determined
hereunder effective as of the Base Rent Adjustment Date. Notwithstanding
anything to the contrary contained herein, in no event shall monthly Base
Rent be reduced below the monthly Base Rent applicable to the Premises
immediately prior to the Base Rent Adjustment Date.
52. Interpretation. The language in all parts of this Lease shall be in all
cases construed as a whole according to its fair meaning and not strictly for
nor against either Landlord or Tenant.
LANDLORD AND TENANT HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LANDLORD AND TENANT WITH RESPECT TO THE
PREMISES.
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The parties hereto have executed this Lease as of the date first written above.
LANDLORD: TENANT:
MT VERNON PROPERTIES, SHINHO ELECTRONICS &
a California corporation COMMUNICATIONS, INC.,
a California corporation
By: /s/ W.Q. Turner By: /s/ Seo Young Kim
---------------------------------- -------------------
Name Printed: Wayne Q. Turner Name Printed: Seo Young Kim
------------------------- -------------
Title: Chairman of the Board Title: President
---------------------------------- ------------------
Address: c/o TDA, Inc. Address: Prior to Commencement
1214 Donnelly Avenue Date:
Burlingame, CA 94010 16444 Manning Way
Attn: Wayne Turner Cerritos, CA 90703
Attn: Michael Chan
Telephone No.: (415) 343-6333 Telephone No.: (310) 802-8116
Fax No.: (415) 343-0858 Fax No.: (310) 802-7637
Following Commencement Date:
The Premises
Attn: Michael Chan
with a copy to:
Jonathan Kang, Esq.
Loeb & Loeb LLP
10100 Santa Monica Boulevard,
Suite 2200
Los Angeles, CA 90067
Telephone No.: (310) 282-2322
Fax No.: (310) 282-2191
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EXHIBIT A
Site Plan
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EXHIBIT B
Tenant Improvements
1. Plans. The parties intend that the Premises shall be leased to
Tenant pursuant hereto on an entirely "AS IS" basis, excepting only that
Landlord shall cause certain improvements to be permanently affixed to the
Premises and constructed by Landlord in accordance herewith (the "Tenant
Improvements"), which Tenant Improvements shall consist of (a) recarpeting the
existing office with carpeting substantially equivalent to the existing grade of
carpet, and (b) performance of such other permanently affixed office space
improvements as the parties shall reasonably approve. Within ten (10) days
following the execution of this Lease, Tenant shall provide to Landlord for
delivery to the approved contractor for construction of the Tenant Improvements
(the "Contractor"), which Contractor shall be selected by a process of
competitive bidding to Shankle Construction and another licensed, experienced
general contractor designated by Landlord and meeting Landlord's requirements
regarding use of union labor, such information respecting Tenant's requirements
as is necessary for the Contractor to prepare plans and specifications for the
Tenant Improvements. Promptly following Tenant's submission of such information
to the Contractor, Landlord shall cause the Contractor to prepare and submit
construction plans and specifications for the Tenant Improvements (the "Final
Plans") to Landlord and Tenant for approval, which approval shall not be
unreasonably withheld, and which approval shall be granted or withheld within
five (5) business days following delivery thereof (with Tenant's failure to
respond within such period being deemed approval). Upon written approval of the
Final Plan by the parties, Landlord shall be authorized to cause Contractor to
proceed with the process of obtaining permits for, and construction of, the
Tenant Improvements in accordance with the Final Plans. For purposes of this
Lease, the Final Plans shall mean such Final Plans as so approved by the
parties, subject to such changes to reflect modifications and/or additions to
the Tenant Improvements required by applicable governmental authorities in order
to comply with Applicable Laws.
2. Tenant Improvements Construction; Additional Fixed Rent.
(a) Subject to the provisions of Section 3 below, Landlord
shall cause the Contractor to construct the Tenant Improvements in accordance
with the approved Final Plans. All Tenant Improvements shall be deemed
Landlord's property under the terms of this Lease.
(b) As used herein, the "TI Costs" shall mean all of
Landlord's costs in connection with the Tenant Improvements (other than
recarpeting the existing office pursuant to Section 1(a) above, which shall be
performed at Landlord's sole cost), including, without limitation, costs of
design and engineering, purchase of materials, obtaining of permits and costs of
construction. Tenant shall reimburse Landlord for all TI Costs by amortization
of TI Costs over the final sixty (60) months of the Initial Term of the Lease
using an interest rate of eleven and one-quarter percent (11.25%), with Tenant
paying equal month installments of such amortized amount, monthly in advance as
additional rent (the "Additional Fixed Rent").
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Additional Fixed Rent shall not be subject to CPI increase and shall not be
payable during the Option Term in the event of the extension of the Term by the
Option Term.
3. Substantial Completion; Force Majeure Delays.
(a) For purposes of this Lease, the "Substantial Completion"
of the Tenant Improvements shall be deemed to occur upon the date of Tenant's
receipt from Landlord of factually correct notice that the Tenant Improvements
have been substantially completed pursuant to the "Final Plans" (as defined in
Exhibit B), as determined by the Contractor, with the exception of (1) any
punch-list items and (2) any tenant fixtures, work-stations, built-in furniture
or equipment to be installed by Tenant. Any such punch-list items shall be
promptly corrected by the Contractor.
(b) As used in this lease, "Force Majeure Delays" shall mean
the amount of any delay in the substantial completion of the Tenant Improvements
resulting from the occurrence of one or more of the following events: fire,
earthquake, explosion, flood, casualty, weather, the elements, acts of God or
the public enemy, strike, other labor trouble, interference or acts of
governmental authorities or agents (including, without limitation, delays in
approval and/or permit processing) or shortages of fuel, supplies or labor
resulting therefrom, or any other cause beyond the reasonable control of
Landlord (financial inability excepted).
4. Miscellaneous.
(a) Tenant has designated Linda Chia as its sole
representative with respect to the matters set forth in this Exhibit B, who,
until further notice to Landlord, shall have full authority and responsibility
to act on behalf of the Tenant as required in this Exhibit B.
(b) Landlord has designated Gary Spanner as its sole
representative with respect to the matters set forth in this Exhibit B, who,
until further notice to Tenant, shall have full authority and responsibility to
act on behalf of the Landlord as required in this Exhibit B.
(c) All references herein to a number of days shall mean and
refer to calendar days. In all instances where Tenant is required to approve or
deliver an item, if no written notice of approval is given or the item is not
delivered within the stated time period, at Landlord's sole option, at the end
of such period the item shall automatically be deemed approved or delivered by
Tenant and the next succeeding time period shall commence.
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Exhibit 10.11
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - GROSS
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
NOVEMBER 1, 1995 is made by and between Marquardt Associates ("Lessor") and
Diamond Entertainment Corporation Inc., a California corporation ("Lessee")
(collectively the "Parties," or individually a "Party").
1.2(a) Premises: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 16808 Marquardt, located in the City of
Cerritos, County of Los Angeles, State of California, with zip code 90703, as
outlined on Exhibit __ attached hereto ("Premises"). The "Building" is that
certain building containing the Premises and generally described as (describe
briefly the nature of the Building): Approximately 22,080 square feet of a
larger 50,416 square foot industrial property (Exhibit A). In addition to
Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee
shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7
below) as hereinafter specified, but shall not have any rights to the roof,
exterior walls or utility raceways of the Building or to any other buildings in
the Industrial Center. The Premises, the Building, the Common Areas, the land
upon which they are located, along with all other buildings and improvements
thereon, are herein collectively referred to as the "Industrial Center." (Also
see Paragraph 2.)
1.2(b) Parking: 44 unreserved vehicle parking spaces ("Unreserved
Parking Spaces"); and __ reserved vehicle parking spaces ("Reserved Parking
Spaces"). (Also see Paragraph 2.6.)
1.3 Term: 5 years and 3 months ("Original Term") commencing January 1,
1996 ("Commencement Date") and ending March 31, 2001 ("Expiration Date"). (Also
see Paragraph 3.)
1.4 Early Possession: November 10, 1995 ("Early Possession Date").
(Also see Paragraphs 3.2 and 3.3.)
1.5 Base Rent: $9,273.60 per month ("Base Rent"), payable on the FIRST
(1ST) day of each month commencing May 1, 1996. (Also see Paragraph 4.)
[X] If this box is checked, this Lease provides for the Base Rent to be adjusted
per Addendum 50, attached hereto.
1.6(a) Base Rent Paid Upon Execution: $9,273.60 as Base Rent for the
period January 1-31, 1996.
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1.6(b) Lessee's Share of Common Area Operating Expenses: Forty-four
percent (44%) ("Lessee's Share") as determined by [ ] prorata square footage of
the Premises as compared to the total square footage of the Building of [ ]
other criteria as described in Addendum __.
1.7 Security Deposit: $19,273.60 ("Security Deposit"). (Also see
Paragraph 5.)
1.8 Permitted Use: Distribution, storage, duplication, marketing and
related office uses of video tape production and other similar products
("Permitted Use"). (Also see Paragraph 6.)
1.9 Insuring Party. Lessor is the "Insuring Party." (Also see Paragraph
8.)
1.10(a) Real Estate Brokers. The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[X] Lee & Associates, Cronin & Manoledes represents Lessor exclusively
("Lessor's Broker");
[X] Voit Malliet represents Lessee exclusively ("Lessee's Broker"); or
[ ] ______ represents both Lessor and Lessee ("Dual Agency"). (Also see
Paragraph 15.)
1.10(b) Payment to Brokers. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of
$_______)(per agreement) for brokerage services rendered by said Broker(s) in
connection with this transaction.
1.11 Guarantor. The obligations of the Lessee under this Lease are to
be guaranteed by N/A ("Guarantor"). (Also see Paragraph 37.)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 54, and Exhibits A through __, all of which
constitute a part of this Lease.
2. Premises, Parking and Common Areas.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in paragraph 1.6(b)) based thereon is
not subject to revision whether or not the actual square footage is more or
less.
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2.2 Condition. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice from Lessee setting forth with specificity the nature and
extent of such non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
thirty (30) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants that any improvements (other than those constructed by Lessee at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within six (6) months following the
Commencement Date and setting forth with specificity the nature and extent of
such non-compliance, take such action, at Lessor's expense, as may be reasonable
or appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined in Paragraph 2.4).
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "Applicable Laws") and the
present and future suitability of the Premises for Lessee's intended use; (b)
that Lessee has made such investigation as it deems necessary with reference to
such matters, is satisfied with reference thereto, and assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties with
respect to said matters other than as set forth in this Lease.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior to the date
set forth in
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Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event,
Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of
the Premises with said warranties.
2.6 Vehicle Parking. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than
full-size passenger automobiles or pick-up trucks, herein called "Permitted Size
Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
contractors or invitees to be loaded, unloaded or parked in areas other than
those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide the
parking facilities required by Applicable Law.
2.7 Common Areas-Definition. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 Common Areas-Lessee's Rights. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Area as they
exist from time to time, subject to any rights, powers, and privileges reserved
by Lessor under the terms hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be deemed
to include the right to store any property, temporarily or permanently, in the
Common Areas. Any such storage shall be permitted only by the prior written
consent of Lessor or Lessor's designated agent, which consent may be revoked at
any time. In the event that any unauthorized storage shall occur then Lessor
shall have the right, without notice, in addition to such other rights and
remedies
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that it may have, to remove the property and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
2.9 Common Areas-Rules and Regulations. Lessor or such other person(s)
as Lessor may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to establish, modify,
amend and enforce reasonable Rules and Regulations with respect thereto in
accordance with Paragraph 40. Lessee agrees to abide by and conform to all such
Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center.
2.10 Common Areas-Changes. Lessor shall the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Common Areas, including, without limitation,
changes in the location, size, shape and number of driveways, entrances, parking
spaces, parking areas, loading and unloading areas, ingress, egress, direction
of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the Industrial
Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Industrial Center as Lessor may, in
the exercise of sound business judgment, deem to be appropriate.
3. Term
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the
Early Possession Date but prior to the Commencement Date, the obligation to pay
Base Rent shall be abated for the period of such early occupancy. All other
terms of this Lease, however (including but not limited to the obligations to
pay Lessee's Share of Common Area Operating Expenses and to carry the
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insurance required by Paragraph 8) shall be in effect during such period. Any
such early possession shall not affect nor advance the Expiration Date of the
Original Term.
3.3 Delay in Possession. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. Rent
4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as
the same may be adjusted from time to time, to Lessor in lawful money of the
United States, without offset or deduction, on or before the day on which it is
due under the terms of this Lease. Base Rent and all other rent and charges for
any period during the term hereof which is less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or to such other person or at such other addresses as Lessor may from time to
time designate in writing to Lessee.
4.2 Common Areas Operating Expenses. Lessee shall pay to Lessor during
the term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "Common Area Operating Expenses" are defined, for purposes of this
Lease, as all costs incurred by Lessor relating to the ownership and operation
of the Industrial Center, including, but not limited to, the following:
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(i) The operation, repair and maintenance, in neat, clean, good
order and condition, of the following:
(aa) The Common Areas, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area
lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to service
the Common Areas.
(iii) Trash disposal, property management and security services
and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of Common
Areas.
(v) Any increase above the Base Real Property Taxes (as defined in
Paragraph 10.2(b)) for the Building and the Common Areas.
(vi) Any "Insurance Cost Increase" (as defined in Paragraph 8.1).
(vii) The cost of insurance carried by Lessor with respect to the
Common Areas.
(viii) Any deductible portion of an insured loss concerning the
Building or the Common Areas.
(ix) Any other services to be provided by Lessor that are stated
elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes that are
specifically attributable to the Building or to any other building in the
Industrial Center or to the operation, repair and maintenance thereof, shall be
allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation for
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has
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the same, Lessor already provides the services, or Lessor has agreed elsewhere
in this Lease to provide the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be payable
by Lessee within ten (10) days after a reasonably detained statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessee's Share of annual
Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessee shall be credited the amount of such
overpayment against Lessee's Share of Common Area Operating Expenses next
becoming due. If Lessee's payments under this Paragraph 4.2(d) during said
preceding year were less than Lessee's Share as indicated on said statement,
Lessee shall pay to Lessor the amount of the deficiency within ten (10) days
after delivery by Lessor to Lessee of said statement.
5. Security Deposit.
Lessee shall deposit with Lessor upon Lessee's execution hereof the
Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful
performance of Lessee's obligations under this Lease. If Lessee fails to pay
Base Rent or other rent or charges due hereunder, or otherwise Defaults under
this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all
or any portion of said Security Deposit for the payment of any amount due Lessor
or to reimburse or compensate Lessor for any liability, cost, expense, loss or
damage (including attorneys' fees) which lessor may suffer or incur by reason
thereof. If lessor uses or applies all or any portion of said Security Deposit,
Lessee shall within ten (10) days after written request therefore deposit monies
with Lessor sufficient to restore said Security Deposit to the full amount
required by this Lease. Any time the Base Rent increases during the term of this
Lease, Lessee shall, upon written request from Lessor, deposit additional monies
with Lessor as an addition to the Security Deposit so that the total amount of
the Security Deposit shall at all times bear the same proportion to the then
current Base Rent as the initial Security Deposit bears to the initial Base Rent
set forth in Paragraph 1.5. Lessor shall not be required to keep all or any part
of the Security Deposit separate from its general accounts. Lessor shall, at the
expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed in
writing by Lessor, no part of the Security Deposit shall be considered to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
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6. Use
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the Permitted Use
set forth in Paragraph 1.8, or any other legal use which is reasonably
comparable thereto, and for no other purpose. Lessee shall not use or permit the
use of the Premises in a manner that is unlawful, creates waste or a nuisance,
or that disturbs owners and/or occupants of, or causes damage to the Premises or
neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants, and
by prospective assignees and subtenants of Lessee, its assignees and subtenants,
for a modification of said Permitted Use, so long as the same will not impair
the structural integrity of the improvements on the Premises or in the Building
or the mechanical or electrical systems therein, does not conflict with uses by
other lessees, is not significantly more burdensome to the Premises or the
Building and the improvements thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within
five (5) business days after such request give a written notification of same,
which notice shall include an explanation of Lessor's reasonable objections to
the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance" as
used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment, or the Premises; (ii) regulated or monitored by any governmental
authority; or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof. Lessee
shall not engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Requirements (as defined in
Paragraph 6.3). "Reportable Use" shall mean: (i) the installation or use of any
above or below ground storage tank, (ii) the generation, possession, storage,
use, transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority, and (iii) the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable laws require that a notice be given to persons entering or occupying
the Premises or neighboring properties. Notwithstanding the foregoing, Lessee
may, without Lessor's prior consent, but upon notice to Lessor and in compliance
with all Applicable Requirements, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of the Permitted
Use,
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so long as such use is not a Reportable Use and does not expose the
Premises or neighboring properties to any meaningful risk of contamination or
damage or expose Lessor to any liability therefor. In addition, Lessor may (but
without any obligation to do so) condition its consent to any Reportable Use of
any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefor, including but not limited to
the installation (and, at Lessor's option, removal on or before Lease expiration
or earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises or the Building, other than as previously consented to by
Lessor, Lessee shall immediately given Lessor written notice thereof, together
with a copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action, or proceeding given to, or received from,
any governmental authority or private party concerning the presence, spill,
release, discharge of, or exposure to, such Hazardous Substance including but
not limited to all such documents as may be involved in any Reportable Use
involving the Premises. Lessee shall not cause or permit any Hazardous Substance
to be spilled or released in, on, under or about the Premises (including,
without limitation, through the plumbing or sanitary sewer system).
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be limited to,
the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement.
6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's
sole cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation,
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manufacture, production, installation, maintenance, removal, transportation,
storage, spill, or release of any Hazardous Substance), now in effect or which
may hereafter come into effect. Lessee shall, within five (5) days after receipt
of Lessor's written request, provide Lessor with copies of all documents and
information, including but not limited to permits, registrations, manifests,
applications, reports and certificates, evidencing Lessee's compliance with any
Applicable Requirements specified by Lessor, and shall immediately upon receipt,
notify Lessor in writing (with copies of any documents involved) of any
threatened or actual claim, notice, citation, warning, complaint or report
pertaining to or involving failure by Lessee or the Premises to comply with any
Applicable Requirements.
6.4 Inspection; Compliance with Law. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders of any
mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall
have the right to enter the Premises at any time in the case of an emergency,
and otherwise at reasonable times, for the purpose of inspecting the condition
of the Premises and for verifying compliance by Lessee with this Lease and all
Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be
entitled to employ experts and/or consultants in connection therewith to advise
Lessor with respect to Lessee's activities, including but not limited to
Lessee's installation, operation, use, monitoring, maintenance, or removal of
any Hazardous Substance on or from the Premises. The costs and expenses of any
such inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections if
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights, but
excluding any items which are the responsibility of Lessor pursuant to Paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices.
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Lessee's obligations shall include restoration, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof in
good order, condition and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguishing system including fire alarm
and/or smoke detection systems and equipment, fire hydrants, parking lots,
walkways, parkways, driveways, landscaping, fences, signs and utility systems
serving the Common Areas and all parts thereof, as well as providing the
services for which there is a Common Area Operating Expense pursuant to
Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior
surfaces of interior surfaces or exterior walls nor shall Lessor be obligated to
maintain, repair or replace windows, doors or plate glass of the Premises.
Lessee expressly waives the benefit of any statute now or hereafter in effect
which would otherwise afford Lessee the right to make repairs at Lessor's
expense or to terminate this Lease because of Lessor's failure to keep the
Building, Industrial Center or Common Areas in good order, condition and repair.
7.3 Utility Installations, Trade Fixtures, Alterations.
(a) Definitions; Consent Required. The term "Utility Installations" is
used in this Lease to refer to all air lines, power panels, electrical
distribution, security, fire protection systems, communications systems,
lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "Alterations" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease other than Utility Installations or Trade
Fixtures. "Lessee-Owned Alterations and/or Utility
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Installations" are defined as Alterations and/or Utility Installations made by
Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee
shall not make nor cause to be made any Alterations or Utility Installations in,
on, under or about the Premises without Lessor's prior written consent. Lessee
may, however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof) without Lessor's consent but upon notice to
Lessor, so long as they are not visible from the outside of the Premises, do not
involve puncturing, relocating or removing the roof or any existing walls, or
changing or interfering with the fire sprinkler or fire detection systems and
the cumulative cost thereof during the term of this Lease as extended does not
exceed $2,500.00.
(b) Consent. Any Alterations or Utility Installations that Lessee shall
desire to make and which require the consent of the Lessor shall be presented to
Lessor in written form with detailed plans. All consents given by Lessor,
whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall
be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as-built plans and specifications therefor. Lessor may, (but without obligation
to do so) condition its consent to any requested Alteration or Utility
Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a
lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation.
(c) Lien Protection. Lessee shall pay when due all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on, or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense, defend and protect itself,
Lessor and the Premises against the same and shall pay and satisfy any such
adverse judgment that may be rendered thereon before the enforcement thereof
against the Lessor or the Premises. If Lessor shall require, Lessee shall
furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one
and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In addition,
Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
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7.4 Ownership, Removal, Surrender, and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal and
to cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee-Owned
Alterations and Utility Installations. Unless otherwise instructed per
Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) Removal. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee-Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding that their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date, clean and
free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease. Except
as otherwise agreed or specified herein, the Premises, as surrendered, shall
include the Alterations and Utility Installations. The obligation of Lessee
shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and
Lessee-Owned Alterations and Utility Installations, as well as the removal of
any storage tank installed by or for Lessee, and the removal, replacement or
remediation of any soil, material or ground water contaminated by Lessee, all as
may then be required by Applicable Requirements and/or good practice. Lessee's
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee subject to its obligation to repair and restore the Premises per this
Lease.
8. Insurance; Indemnity.
8.1 Payment of Premium Increases.
(a) As used herein, the term "Insurance Cost Increase" is defined as
any increase in the actual cost of the insurance applicable to the Building and
required to be carried by Lessor pursuant to Paragraphs 8.2(b), 8.3(a) and
8.3(b) ("Required Insurance"), over and above the Base Premium, as hereinafter
defined, calculated on an annual basis. "Insurance Cost Increase" shall include,
but not be limited to, requirements of the holder of a mortgage or deed of trust
covering the Premises, increased valuation of the Premises, and/or a general
premium rate increase. The term "Insurance Cost Increase" shall not, however,
include any premium increases resulting from the nature of the occupancy of any
other lessee of the Building. If the
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parties insert a dollar amount in Paragraph 1.9, such amount shall be considered
the "Base Premium." If a dollar amount has not been inserted in Paragraph 1.9
and if the Building has been previously occupied during the twelve (12) month
period immediately preceding the Commencement Date, the "Base Premium" shall be
the annual premium applicable to such twelve (12) month period. If the Building
was not fully occupied during such twelve (12) month period, the "Base Premium"
shall be the lowest annual premium reasonably obtainable for the Required
Insurance as of the Commencement Date, assuming the most nominal use possible of
the Building. In no event, however, shall Lessee be responsible for any portion
of the premium cost attributable to liability insurance coverage in excess of
$1,000,000 procured under Paragraph 8.2(b).
(b) Lessee shall pay any Insurance Cost Increase to Lessor pursuant to
Paragraph 4.2. Premiums for policy periods commencing prior to, or extending
beyond, the term of this Lease shall be prorated to coincide with the
corresponding Commencement Date or Expiration Date.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force during the
term of this Lease a Commercial General Liability policy of insurance protecting
Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in
writing (as additional insureds) against claims for bodily injury, personal
injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "insured contract"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) Carried by Lessor. Lessor shall also maintain liability insurance
described in Paragraph 8.2(a) above, in addition to and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and to any Lender(s), insuring against loss or damage to
the Premises. Such insurance shall be for full replacement cost, as the same
shall exist from time to time, or the amount required by any
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Lender(s), but in no event more than the commercially reasonable and available
insurance value thereof if by reason of the unique nature or age of the
improvements involved, such latter amount is less than full replacement cost.
Lessee-Owned Alterations and Utility Installations, Trade Fixtures and Lessee's
personal property shall be insured by Lessee pursuant to Paragraph 8.4. If the
coverage is available and commercially appropriate, Lessor's policy or policies
shall insure against all risks of direct physical loss or damage (except the
perils of flood and/or earthquake unless required by a Lender or included in the
Base Premium), including coverage for any additional costs resulting from debris
removal and reasonable amounts of coverage for the enforcement of any ordinance
or law regulating the reconstruction or replacement of any undamaged sections of
the Building required to be demolished or removed by reason of the enforcement
of any building, zoning, safety or land use laws as the result of a covered
loss, but not including plate glass insurance. Said policy or policies shall
also contain an agreed valuation provision in lieu of any co-insurance clause,
waiver of subrogation, and inflation guard protection causing an increase in the
annual property insurance coverage amount by a factor of not less than the
adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers
for the city nearest to where the Premises are located.
(b) Rental Value. Lessor shall also obtain and keep in force during the
term of this Lease a policy or policies in the name of Lessor, with loss payable
to Lessor and any Lender(s), insuring the loss of the full rental and other
charges payable by all lessees of the Building to Lessor for one year (including
all Real Property Taxes, insurance costs, all Common Area Operating Expenses and
any scheduled rental increases). Said insurance may provide that in the event
the Lease is terminated by reason of an insured loss, the period of indemnity
for such coverage shall be extended beyond the date of the completion of repairs
or replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any co-insurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income, Real
Property Taxes, insurance premium costs and other expenses, if any, otherwise
payable, for the next 12-month period. Common Area Operating Expenses shall
include any deductible amount in the event of such loss.
(c) Adjacent Premises. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas of
other buildings in the Industrial Center if said increase by Lessee's acts,
omissions, use or occupancy of the Premises.
(d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor
shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 Lessee's Property Insurance. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned
Alterations and Utility Installations in, on, or about the Premises
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similar in coverage to that carried by Lessor as the Insuring Party under
Paragraph 8.3(a). Such insurance shall be full replacement cost coverage with a
deductible not to exceed $1,000 per occurrence. The proceeds from any such
insurance shall be used by Lessee for the replacement of personal property and
the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility
Installations. Upon request from Lessor, Lessee shall provide Lessor with
written evidence that such insurance is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other rating as may be required by a Lender, as set
forth in the most current issue of "Best's Insurance Guide." Lessee shall not do
or permit to be done anything which shall invalidate the insurance policies
referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor,
within seven (7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the existence
and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such
policy shall be cancelable or subject to modification except after thirty (30)
days' prior written notice to Lessor. Lessee shall at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with evidence of
renewals or "insurance binders" evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages (whether in contract or in tort) against
the other, for loss or damage to their property arising out of or incident to
the perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liability arising out of, involving, or in connection
with, the occupancy of the Premises by Lessee, the conduct of Lessee's business,
any act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably
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satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense.
Lessor need not have first paid any such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the Industrial Center. Notwithstanding Lessor's negligence or
breach of this Lease, Lessor shall under no circumstances be liable for injury
to Lessee's business or for any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is less than fifty percent (50%) of
the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is fifty percent (50%) or more of the
then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and
Utility Installations and Trade Fixtures) immediately prior to such damage or
destruction. In addition, damage or destruction to the Building, other than
Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any
lessees of the Building, the cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures of any lessees of the
Building) of the Building shall, at the option of Lessor, be deemed to be
Premises Total Destruction.
(c) "Insured Loss" shall mean damage or destruction to the Premises,
other than Lessee-Owned Alterations and Utility Installations and Trade
Fixtures, which was caused by an event required to be covered by the insurance
described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage
limits involved.
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(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Premises Partial Damage-Insured Loss. If Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. In the event, however, that there is a
shortage of insurance proceeds and such shortage is due to the fact that, by
reason of the unique nature of the improvements in the Premises, full
replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (10) day period, Lessor shall complete them as soon as
reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If Lessor does not receive such funds or assurance within such
ten (10) day period, and if Lessor does not so elect to restore and repair, then
this Lease shall terminate sixty (60) days following the occurrence of the
damage or destruction. Unless otherwise agreed, Lessee shall in no event have
any right to reimbursement from Lessor for any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but the net proceeds
of any such insurance shall be made available for the repairs if made by either
Party.
9.3 Partial Damage-Uninsured Loss. If Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the repair of such damage totally at Lessee's expense and without
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reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 Damage Near End of Term. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such period, then this
Lease shall terminate as of the date set forth in the first sentence of this
Paragraph 9.5.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the Base Rent,
Common Area Operating Expenses and other charges, if any, payable by Lessee
hereunder for the period during which such damage or condition, its repair,
remediation or restoration continues, shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired, but not in excess of
proceeds from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other charges, if
any, as aforesaid, all other obligations of Lessee hereunder shall be performed
by Lessee, and Lessee shall have no
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claim against Lessor for any damage suffered by reason of any such damage,
destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, given written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect. "Commence" as used in this Paragraph
9.6 shall mean either the unconditional authorization of the preparation of the
required plans, or the beginning of the actual work on the Premises, whichever
occurs first.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) of the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000 whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 Termination-Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment
made by Lessee to Lessor and so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
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9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent it is inconsistent
herewith.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2(a), applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any increases in such amounts over the
Base Real Property Taxes shall be included in the calculation of Common Area
Operating Expenses in accordance with the provisions of Paragraph 4.2.
10.2 Real Property Tax Definitions.
(a) As used herein, the term "Real Property Taxes" shall include any
form of real estate tax or assessment, general, special, ordinary or
extraordinary, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than inheritance, personal income or estate taxes)
imposed upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage, or other improvement
district thereof, levied against any legal or equitable interest of Lessor in
the Industrial Center or any portion thereof. Lessor's right to rent or other
income therefrom, and/or Lessor's business of leasing the Premises. The term
"Real Property Taxes" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring, or
changes in Applicable Law taking effect, during the term of this Lease,
including but not limited to a change in the ownership of the Industrial Center
or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties.
(b) As used herein, the term "Base Real Property Taxes" shall be the
amount of Real Property Taxes, which are assessed against the Premises, Building
or Common Areas in the calendar year during which the Lease is executed. In
calculating Real Property Taxes for any calendar year, the Real Property Taxes
for any real estate tax year shall be included in the calculation of Real
Property Taxes for such calendar year based upon the number of days which such
calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason
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of Alterations, Trade Fixtures or Utility Installations placed upon the Premises
by Lessee or at Lessee's request.
10.4 Joint Assessment. If the Building is not separately assessed,
Real Property Taxes allocated to the Building shall be an equitable
proportion of the Real Property Taxes for all of the land and improvements
included within the tax parcel assessed, such proportion to be determined by
Lessor from the respective valuations assigned in the assessor's work sheets
or such other information as may be reasonably available. Lessor's reasonable
determination thereof, in good faith, shall be conclusive.
10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. Utilities. Lessee shall pay directly for all utilities and services supplied
to the Premises, including but not limited to electricity, telephone, security,
gas and cleaning of the Premises, together with any taxes thereon. If any such
utilities or services are not separately metered to the Premises or separately
billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be
determined by Lessor of all such charges jointly metered or billed with other
premises in the Building, in the manner and within the time periods set forth in
Paragraph 4.2(d).
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee,
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as hereinafter defined, by an amount equal to or greater than twenty-five
percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the
time of full execution and delivery of this Lease or at the time of the most
recent assignment to which Lessor has consented, or as it exists immediately
prior to said transaction or transactions constituting such reduction, at
whichever time said Net Worth of Lessee was or is greater, shall be considered
an assignment of this Lease by Lessee to which Lessor may reasonably withhold
its consent. "Net Worth of Lessee" for purposes of this Lease shall be the net
worth of Lessee (excluding any Guarantors) established under generally accepted
accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1, or a non-curable Breach without
the necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment or subletting as a non-curable Breach, Lessor shall
have the right to either: (i) terminate this Lease, or (ii) upon thirty (30)
days' written notice ("Lessor's Notice"), increase the monthly Base Rent for the
Premises to the greater of the then fair market rental value of the Premises, as
reasonably determined by Lessor, or one hundred ten percent (110%) of the Base
Rent then in effect. Pending determination of the new fair market rental value,
if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice,
with any overpayment credited against the next installment(s) of Base Rent
coming due, and any underpayment for the period retroactively to the effective
date of the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and rental adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to the then fair market value as reasonably
determined by Lessor (without the Lease being considered an encumbrance or any
deduction for depreciation or obsolescence, and considering the Premises at its
highest and best use and in good condition) or one hundred ten percent (110%) of
the price previously in effect, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to require that
the base index be determined with reference to the index applicable to the time
of such adjustment, and (iii) any fixed rental adjustments scheduled during the
remainder of the Lease term shall be increased in the same ratio as the new
rental bears to the Base Rent in effect immediately prior to the adjustment
specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting shall
not (i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, nor (iii) alter the primary liability of Lessee for
the payment of Base Rent and other sums due Lessor hereunder or for the
performance of any other obligations to be performed by Lessee under this Lease.
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(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and assignment
of the sublease or any amendments or modifications thereto without notifying
Lessee or anyone else liable under this Lease or the sublease without obtaining
their consent, and such action shall not relieve such persons from liability
under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's obligation under
this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone
else responsible for the performance of the Lessee's obligations under this
Lease, including any sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor.
(e) Each request for consent to an assignment or subletting shall be in
writing, accompanied by information relevant to Lessor's determination as to the
financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the monthly Base Rent applicable to
the portion of the Premises which is the subject of the proposed assignment or
sublease, whichever is greater, as reasonable consideration for Lessor's
considering and processing the request for consent. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason of
accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.2(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment schedule of the rent
payable under this Lease be
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adjusted to what is then the market value and/or adjustment schedule for
property similar to the Premises as then constituted, as determined by Lessor.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect, and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of the foregoing
provision or any other assignment of such sublease to Lessor, nor by reason of
the collection of the rents from a sublessee, be deemed liable to the sublessee
for any failure of Lessee to perform and comply with any of Lessee's obligations
to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor stating
that a Breach exists in the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become due under
the sublease. Sublessee shall rely upon any such statement and request from
Lender and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary, Lessee
shall have no right or claim against such sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior defaults
or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior written
consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
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13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "Default" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"Breach" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent, Lessee's Share of Common Area
Operating Expenses, or any other monetary payment required to be made by Lessee
hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which endangers
or threatens life or property, where such failure continues for a period of
three (3) days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure
by Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with Applicable Requirements per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the rescission of an authorized assignment or
subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37,
(v) the subordination or non-subordination of this Lease per Paragraph 30, (vi)
the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that
are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be
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deemed to be a Breach of this Lease by Lessee if Lessee commences such cure
within said thirty (30) day period and thereafter diligently prosecutes such
cure to completion.
(e) The occurrence of any of the following events: (i) the making by
Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1(e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of Lessee or
of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially
false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurances of security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the Guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee upon invoice therefor. If any check given to Lessor by Lessee shall not
be honored by the bank upon which it is drawn, Lessor, at its own option, may
require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee (as
defined in Paragraph 13.1), with or without further notice or demand, and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately
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surrender possession of the Premises to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the worth at the time of the award of the
unpaid rent which had been earned at the time of termination; (ii) the worth at
the time of award of the amount by which the unpaid rent which would have been
earned after termination until the time of award exceeds the amount of such
rental loss that the Lessee proves could have been reasonably avoided; (iii) the
worth at the time of award of the amount by which the unpaid rent for the
balance of the term after the time of award exceeds the amount of such rental
loss that the Lessee proves could be reasonably avoided; and (iv) any other
amount necessary to compensate Lessor for all the detriment proximately caused
by the Lessee's failure to perform its obligations under this Lease or which in
the ordinary course of things would be likely to result therefrom, including but
not limited to the cost of recovering possession of the Premises, expenses of
reletting, including necessary renovation and alteration of the Premises,
reasonable attorneys' fees, and that portion of any leasing commission paid by
Lessor in connection with this Lease applicable to the unexpired term of this
Lease. The worth at the time of award of the amount referred to in provision
(iii) of the immediately preceding sentence shall be computed by discounting
such amount at the discount rate of the Federal Reserve Bank of San Francisco or
the Federal Reserve Bank District in which the Premises are located at the time
of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by
Lessee's Default or Breach of this Lease shall not waive Lessor's right to
recover damages under this Paragraph 13.2. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve the right to recover all or any part
thereof in a separate suit for such rent and/or damages. If a notice and grace
period required under Subparagraphs 13.1(b), (c) or (d) was not previously
given, a notice to pay rent or quit, or to perform or quit, as the case may be,
given to Lessee under any statute authorizing the forfeiture of leases for
unlawful detainer shall also constitute the applicable notice for grace period
purposes required by Subparagraphs 13.1(b), (c) or (d). In such case, the
applicable grace period under the unlawful detainer statute shall run
concurrently after the one such statutory notice, and the failure of Lessee to
cure the Default within the greater of the two (2) such grace periods shall
constitute both an unlawful detainer and a Breach of this Lease entitling Lessor
to the remedies provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
recover the rent as it becomes due, provided Lessee has the right to sublet or
assign, subject only to reasonable limitations. Lessor and Lessee agree that the
limitations on assignment and subletting in this Lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under this Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination
of Lessee's right to possession shall not relieve Lessee from liability under
any indemnity provisions of
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this Lease as to matters occurring or accruing during the term hereof or by
reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture in Event of Breach. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants, and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor, as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of
such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or deed of trust covering the
Premises. Accordingly, if any installment of rent or other sum due from Lessee
shall not be received by Lessor or Lessor's designee within ten (10) days after
such amount shall be due, then, without any requirement for notice to Lessee,
Lessee shall pay to Lessor a late charge equal to six percent (6%) of such
overdue amount. The parties hereby agree that such late charge represents a fair
and reasonable estimate of the costs Lessor will incur by reason of late payment
by Lessee. Acceptance of such late charge by Lessor shall in no event constitute
a waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by any Lender(s) whose name and address shall have been furnished to
Lessee in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably
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required for its performance, then Lessor shall not be in breach of this Lease
if performance is commenced within such thirty (30) days period and thereafter
diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of any exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the portion of
the Common Areas designated for Lessee's parking, is taken by condemnation,
Lessee may, at Lessee's option, to be exercised in writing within ten (10) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the Base Rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of Base
Rent shall occur if the condemnation does not apply to any portion of the
Premises. Any award for the taking of all or any part of the Premises under the
power of eminent domain or any payment made under threat of the exercise of such
power shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is
not terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above Lessee's Share of the legal and
other expenses incurred by Lessor in the condemnation matter, repair any damage
to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. Brokers' Fees.
15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 Additional Terms. Unless Lessor and Broker(s) have otherwise
agreed in writing, Lessor agrees that (a) if Lessee exercises any Option (as
defined in Paragraph 39.1) granted under this Lease or any Option subsequently
granted, or (b) if Lessee acquires any rights to the Premises or other premises
in which Lessor has an interest, or (c) if Lessee remains in possession of the
Premises with the consent of Lessor after the expiration of the term of this
Lease after having failed to exercise an Option, or (d) if said Brokers are the
procuring cause of any other lease or sale entered into between the Parties
pertaining to the Premises and/or any adjacent property in which Lessor has an
interest, or (e) if Base Rent is increased, whether by agreement or operation of
an escalation clause herein, then as to any of
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said transactions, Lessor shall pay said Broker(s) a fee in accordance with the
schedule of said Broker(s) in effect at the time of the execution of this Lease.
15.3 Assumption of Obligations. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation of
law, shall be deemed to have assumed Lessor's obligation under this Paragraph
15. Each Broker shall be an intended third party beneficiary of the provisions
of Paragraph 1.10 and of this Paragraph 15 to the extent of its interest in any
commission arising from this Lease and may enforce that right directly against
Lessor and its successors.
15.4 Representations and Warranties. Lessee and Lessor each represent
and warrant to the other that it has had no dealings with any person, firm,
broker or finder other than as named in Paragraph 1.10(a) in connection with the
negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or similar party by reason of any dealings or actions of the
Indemnifying Party, including any costs, expenses, and/or attorneys' fees
reasonably incurred with respect thereto.
16. Tenancy and Financial Statements.
16.1 Tenancy Statement. Each Party (as "Responding Party") shall within
ten (10) days after written notice from the other Party (the "Requesting Party")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in a form similar to the then most current "Tenancy Statement" form published by
the American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Party.
16.2 Financial Statement. If Lessor desires to finance, refinance, or
sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises. In the event of
a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease
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thereafter to be performed by the Lessor. Subject to the foregoing, the
obligations and/or covenants in this Lease to be performed by the Lessor shall
be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest or Past-Due Obligations. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within ten (10) days following
the date on which it was due, shall bear interest from the date due at the prime
rate charged by the largest state chartered bank in the state in which the
Premises are located plus four percent (4%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. Each Broker shall be an intended third party beneficiary
of the provisions of this Paragraph 22.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
messenger or courier service) or may be sent by regular, certified or registered
mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile
transmission during normal business hours, and shall be deemed sufficiently
given if served in a manner specified in this Paragraph 23. The addresses noted
adjacent to a Party's signature on this Lease shall be that Party's address for
delivery or mailing of notice purposes. Either Party may by written notice to
the other specify a different address for notice purposes, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for the purpose of mailing or delivering notices to Lessee. A
copy of all notices required or permitted to be given to Lessor hereunder shall
be concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
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23.2 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail, the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by the United States Express Mail or overnight courier that
guarantees next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the United States Postal Service or courier. If any
notice is transmitted by facsimile transmission or similar means, the same shall
be deemed served or delivered upon telephone or facsimile confirmation of
receipt of the transmission thereof, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday or a Sunday or a legal
holiday, it shall be deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be construed
as a consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
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29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act of omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
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31. Attorneys' Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereinafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "Prevailing Party" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other party or Broker of its claim or defense. The
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or about the
Premises or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place on or
about the Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the exterior of the Premises or
the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign on
the Premises by or for Lessee shall be subject to the provisions of Paragraph 7
(Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation
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hereof, or a termination hereof by Lessor for Breach by Lessee, shall
automatically terminate any sublease or lesser estate in the Premises; provided,
however, Lessor shall, in the event of any such surrender, termination or
cancellation, have the option to continue any one or all of any existing
subtenancies. Lessor's failure within ten (10) days following any such event to
make a written election to the contrary by written notice to the holder of any
such lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 Form of Guaranty. If there are to be any Guarantors of this Lease
per Paragraph 1.11, the form of the guaranty to be executed by each such
Guarantor shall be in the form most recently published by the American
Industrial Real Estate Association, and each such Guarantor shall have the same
obligations as Lessee under this Lease, including but not limited to the
obligation to provide the Tenancy Statement and information required in
Paragraph 16.
37.2 Additional Obligations of Guarantor. It shall constitute a Default
of the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to
37
<PAGE>
give: (a) evidence of the due execution of the guaranty called for by this
Lease, including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and resolution
of its board of directors authorizing the making of such guaranty, together with
a certificate of incumbency showing the signatures of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. Options.
39.1 Definition. As used in this Lease, the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor or the right of first refusal to
purchase other property of Lessor, or the right of first offer to purchase other
property of Lessor.
39.2 Options Personal to Original Lessee. Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof,
and cannot be voluntarily or involuntarily assigned or exercised by any person
or entity other than said original Lessee while the original Lessee is in full
and actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later option cannot be exercised unless
the prior Options to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
38
<PAGE>
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of separate Defaults under Paragraph 13.1 during the twelve
(12) month period immediately preceding the exercise of the Option, whether or
not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligations becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. Rules and Regulations. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
39
<PAGE>
44. Authority. If either Party hereto is a corporation, trust or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S
REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND
STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE
BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES; THE PARTIES SHALL
40
<PAGE>
RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN
CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE
CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Executed at:
---------------------------- -----------------------
on: on:
------------------------------------- ---------------------------------
By LESSOR: By LESSEE:
MARQUARDT ASSOCIATES DIAMOND ENTERTAINMENT CORP.,
- ---------------------------------------- ------------------------------------
INC. A CALIFORNIA CORPORATION
- ---------------------------------------- ------------------------------------
By: By: /s/James Lu
----------------------------------- -------------------------------
Name Printed: Name Printed: James Lu
------------------------- ---------------------
Title: Title: President
-------------------------------- ----------------------------
By: By:
----------------------------------- ---------------------------------
Name Printed: Name Printed:
------------------------- -----------------------
Title: Title:
---------------------------------- ------------------------------
Address: 150 Marcus Boulevard Address:
------------------------------ ----------------------------
Hauppauge, NY 11788
---------------------------------- ------------------------------------
Telephone: (516) 231-7750 Telephone: ( )
---------------------------- ------------------------
Facsimile: ( ) Facsimile: ( )
---------------------------- ------------------------
BROKER: BROKER:
Executed at: Executed at:
----------------------------- ------------------------
on: on:
------------------------------------- -------------------------------
By: By:
------------------------------------- -------------------------------
Name Printed: Titanium Cronin/Anita Name Printed:
-------------------------- ----------------------
Manoledes
- ----------------------------------------- -------------------------------
Title: Title:
---------------------------------- -------------------------------
Address: 13181 Crossroads Parkway Address: 2099 S. State College
------------------------------- --------------------------
North, Suite 300, City Of Boulevard, Anaheim, CA 92806
- ----------------------------------------- ------------------------------------
Industry, CA 91746
- ----------------------------------------- ------------------------------------
Telephone: (310) 699-7500 Telephone: (714) 978-7880
----------------------------- ------------------------
Facsimile: (310) 695-3133 Facsimile: ( )
----------------------------- ------------------------
41
<PAGE>
(EXHIBIT A)
SITE PLAN AND FLOOR PLAN
<PAGE>
ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL
MULTI-TENANT LEASE-GROSS
Dated, November 1, 1995
By And Between:
MARQUARDT ASSOCIATES
As Lessor
And
DIAMOND ENTERTAINMENT CORPORATION INC.,
A California Corporation
As Lessee
49. Rental Abatement: Lessee shall receive February 1-29, 1996, March 1-31,
1996 and April 1-31, 1996 free of any rent.
50. Rental Schedule: In the 34th month of the lease or September 1, 1998
the rental amount will be adjusted to $9,936.00 per month through the
balance of the term.
51. Early Occupancy: Lessee shall have access to the warehouse upon
execution of the lease. The square footage shall be limited to 10,000
Square Feet. Additionally the Lessee shall have access to the office
area for renovation beginning December 1, 1995.
52. Tenant Improvements: Lessor shall provide Lessee with a $20,000.00
tenant improvement allowance to be issued as a check to Lessee upon
submission of invoices for work completed. Any unused T.I. Allowance,
if any, shall be credited toward Lessee's base rent for May, 1996.
53. Surrender: At Lessor's option upon surrender of the premises at lease
expiration or earlier termination tenant shall be responsible for
restoring the entry and lobby back to the existing condition.
54. Security Deposit: After Lessor has received twelve (12) timely
consecutive monthly payments of rent and provided Lessee is not in
default of this Lease, Lessor, in its sole discretion, upon review of
Lessee's financial condition, shall refund to Lessee $9,273.60 of the
Security Deposit.
AGREED AND ACCEPTED AGREED AND ACCEPTED
Lessor: Lessee:
Marquardt Associates Diamond Entertainment Corporation, Inc.
A California Corporation
By: By: /s/ James Lu
----------------------------- ------------
Its: Its: President
--------------------------- ---------
Date: Date: 11/15/95
--------------------------- --------
<PAGE>
Exhibit 10.12
O F F I C E L E A S E A G R E E M E N T
BY AND BETWEEN:
FREEHOLD-CRAIG ROAD PARTNERSHIP,
a New Jersey partnership,
as "Landlord"
-and-
DIAMOND ENTERTAINMENT CORPORATION as "Tenant"
PREMISES: Freehold Executive Center
Portion of 2ND Floor
Freehold, New Jersey
DATED: OCTOBER 31, 1997
<PAGE>
This Lease Agreement, made this 31st day of October 1997, between
Freehold-Craig Road Partnership, a New Jersey partnership, having an address at
4400 Rte. 9 South, Freehold, New Jersey, 07728, hereinafter called the
"Landlord"; and Diamond Entertainment Corporation, having an office at Freehold
Executive Center, Route 9, Freehold, New Jersey, Hereinafter called the
"Tenant".
WITNESSETH:
WHEREAS, the Landlord is the owner of certain lands and premises
located on Route 9, in Freehold Township, County of Monmouth and State of New
Jersey, which said lands and premises contain approximately 5.02 acres of land,
(hereinafter referred to as the "Property") and are more particularly described
on Schedule "A" attached hereto and made a part hereof; and
WHEREAS, the Landlord has erected on the Property an office building
commonly known as Freehold Executive Center, containing approximately 64,669
square feet (hereinafter called the "Building"); and
WHEREAS, the Tenant shall rent and occupy a portion of the second (2nd)
floor of the Building, which floor space contains 1289 gross square feet of
leased space, hereinafter called the "leased premises"), together with the right
of Tenant to use common area spaces of the Building, all in accordance with
terms and conditions hereinafter mentioned and the considerations herein
expressed,
NOW, THEREFORE, in consideration of the covenants and conditions
hereinafter set forth and for other good and valuable considerations, the
Landlord does demise, lease and let unto the Tenant, and the Tenant does rent
and take from the Landlord the leased premises, and the Landlord and Tenant
mutually covenant and agree as follows:
1. LEASED PREMISES
1.1 The leased premises consists of that portion of the second floor of
the Building containing 1289 square feet of office space, based on outside of
glass dimensions to center line of common wall, inclusive of a factor
attributable to the common area space hereinafter referred to in Section 1.2,
and hereinafter referred to as the "Gross Rentable Area". The leased premises
are outlined on the plan attached hereto and made a part hereof, marked Schedule
"B".
1.2 The use of the leased premises includes the right, in common with
other tenants of the Building, to use the common entranceways, foyers,
lavatories, stairways, elevators, plaza areas and parking areas.
1.3 The Landlord covenants and agrees with Tenant that it will provide
5 parking spaces for the use of the Tenant, its employees, agents, servants or
invites, which use shall be in common with other tenants of the Building.
Landlord shall have no obligation to police the use of the parking lot or the
operation thereof.
1
<PAGE>
1.4 Anything herein contained to the contrary notwithstanding, it is
expressly understood and agreed that the Tenant shall take the leased premises
and improvements as of the Commencement Date of the within lease in an "as is"
condition. Landlord warrants that effective as of the commencement Date of the
lease all building systems, fixtures and equipment shall be in good repair and
operating condition.
2. TERM OF LEASE
2.1 The Landlord leases unto the Tenant, and the Tenant hires the
leased premises for the term of three (3) years to commence on June 1, 1997 or
the first day of a calendar month on or following the date when the leased
premises are Ready for Occupancy (the "Commencement Date").
2.2 During any partial monthly occupancy prior to the Commencement
Date, Tenant shall be responsible to pay pro rata Annual Basic Rent, together
with Tenant's Percentage of Additional Rent as in this lease provided. During
said period of partial month occupancy the Tenant shall comply with all other
terms and conditions of this lease on the part of the Tenant to be performed.
3. RENT
3.1 Effective as of the Commencement Date of the lease, the Tenant
shall pay Annual Basic Rent for the entire term in the annual sum of Sixty Nine
Thousand Five Hundred Eighty Five Dollars and 00/100 ($69,585.00) dollars,
payable in equal monthly installments in advance in the sum of One Thousand Nine
Hundred Thirty Two and 91/100 ($1932.91) dollars, due promptly on the first day
of each and every month during the term of this lease, without demand and
without offset or deduction, together with such Additional Rent or charges
required to be paid by the Tenant as hereinafter provided.
3.2 In addition to the Annual Basic Rent and Additional Rent required
to be paid hereunder, Tenant shall pay monthly during the lease term, a sum
representing payment for Tenant's consumption of electrical energy at the leased
premises, hereinafter referred to as "Tenant's electric". The aforementioned sum
shall be paid together with the monthly payments of Annual Basic Rent to be paid
as herein provided. Landlord shall furnish to Tenant, monthly, an invoice for
Tenant's electric based upon readings of a submeter (which shall measure
Tenant's use of electric energy within the leased premises), and Tenant's
Percentage of the cost for electrical energy furnished to common area spaces and
all services of the Building. Tenant shall pay such amounts to Landlord within
ten (10) days of receipt of Landlord's invoice therefor, if not theretofore paid
with Tenant's payment of Annual Basic Rent as hereinabove set forth.
3.3 Any installment of rent accruing hereunder, and any other sum
payable hereunder by Tenant to Landlord which is not paid prior to the tenth
(10th) day of any lease month, shall bear interest at the per annum rate of five
(5% percent over the prime rate charged by The Chase Manhattan Bank, N.A., to
its most favored borrowers (hereinafter in
2
<PAGE>
this lease referred to as the "Premium Rate"), computed from the time when the
same shall respectively become due and payable until the same shall be paid,
which shall reflect daily rate changes as applicable.
4. ADDITIONAL RENT
Additional rent shall be paid by the Tenant in accordance with
the provisions of this Article 4.
4.1 Additional rent, taxes
(a) In the event that the amount of real estate taxes,
assessments, sewer rents, rates and charges, state and local taxes, transit
taxes or any other governmental charge, general, special, ordinary or
extraordinary, hereinafter collectively called taxes (but not including income
or franchise taxes or any other taxes imposed upon or measured by the Landlord's
income or profits, except if in substitution for real estate taxes as
hereinafter provided) which may now or hereafter be levied or assessed against
the Property and upon the Building (hereinafter collectively called the "Real
property") attributable to any tax year shall be greater than the amount of
taxes on the Real Property attributable to the Base Year, then the Tenant shall
pay to the Landlord, as additional rent, an amount equal to that proportion of
such increase as the Gross Rentable Area of the leased premises bears to the
Gross Rentable Area of the Building, which proportion is designated as "Tenant's
Percentage", which for the purposes of this lease has been established as 2%.
"Base Year" for purposes of this Article 4.1 shall mean the tax rate in effect
as of the calendar year 1998, and the assessment shall be the calendar year in
which the Building was fully assessed (which is 1987) as a completed building.
The Landlord shall take the benefit of the provisions of any statute or
ordinance permitting any assessment to be paid over a period of time, and Tenant
shall be obliged to pay Tenant's Percentage only of the installments of any such
assessment applicable to the terms of this lease or any renewal hereof. Any
amount due to the Landlord under the provisions of this Article 4.1 (a) shall be
paid as part of Additional Rent as hereinafter provided in Article 4.2. Landlord
shall furnish to Tenant a detailed statement showing the computation of Tenant's
percentage of real estate taxes as part of the requirements of Article 4.2(c).
The amount of taxes for the Base Year, against which Tenant's liability for
Additional Rent in subsequent years is determined, shall be the amount thereof
finally determined to be legally payable by legal proceedings or otherwise. In
the event the amount of taxes for the Base Year has not been finally determined
by legal proceedings or otherwise at the time of payment of taxes for any
subsequent year, the actual amount of taxes paid by landlord for the Base Year
shall be used in the statement provided by Landlord as the basis for Tenant's
liability hereunder with respect to such subsequent year. Upon final
determination of the amount of taxes for the Base Year by legal proceedings or
otherwise, landlord shall deliver to Tenant a statement setting forth the amount
of taxes for the Base Year as finally determined and showing in reasonable
detail the computation of any adjustment due to landlord by reason thereof. Any
payment due to Landlord by reason of such adjustment shall be paid as
hereinbefore provided.
(b) If landlord shall receive any tax refund or rebate in
respect of any tax year following the Base year, landlord may deduct from such
tax refund any reasonable
3
<PAGE>
expenses incurred in obtaining such tax refund, and out of the remaining balance
of such tax refund, Landlord shall pay to Tenant that proportion of such refund
or rebate as the rentable area of the leased premises bears to the rentable area
of the Building provided that Tenant shall have paid the Landlord any portion of
the taxes being refunded.
(c) If the tax year for real estate taxes shall be changed,
then an appropriate adjustment shall be made in the computation of the
additional tax due to Landlord or any amount due to Tenant. The computation
shall be made in accordance with generally accepted accounting principles
applied on a consistent basis.
(d) If the last year of the term of this lease ends on any day
other than the last day of a tax year, any payment due to landlord or to tenant
by reason of any increase or decrease in taxes shall be prorated and Tenant
shall pay any amount due to Landlord within thirty (30) days after being billed
therefor, and Landlord shall pay any amount due to Tenant. This covenant shall
survive the expiration or termination of this lease.
(e) If at any time during the term of this lease the method or
scope of taxation prevailing at the commencement of the lease term shall be
altered, modified or enlarged so as to cause the method of taxation to be
changed, in whole or in part, so that in substitution for the real estate taxes
now assessed there may be, in whole or in part, a capital levy or other
imposition based on the value of the Real Property, or the rents received
therefrom, or some other form of assessment based in whole or in part on some
other valuation of the Landlord's Real Property, as if such Real Property were
the only property owned by the Landlord, then and in such event, such
substituted tax or imposition shall be payable and discharged pro rata, as
applicable, in accordance with the obligations set forth in this Article 4,
computed on the basis of such law promulgated which shall authorize such change
in the scope of taxation, and as required by the terms and conditions of the
within lease.
4.2 Additional rent, operating expenses.
(a) In the event that the amount of Operating Expenses (as
hereinafter defined) for the Base Year (for the purposes of this Article 4.2
herein defined to be the first calendar year of Tenant's occupancy) shall be
less than the amount of Operating Expenses for any succeeding calendar year,
then Tenant shall pay to landlord Tenant's percentage of the increase in
Operating Expenses for said succeeding calendar year, such cost to be projected
and interpolated as if the Building were 95% rented during the Base Year
hereinabove defined.
(b) For the purposes of this Article 4.2, "Operating Expenses"
shall mean the following expenses paid or incurred by Landlord in connection
with the Building and the Property:
(A) Wages, salaries, fees and other compensation
and payments and payroll taxes and contributions to any social security,
unemployment insurance, welfare, pension or similar fund and payments for other
fringe benefits required by law or by union agreement (or, if the employees or
any of them are non-union, then payments for benefits comparable to those
generally required by union agreement in first-class office buildings in the
4
<PAGE>
Monmouth County area, which are unionized) made to or on behalf of all employees
of Landlord performing services rendered in connection with the operation and
maintenance of the Building and the property, including, without limitation,
persons engaged in the operation and maintenance of the Building and Property,
Building superintendent and assistants, Building manager, and clerical and
administrative personnel.
(B) Applicable real estate taxes and assessments
pursuant to Article 4.1.
(C) Cleaning costs for the Building and the Property,
including the windows and sidewalks, all snow and rubbish removal (including
separate contracts therefor) and the costs of all labor, supplies, equipment and
materials incidental thereto.
(D) Premiums and other charges incurred by
landlord with respect to all insurance relating to the Building and the
property and the operation and maintenance thereof, including, without
limitation: fire and extended coverage insurance, including windstorm, flood,
hail, explosion, riot, rioting attending a strike, civil commotion, aircraft,
vehicle and smoke insurance; public liability; elevator; workmen's
compensation; boiler and machinery; rent; use and occupancy; health, accident
and group life insurance of all employees; and casualty rent insurance.
(E) The cost of heat, water and sewer, electric
and any and all other utility services used in connection with the operation
and maintenance of the Building and the Property (excluding electricity and
other utility services, if any, which are paid directly by tenants).
(F) Cost incurred for operation, service,
maintenance, inspection, repair and alteration of the Building, the Property,
and the heating, air-conditioning, ventilating, plumbing, electrical and
elevator systems of the Building (including any separate contract therefor)
and the costs of labor, materials, supplies and equipment used in connection
with all of the aforesaid items, including the cost attributable to
maintenance and replacement of all landscaped areas, including maintenance of
any underground sprinkler systems used in connection with the same,
maintenance and replacement of the parking lot, including curbs, paving,
striping and lighting.
(G) Sales and excise taxes and the like upon any of
the expenses enumerated herein.
(H) Management fees of the managing agent for the
Building, if any. If there shall be no managing agent, or if the managing
agent shall be a company affiliated with Landlord, the management fees that
would customarily be charged for the management of the Building by an
independent, first-class agent in the Monmouth County area.
(I) The cost of replacements for tools and
equipment used in the operation and maintenance of the Building and the
Property.
5
<PAGE>
(J) The cost of repainting or otherwise
redecorating any part of the Building other than premises demised to tenants
in the Building.
(K) Decorations for the lobby and other public
portions of the Building below the
second floor.
(L) The cost of telephone service, postage, office
supplies, maintenance and repair of office equipment and similar costs
related to operation of the Building Superintendent's office.
(M) The cost of licenses, permits and similar fees
and charges related to operation, repair and maintenance of the Building.
(N) Auditing fees necessarily incurred in
connection with the maintenance and operation of the Building, and accounting
fees incurred in connection with the preparation and certification of a real
estate tax escalation and the Operating Expenses escalation statements
pursuant to this Article 4.
(O) all costs incurred by landlord to retrofit any
portion or all of the Building to comply with a change in existing
legislation, whether Federal, State or Municipal; repairs, replacements and
improvements which are appropriate for the continued operation of the
Building as a first-class building.
(P) All expenses associated with the installation
or upgrading of any energy or cost saving devices.
(Q) Any and all other expenditures of Landlord in
connection with the operation, repair or maintenance of the Property or the
Building which are properly expensed in accordance with generally accepted
accounting principals consistently applied with respect to the operation,
repair and maintenance of first-class office buildings in the Monmouth County
area.
If Landlord shall purchase any item of capital equipment or make any capital
expenditure as described in subsections O and P above, then the costs for the
same shall be included in Operating Expenses in the year of installation and in
subsequent years amortized on a straight-line basis, over an appropriate period,
but not more than ten (10) years, with an interest factor equal to the prime
interest rate charged by The Chase Manhattan Bank, N.A., to its most favored
borrowers. If Landlord shall lease such item of capital equipment, then the
rentals or other operating costs paid pursuant to such leasing shall be included
in Operating Expenses for each year in which they are incurred. Notwithstanding
the foregoing, "Operating Expenses" shall not include expenditures for any of
the following:
(AA) The cost of any capital addition made to the
Building (other than that specified as a part of Operating Expenses as provided
above), including the cost to prepare space for occupancy by a new tenant.
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(BB) Repairs or other work occasioned by fire,
windstorm or other insure casualty or hazard, to the extent that Landlord shall
receive proceeds of such insurance.
(CC) Leasing commissions, advertising expenses
and other costs incurred in leasing or procuring new tenants.
(DD) Repairs or rebuilding necessitated by
condemnation.
(EE) Depreciation and amortization of the
Building, other than
(i) capital expenditures which under
generally applied real estate practice are expensed or regarded as deferred
expenses;
(ii) capital expenditures appropriate to a
first-class office building or required by law as described in subsection O
above; and
(iii) capital expenditures designed to
result in savings or reductions in Operating Expenses as described in subsection
P above.
(FF) The salaries and benefits of executive officers
of landlord, if any.
Operating Expenses shall be "net" and, for that purpose, shall be reduced by the
amounts of any reimbursement or credit received or receivable by landlord with
respect to an item of cost that is included in Operating Expenses (other than
reimbursements to landlord by tenants of the Building pursuant to Operating
Expenses escalation provisions). If landlord shall eliminate the payment of any
wages or other labor costs or otherwise reduce Operating Expenses as a result of
the installation of new devices or equipment, or by any other means, then in
computing the Operating Expenses the corresponding items shall be deducted from
the Operating Expenses allowance for the operating year.
(c) As soon as reasonably feasible after the expiration of the
first calendar lease year (Base Year), landlord will furnish to Tenant a
statement by an officer of landlord showing in reasonable detail the Operating
Expenses for the Base year. As soon as reasonably feasible after the expiration
of each calendar lease year after the Base Year, Landlord will furnish to Tenant
a statement by an officer of the Landlord showing in reasonable detail the
Operating Expenses for said calendar lease year, as compared to the statement of
the Operating Expenses for the preceding year. At the time of rendering such
statement, any adjustment due to the Landlord for underpayment or to Tenant for
overpayment under the provisions of Article 4.2 shall be paid or credited as
applicable as hereinafter provided as follows:
(i) Commencing with the second calendar year of
the lease term Tenant agrees to pay monthly, in addition to the Annual Basic
Rent, a sum equal to one-twelfth (1/12th) of Landlord's estimate of Tenant's
percentage of Operating Expenses for the second year of the lease term based on
Landlord's Operating Expenses for the first lease year. Landlord shall advise
Tenant in writing of such required payment and at the expiration
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of the second lease year Landlord and Tenant agree to adjust such estimated
payment as hereinafter set forth in subsection (ii).
(ii) Commencing with the third calendar year of
the lease term, and continuing yearly thereafter, in the event the Tenant
shall be required to pay additional rent for Operating Expenses as in this
Article 4.2 required, the Tenant agrees, in addition to the Annual Base Rent
to be paid pursuant to Article 3, that it will pay monthly 1/12th of the sum
required to be paid as Additional Rent attributable to Tenant's Percentage of
Operating Expenses for the prior lease year or Landlord's estimate thereof if
the actual Operating Expenses have not been ascertained. Such monthly payment
shall be made together with Tenant's regular monthly payment of Annual Basic
Rent. At the end of each lease, including the end of the second lease year as
hereinabove provided in subsection (i), there shall be an adjustment between
the Landlord and Tenant with respect to the aggregate of the monthly
Additional Rent paid for Operating Expenses so as to either (i) require
payment by tenant to Landlord of any amount required in excess of the twelve
(12) monthly payments, based on the prior year's Operating Expenses as
hereinabove provided; or (ii) credit the Tenant with any overpayment made in
excess of required Operating Expenses for that calendar year. Landlord shall
furnish Tenant with the computation of detailed Operating Expenses for the
applicable lease year in the manner hereinabove provided, and any required
payment to Landlord or credit to Tenant, as applicable, shall be paid or made
within thirty (30) days after Landlord's demand and furnishing by Landlord to
Tenant the required computation and statement of Tenant's percentage of
Operating Expenses as above provided.
(d) Tenant or its representatives shall have the right to
request to examine Landlord's books and records with respect to the items in the
foregoing statement of Operating Expenses during normal business hours at any
time within ninety (90) days following the delivery by Landlord to Tenant of
such statement. Tenant shall have an additional sixty (60) days to file any
written exception to any item of expense, however, nothing herein shall be
deemed to afford Tenant any right to withhold any payment due from Tenant to
Landlord; and, in the event of any such withholding of payment of Annual basic
Rent or Additional rent, Tenant shall pay the Premium Rate, computed daily from
the date of default to the date of payment. Each expense for which Landlord
shall bill Tenant as set forth hereinabove shall be necessary and reasonable for
the operation of the Building and Property and shall be delineated by Landlord
in detail to Tenant.
(e) If the last year of the term of this lease ends on any day
other than the last day of a calendar year, any payment due to Landlord or to
tenant by reason of any increase or decrease in Operating Expenses shall be
prorated and Tenant shall pay any amount due to Landlord within thirty (30) days
after being billed therefor. This covenant shall survive the expiration or
termination of this lease.
5. USE
5.1 The Tenant covenants and agrees to use and occupy the leased
premises for general offices purposes only, and for no other purpose.
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5.2 The Tenant covenants and agrees that it will not use the
leased premises for any use which creates an extra hazard of fire or other
danger or casualty, or which will increase the rate which Landlord or other
tenants must pay to secure fire or liability insurance, or which will render the
Building or it's improvement's uninsurable.
6. REPAIRS AND MAINTENANCE
6.1 During the term of this lease, the Landlord, at its expense,
shall keep in good order, safe condition and repair, the structural parts of the
Building and the common areas which the leased premises are a part, including
the walls, roof, floor, foundation load bearing members, trusses and joists, as
well as all plumbing, utilities and facilities serving the leased premises,
(with the exception of lighting fixture bulbs) except for repairs or maintenance
occasioned by the negligence or deliberate act of Tenant, or its agents,
servants, employees and invites which shall be then repaired at the cost and
expense of the tenant.
6.2 The landlord shall take good care of and maintain and repair
the lawns, shrubbery, driveway, sidewalks, entranceways, foyers, curbs and
parking area on the Property, and the Landlord shall provide snow removal.
6.3 Tenant agrees to keep the leased premises in as good repair as
they are at the beginning of the term of this lease, reasonable use and wear
thereof and damage by fire or other casualty not caused by Tenant excepted.
Tenant further agrees not to damage, overload, deface or commit waste of the
leased premises. Tenant shall be responsible for all damage of any kind or
character to the leased premises including the windows, floors, walls and
ceilings, caused by Tenant or by anyone using or occupying the leased premises
by, through or under the Tenant. Landlord shall repair the same as deemed
necessary by Tenant or Landlord, and Tenant agrees to pay the costs incurred
therefor to Landlord upon demand. Anything hereinabove contained to the contrary
notwithstanding, it is expressly understood and agreed that the Tenant shall, at
its sole cost and expense, be responsible for the repair, maintenance and
replacement of any items installed by Landlord for Tenant's use as leasehold
improvements over and above the improvements furnished by Landlord. Landlord
shall not be liable by reason of any injury to or interference with Tenant's
business arising from the making of any repairs, alterations, additions or
improvements in or to the leased premises or the Building or to any
appurtenances or equipment therein. There shall be no abatement of rent because
of such repairs, alterations, additions or improvements or because of any delay
by Landlord in making the same. Tenant shall give to Landlord prompt written
notice of any accidents to, or defects in plumbing, electrical, heating and
air-conditioning systems and apparatus located in the leased premises.
7. LANDLORD'S SERVICES
7.1 Landlord shall furnish the services for which the Building is
equipped, to the extent that the existing facilities for such services permit,
except that heat and air-conditioning, as required, shall be furnished only
between the hours of 8:00 A.M. and 6:00 P.M. Monday through Friday; 8:00 A.M.
and 12:00 P.M. Saturdays (Sundays and national holidays excluded).
Notwithstanding the foregoing, it is understood and agreed that the Tenant shall
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have twenty-four (24) hour access to the Building at all times. Landlord shall,
at its cost and expense, install a submeter to measure Tenant's use of electric
energy at the leased premises and may also install a bypass switch to measure
and monitor hours of overtime usage by Tenant at the rate of $40.00 per hour
during the first year of the term hereof and thereafter, said hourly charge
shall be increased annually by the percentage increase in electric and gas
utility rates for the Building operation, if any. If a bypass switch may not be
installed, Tenant agrees that it will keep a log of its overtime hours and
furnish to Landlord monthly a statement of any such overtime. Landlord reserves
the right to establish such other methods of monitoring overtime use, and Tenant
agrees to comply with any such reasonable regulations, which regulations in any
event shall apply to all other tenants of the Building.
7.2 Electric energy for Tenant's requirements within the leased
premises (excluding HVAC), including Tenant's electric for lighting, electric
typewriters, adding machines, copying machines, work processors, and any other
similar electricity requirements, as are customarily used in a general business
office, shall be paid for by tenant to the Landlord, based upon a Landlord
handling fee and the charges indicated by the submeter which shall be installed
by Landlord to monitor such electric usage within the leased premises. Any
requirements for high energy computers shall be only with the express written
consent of Landlord who reserves the right to require Tenant to pay any
additional costs attributable to such high energy use including any additional
requirements for air-conditioning attributable to such use or installation of
additional power service.
7.3 Tenant agrees not to connect any additional electrical
equipment of any type to the Building electric distribution system over and
above that equipment shown on Tenant's Plan without the Landlord's prior written
consent, however, Landlord shall not unreasonably withhold such consent.
Landlord shall not be liable in any way to tenant for any failure or defect in
the supply or character of electric energy furnished on the leased premises by
reason of any requirement, act or omission of the public utility serving the
Building with electricity. Tenant's use of electric energy in the leased
premises shall not at any time exceed the capacity of any of the electric
conductors and equipment in or otherwise serving the leased premises.
7.4 Janitorial services are as referred to on Schedule "E" annexed
hereto and made a part hereof.
8. INABILITY TO PERFORM
In case Landlord is prevented or delated in furnishing any
service as set forth herein or otherwise by reason of any cause beyond
Landlord's reasonable control, Landlord shall not be liable to Tenant therefor,
nor shall Tenant be entitled to any abatement or reduction in Annual Basic Rent
by reason thereof, nor shall the same give rise to a claim in Tenant's favor
that such absence of Building services constitutes actual or constructive, total
or partial eviction or renders the leased premises untenantable. Landlord
reserves the right to stop any service or utility system, when necessary by
reason of accident or emergency, or until necessary repairs have been completed,
provided, however, that in each instance of stoppage, Landlord shall exercise
reasonable diligence to eliminate the cause thereof. Except in case of emergency
repairs, Landlord will give tenant reasonable advance notice of any contemplated
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stoppage and will use reasonable efforts to avoid unnecessary inconvenience to
Tenant by reason thereof. Landlord agrees, however, that it will use all
reasonable efforts to obtain restoration of services based on the then existing
circumstances.
9. INSURANCE
Tenant shall keep in force at its own expense comprehensive
general liability insurance (including a contractual liability insurance
endorsement) in companies acceptable to Landlord sufficient to cover such
indemnification and naming as insured Landlord, owner of the Property,
Landlord's managing agent, if any, Landlords mortgagees and Tenant against
claims for "personal injury", including bodily injury and death, in amounts not
less than three million and 00/100 ($3,000,000.00) dollars, and for property
damage in amounts not less than one million and 00/100 ($1,000,000.00) dollars,
(or such higher limits as may be determined by Landlord), and Tenant will
further deposit the policy or policies of such insurance, or certificates
thereof, with Landlord. Said policy or policies of insurance or certificates
thereof shall have attached thereto an endorsement that such policy shall not be
cancelled without at lease ten (10) days' prior written notice to Landlord and
Landlord's managing agent, if any, and that no act or omission of Tenant shall
invalidate the interest of Landlord under said insurance. Landlord and Tenant
hereby release the other from any and all liability or responsibility to the
other or anyone claiming through or under them by way of subrogation or
otherwise for any loss or damage to property covered by any insurance then in
force, even if such fire or other casualty shall have been caused by the fault
or negligence of the other party, or anyone for whom such party may be
responsible, provided, however, that this release shall be applicable and in
force and effect only to the extent of and with respect to any loss or damage
occurring during such time as the policy or policies of insurance covering said
loss shall contain a clause or endorsement to the effect that this release shall
not adversely affect or impair said insurance or prejudice the right of the
insured to recover thereunder.
10. LANDLORD'S ACCESS FOR FUTURE CONSTRUCTION
The Landlord reserves the right to enter the Building,
property and leased premises in connection with the construction and erection of
any additions or improvements to the Building and Property of which the leased
premises are a part, provided that in the use of such right the Landlord shall
not unreasonably interfere with the use of the parking areas and driveways or
the Tenant's business.
11. FIXTURES
11.1 The Tenant may install and remove Tenant's property, equipment
and fixtures in the leased premises during the term of the lease. If the Tenant
moves out or is dispossessed, and fails to remove any such property, equipment
and fixtures after the last day for which all Annual Basic Rent is paid, then
the said property, equipment and fixtures shall be deemed at the option of the
Landlord to be abandoned, and Tenant shall reimburse to Landlord the reasonable
cost of removal thereof from the leased premises, including any cost of disposal
thereof.
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11.2 The Tenant shall repair, at its cost and expense, any damage
to the leased premises resulting from the removal of its property, equipment and
fixtures. However, if Tenant fails to do so, it shall be responsible to
reimburse the Landlord for the reasonable cost of compliance with the terms and
conditions of the within covenant.
11.3 All installation and removal of tenants fixtures, property and
equipment shall be done in accordance with all applicable laws and ordinances
and the rules and regulations of all governmental boards and bodies having
jurisdiction.
12. CHANGES IN OR ABOUT PREMISES
This lease shall not be affected or impaired by any change in
any sidewalk, alleys or streets adjacent to or around the Building, or in
parking regulations of the Township of Freehold or any County or State Agency or
Office.
13. ASSIGNMENT AND SUBLETTING
13.1 Tenant shall not assign, mortgage or otherwise transfer or
encumber this lease, nor sublet all or any part of the leased premises or permit
the same to be occupied or used by anyone other than Tenant or its employees
without Landlord's prior written consent, which shall not be unreasonably
withheld or delayed. It will not be unreasonable for Landlord to withhold its
consent if the reputation, financial responsibility, or business of a proposed
assignee or subtenant is unsatisfactory to Landlord, or if Landlord deems such
business to not be consistent with that of other tenants in the Building, or if
the intended use by the proposed assignee or subtenant conflicts with any
commitment made by Landlord to any other tenant in the Building, or if the
proposed rental rate is lower than the then current rate at which similar space
in the Building is being offered by Landlord, or if the proposed subletting is
to a prospective subtenant for less than fifty (50%) per cent of the leased
premises, provided that:
(A) Tenant's request for consent to sublease and assignment
shall be in writing and contain the name, address, and description of the
business of the proposed assignee or subtenant, its most recent financial
statement and other evidence of financial responsibility, its intended use of
the leased premises, and the terms and conditions of the proposed assignment or
subletting.
(B) Within thirty (30) days from receipt of such request,
Landlord shall either: (a) grant or refuse consent; or (b) elect to require
Tenant (i) to execute an assignment of lease or sublease of Tenant's interest
hereunder to Landlord or its designee upon the same terms and conditions as are
contained herein, together with an assignment of Tenant's interest as sublessor
in any such proposed sublease, or (ii) if the request is for consent to a
proposed assignment of this lease, to terminate this lease and the term hereof
effective as of the last day of the third month following the month in which the
request was received.
(C) Each assignee hereunder shall assume and be deemed to have
assumed this lease and shall be and remain liable jointly and severally with
Tenant for all payments and for the due performance of all terms, covenants,
conditions and provisions herein contained on
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Tenant's part to be observed and performed. No assignment shall be binding upon
Landlord unless the assignee shall deliver to Landlord an instrument in
recordable form containing a covenant of assumption by the assignee, but the
failure or refusal of assignee to execute the same shall not release assignee
from it's liability as set forth herein.
(D) Landlord shall not be deemed to have unreasonably withheld
its consent if it shall in any instance refuse such consent to:
(i) subletting to more than two subtenants
(including Tenant) for the entire leased premises;
(ii) as assignment or sublease for a term of less
than two (2) years (unless the unexpired term hereof shall be less than
two (2) years, in which event, such sublease shall be for one day less than
such unexpired term).
(E) If such consent to any assignment or subletting hereunder
shall be given:
(i) such consent to assign this lease or to
sublet shall not release or discharge Tenant of or from any liability, whether
past, present or future, under this lease and Tenant shall continue fully liable
under this lease for any default under or in respect of any of the terms,
covenants, conditions, provisions or agreements of this lease;
(ii) the subtenant or subtenants shall agree to
perform faithfully and be bound by all the terms, covenants, conditions,
provisions or agreements of this lease to the extent of the leased premises
sublet;
(iii) an executed copy of each sublease and agreement
of assumption of performance by each of the subtenants (limited to the extent of
the leased premises sublet) shall be delivered to Landlord promptly upon
execution;
(iv) (a) the tenant shall pay to the Landlord
monthly, one-half of any increment in rent received by Tenant per square foot
per annum over the Annual Basic Rent and any Additional Rent then in effect
during the year of assignment or subletting, which payment shall be made monthly
together with the required monthly payments of Annual Basic rent to be paid
pursuant to Article 3; and (b) if Tenant receives any consideration or value for
such assignment or subletting Landlord shall be paid one-half of any such
consideration or value within 10 days after receipt of the same by Tenant. As a
condition hereunder, Tenant warrants and represents to Landlord that it will
furnish to Landlord a copy of all pertinent documents with respect to any such
assignment or subletting so as to establish Tenant's obligation to Landlord
hereunder.
13.2 Tenant is expressly prohibited from assigning or subleasing
Tenant's leased space to any tenant, or assignee or subtenant of a tenant,
occupying space in the Freehold Executive Center. Any assignment or sublease in
violation of the prohibition hereinabove referred to shall be deemed a default
under this lease.
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13.3 As an express inducement to Landlord to enter into this lease,
Tenant agrees that in the event it elects to assign or sublease, and in the
event Landlord shall not recapture the leased premises as hereinbefore provided
in Article 13.1, Tenant agrees that it will grant to the Landlord's managing
agent a six (6) month exclusive to produce an assignee or subtenant pursuant to
the authorization of tenant, the managing agent to be paid a customary brokerage
commission in accordance with the practice of the local real estate boards in
consideration of the services rendered in the event of the consummation of any
such assignment of lease or sublease of the leased premises.
14. FIRE
14.1 In case of any damage to the Building on the Property by fire
or other casualty occurring during the term of this lease or previous thereto,
which renders the leased premises wholly untenantable so that the same cannot be
repaired within one hundred twenty (120) days from the happening of such damage,
then the terms hereby created shall, at the option of the Landlord, terminate
from the date of such damage. In the event the Landlord elects to terminate the
lease for any reason which is due to the inability to restore the same within
the one hundred twenty (120) day period, Landlord shall notify the Tenant, in
writing, certified mail, return receipt requested, of such a fact within thirty
(3) days of the happening of the fire or casualty, and in such event the tenant
shall immediately surrender the leased premises and shall pay rent only to the
time of such damage and the Landlord may re-enter and repossess the leased
premises discharged from this lease. In the event the Landlord can restore the
leased premises within one hundred twenty (120) days, it shall advise the Tenant
of such fact within thirty (30) days of such damage in writing, by certified
mail, return receipt requested, and the lease shall remain in full force and
effect during the period of Landlord's restoration, except that rent shall abate
while the repairs and restorations are being made, but the rent shall recommence
upon restoration of the leased premises and delivery of the same by the Landlord
to the Tenant. Landlord agrees that it will undertake reconstruction and
restoration of the damaged premises with due diligence and reasonable speed and
dispatch.
14.2 If the Building shall be damaged, but the damage is repairable
by Landlord's estimation within one hundred twenty (120) days, the Landlord
agrees to repair the same with reasonable promptness. In such event, the rent
accrued and accruing shall not abate, except for that portion of the leased
premises that has been rendered untenantable and as to that portion the rent
shall abate based on equitable adjustments as determined by Landlord.
14.3 In connection with Landlord's restoration as hereinabove
referred to, in determining what constitutes reasonable promptness consideration
shall be given to delays caused by acts of God, strikes, and other causes of
Force Majeure beyond the Landlord's control.
14.4 The Tenant shall immediately notify the Landlord in case of
fire or other damage to the leased premises.
14.5 Notwithstanding anything contained in Articles 14.1 or 14.2
above, if such repairs are for any reason not completed within one hundred
twenty (120) days, then the
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Tenant shall have the right to terminate this lease, and in such event of
termination Landlord and Tenant shall thereupon be released of liability one to
the other, and the within lease shall be deemed null and void.
15. COMPLIANCE WITH LOCAL RULES AND REGULATIONS
15.2 Landlord covenants and agrees with Tenant that upon acceptance
and occupancy of the leased premises, the leased premises will comply with all
statutes, ordinances, rules, orders, regulations and requirements of the Federal
State and Municipal Government and of any and all their departments and bureaus,
and to the requirements of the Board of Fire Underwriters or its equivalent in
the State of New Jersey, which are applicable to the use and construction of the
same.
15.2 The Tenant covenants and agrees that upon and after acceptance
and occupancy of the leased premises, it will promptly execute and comply with
all statutes, ordinances, rules, orders, regulations and requirements of the
Federal, State and Municipal Government and of any and all their departments and
bureaus (provided same are applicable to Tenant's occupancy or use of said
leased premises) or to the reasonable rules promulgated by the Landlord in
writing for the correction, prevention and abatement of nuisances, violations or
other grievances, in, upon or connected with said leased premises during said
term and arising from the operations of the Tenant therein, at the Tenant's cost
and expense, subject to the right of the Tenant to contest the decision by any
such department or bureau as hereinafter mentioned. In the event the Tenant
contests any such governmental decision, it shall indemnify, defend and save the
Landlord harmless from any fine, penalty, costs and liability imposed upon the
Landlord as a result of Tenant's failure so to comply. The tenant covenants and
agrees, at its own cost and expense, to comply with such regulations or requests
as may be required by the fire or liability insurance carriers providing
insurance for the leased premises, and will further comply with such other
requirements that may be promulgated by the Board of Fire Underwriters or its
equivalent in connection with the use and occupancy of the leased premises by
the Tenant in the conduct of its business. Anything hereinabove to the contrary
notwithstanding, it is expressly understood and agreed that the Tenant shall not
be required to make structural changes in the Building if the same are required
by governmental regulation, as the same may be applicable as a matter of general
application to the leased premises, provided that the Tenant shall be required
to make structural changes that may be required by governmental regulation if
directly attributable and resulting from Tenant's occupancy and use of the
Building in the conduct of its business.
15.3 If the Tenant shall fail or neglect to comply with the
aforesaid statutes, ordinances, rules, orders, regulations and requirements or
any of them, failure of the Tenant to comply with the requirements of Article
15.2 above shall be deemed an item of default for which the Landlord shall have
recourse by termination of this lease of exercise of any other rights reserved
to the Landlord hereunder, in accordance with the terms and conditions of this
lease.
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16. TERMINATION
16.1 If there should occur any default on the part of the Tenant in
the performance of any conditions and covenants herein contained, or if during
the term hereof the leased premises or any part thereof shall be or become
abandoned or deserted, or should the Tenant be evicted by summary proceedings or
otherwise, the Landlord, in addition to any other remedies herein contained or
as may be permitted by law, may without being liable for damages, re-enter the
leased premises and take possession thereof; and, without being obligated to
relet the leased premises as agent for the Tenant or otherwise, the landlord may
at its option relet the leased premises and receive the rents therefor and apply
the same, first to the payment of such expenses, including real estate
brokerage, reasonable attorney fees and costs, as the Landlord may have been put
into reentering and repossessing the same and in making such repairs and
alterations as may be necessary; and second to the payment of rents due
hereunder. The Tenant shall remain liable for such rents as may be in arrears
and also the rents as may accrue subsequent to the re-entry by the landlord, to
the extent of the difference between the rents reserved hereunder and the rents,
if any, received by the Landlord during the remainder of the unexpired term
hereof, after deducting the aforementioned expenses, fees and costs; the same to
be paid as such deficiencies arise and are ascertained by Landlord. Said
deficiencies will be increased by the Premium Rate retroactive to the date of
re-entry by Landlord.
16.2 If the Tenant defaults in the performance of any conditions or
covenants in this lease contained, or should the Tenant be adjudicated a
bankrupt, insolvent or placed in receivership, or should proceedings be
instituted by or against the Tenant for bankruptcy, insolvency, receivership,
agreement of composition or assignment for the benefit of creditors, or if this
lease, or the estate of the Tenant hereunder shall pass to another by virtue of
any court proceedings, writ of execution, levy, sale or by operation of law,
then in either of such events, unless they shall be cured within thirty (30)
days' after receipt of written notice from Landlord or his agent, of such
termination. This lease and the term hereof shall end on the date fixed in such
notice as if the said date was the date originally fixed in this lease for the
expiration hereof. Notwithstanding the termination, the landlord may still
enforce its rights reserved pursuant to Article 16.1.
16.3 Anything in Articles 16.1 and 16.2 above to the contrary
notwithstanding, any default by Tenant in the payment of rent or any other
monetary obligation shall be cause for termination if the same is not paid
promptly as required by the terms and conditions of the lease. Any other default
in the lease shall be cause for termination if the same is not cured within
thirty (30) days after written notice given in the same manner as provided in
Article 16.2 above.
17. INSPECTION BY LANDLORD
The Tenant agrees that the said Landlord's agents, and other
representatives, shall have the right to enter into and upon the leased
premises, or any part thereof, at all reasonable hours without unduly disturbing
the operations of the Tenant for the purpose of examining the same or for making
such repairs or alterations therein as may be necessary for the safety and
preservation thereof.
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18. NOTICES
All notices required or permitted to be given to the Landlord
shall be given by certified mail, return receipt requested, addressed to the
Landlord at the address set forth at the head of this agreement or such other
place as the Landlord shall designate in writing. All notices required or
permitted to be given to the Tenant shall be given by certified mail, return
receipt requested, addressed to the Tenant at the leased premises, or such other
place as the Tenant shall designate in writing.
19. NON-WAIVER
The failure of the landlord to insist upon strict performance
of any of the covenants or conditions of this lease or to exercise any option
herein conferred in any one or more instances, shall not be construed as a
waiver or relinquishment of any such covenants, conditions or options, but the
same shall be and remain in full force and effect. If the landlord pursues any
remedy granted by the terms of this lease or their terms of applicable law, it
shall not be construed as a waiver or relinquishment of any other remedy
afforded thereby.
20. ALTERATIONS OR IMPROVEMENTS BY TENANT
20.1 Tenant shall not do any painting or decorating, or erect any
partitions or make any alterations or improvements in the leased premises, or do
any nailing or boring into the ceilings, walls, or floors, without the prior
written consent of landlord. Tenant shall furnish to Landlord a plan and/or
specifications with respect to Tenant's proposed work in connection with any
request for Landlord's consent to permit the work to be performed by Tenant as
hereinabove referred to. Unless objected to by Landlord in writing, such work
may be performed by Tenant or under the direction of Tenant, at its cost and
expense. Nothing herein contained shall be construed to permit Tenant at any
time to make any structural modifications to the leased premises or any
alterations or modifications to the leased premises or any alterations or
modifications to existing Building systems serving the leased premises. Tenant
hereby agrees that all permitted alterations and improvements made in, to or on
the leased premises shall unless otherwise provided by written agreement, be the
property of Landlord and shall remain upon and be surrendered with the leased
premises. At Landlord's request all such alterations and improvements shall be
restored to their original condition at Tenant's expense at the termination of
this lease.
20.2 Nothing herein contained shall be construed as a consent on
the part of the landlord to subject the estate of the Landlord to liability
under the Mechanic's Lien Law of the State of New Jersey, it being expressly
understood that the Landlord's estate shall not be subject to such liability.
Tenant agrees that it will cause the removal of such mechanic's liens occasioned
by it within five (5) days after notice given by landlord to Tenant of the
existence of same. Tenant's failure to cause such removal shall be deemed a
default pursuant to the terms and conditions of the within lease, permitting
landlord to exercise its right of termination at the expiration of the five (5)
day period hereinabove referred to. In addition, Tenant shall
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indemnify Landlord from any liability, loss or damage occasioned by failure of
Tenant to cause such mechanic's lien to be discharged.
21. NON-LIABILITY OF LANDLORD
21.1 It is understood and agreed that landlord, in its capacity as
landlord and, if applicable, as builder or general contractor of the Building
shall not be liable to Tenant, Tenant's agents, employees, contractors, invites
or any other occupant of the leased premises for any damage to property or for
any inconvenience or annoyance to Tenant or any other occupant of the leased
premises or interruption of Tenant's or such other occupant's business, arising
out of or attributable to (1) the design and construction of the leased premises
and the Building; (ii) any maintenance, repairs, replacements, additions,
alterations, substitutions and installations made to the leased premises and the
Building; (iii) the failure of Landlord to perform Landlord's lease obligations;
and (iv) any cause of happening whatsoever, including negligence by Landlord and
Landlord's agents, servants and employees with respect to any of the events or
occurrence referred to in subdivision (i) through (iii), or otherwise. The
foregoing covenant is an express inducement to landlord to enter into the within
lease and the Tenant acknowledge that it understands the scope and consequence
of Landlord's exculpation as herein provided.
21.2 Anything hereinabove contained to the contrary
notwithstanding, Tenant in all events shall assume all risk of damage or loss to
its property, equipment and fixtures occurring in or about the leased premises,
whatever the cause of such damage or loss, including Landlord's negligence.
22. CONDEMNATION
If the whole or part of the leased premise shall be acquired
by Eminent Domain for any public or quasi public use or purpose so that the
leased premises cannot be used for its intended leased purposes, or if the
parking areas shall be taken by Eminent Domain and the Landlord shall not
substantially replace such parking areas so as to provide the parking spaces for
Tenant required pursuant to Article 1.3, then and in either such event, the term
of this lease shall cease and terminate from the date that possession of the
leased premises is taken by the condemning authority in the Eminent Domain
proceeding, or as the result of the delivery of a deed in lieu of condemnation.
The Tenant shall have no claim against the Landlord for the value of any
unexpired term of said lease. No part of any award made to the landlord shall
belong to the Tenant, nor shall the Tenant make any claim against the condemning
authority for the value of its leasehold. Anything hereinabove contained to the
contrary notwithstanding, it is expressly understood and agreed that without
affecting Landlord's award as hereinabove referred to, the Tenant may make such
independent claim as the law may allow with respect to Tenant's leasehold
improvements, if any, trade fixtures and equipment.
23. INCREASE OF INSURANCE RATES
If the rate which the Landlord must pay to secure fire
insurance shall be increased because of any change in occupancy or use of the
leased premises by the Tenant, or
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because of the Tenant's non-compliance with the rules, regulations or requests
of the fire insurance carrier, then such increase shall be paid by the Tenant to
the Landlord as Additional Rent.
24. TENANT'S FIRE INSURANCE
The tenant, at its own cost and expense, shall insure its own
fixtures, equipment and contents, it being expressly understood and agreed that
the same is not the responsibility of the Landlord nor shall it be liable
therefor.
25. INDEMNITY
Anything in this lease to the contrary notwithstanding, and
without limiting the Tenant's obligation to provide insurance pursuant to
Article 9 hereunder, the Tenant covenants and agrees that it will indemnify,
defend and save harmless the Landlord against and from all liabilities,
obligations, damages, penalties, claims, costs, charges and expenses, including
without limitation reasonable attorneys' fees, which may be imposed upon or
incurred by landlord by reason of any of the following occurring during the term
of this lease:
(i) Any matter, cause or thing arising out of use, occupancy,
control or management of the leased premises and any part thereof;
(ii) Any negligence on the part of the Tenant or any of
its agents, contractors, servants, employees, licensees or invites;
(iii) any accident, injury, damage to any person or property
occurring in, or about the leased premises;
(iv) Any failure on the part of Tenant to perform or comply
with any of the covenants, agreements, terms or conditions contained in this
lease on its part to be performed or complied with. Landlord shall promptly
notify Tenant of any such claim asserted against it and shall promptly send to
Tenant copies of all papers or legal process served upon it in connection with
any action or proceeding brought against Landlord by reason of any such claim.
26. FORCE MAJEURE
Except for the obligation of the Tenant to pay rent and other
charges as in this lease provided, the period of time during which the Landlord
or Tenant is prevented from performing any other act required to be performed
under this lease by reason of fire, catastrophe, strikes, lockouts, civil
commotion, acts of God or the public enemy, government prohibitions or
preemptions, embargoes, inability to obtain material or labor by reason of
governmental regulations or prohibitions, the act or default of the other party,
or other events beyond the reasonable control of landlord or Tenant, as the case
may be, shall be added to the time for performance of such act.
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27. MORTGAGE PRIORITY
This lease and the estate, interest and rights hereby created
are subordinate to any mortgage now or hereafter placed upon the Property, the
Building or any estate or interest therein, including, without limitation, any
mortgage on any leasehold estate, and to all renewals, modifications,
consolidations, replacements and extensions of same as well as any substitutions
therefor. Tenant agrees that in the event any person, firm, corporation or other
entity acquires the right to possession of the property and the Building,
including any mortgagee or holder of any estate or interest having priority over
this lease, Tenant shall, if requested by such person, firm, corporation or
other entity, attorn to and become the tenant of such person, firm, corporation
or other entity, upon the same terms and conditions as are set forth herein for
the balance of the lease term. Notwithstanding the foregoing, any mortgagee may,
at any time, subordinate its mortgage to this lease, without Tenant's consent,
by notice in writing to Tenant, and thereupon this lease shall be deemed prior
to such mortgage without regard to their respective dates of execution and
delivery, and in that event, such mortgagee shall have the same rights with
respect to this lease as though it had been executed prior to the execution and
delivery of the mortgage. Tenant, if requested by Landlord, shall execute any
such instruments in recordable form as may be reasonable required by landlord in
order to confirm or effect the subordination of this lease and the attornment of
Tenant to future landlords or mortgagees in accordance with the terms of this
lease.
28. SURRENDER OF PREMISES
On the last day, or earlier permitted termination of the lease
term, Tenant shall quit and surrender the leased premises in good and orderly
condition and repair (reasonable wear and tear, and damage by fire or other
casualty excepted) and shall deliver and surrender the leased premises to the
Landlord peaceably, together with all alterations, additions and improvements
in, to or on the leased premises made by Tenant as permitted under the lease.
The Landlord reserves the right, however, to require the Tenant at its cost and
expense to remove any alterations or improvements installed by the Tenant and
not permitted or consented to by the Landlord pursuant to the terms and
conditions of the lease, which covenant shall survive the surrender and the
delivery of the leased premises as provided hereunder. Prior to the expiration
of the lease term the Tenant shall remove all of its property, fixtures,
equipment and trade fixtures from the leased premises. All property not removed
by tenant shall be deemed abandoned by Tenant, and Landlord reserves the right
to charge the reasonable cost of such removal to the Tenant, which obligation
shall survive the lease termination and surrender hereinabove provided. If the
leased premises be not surrendered to the end of the lease term,, Tenant shall
indemnify Landlord against loss or liability resulting from delay by Tenant in
surrendering the leased premises, including, without limitation any claims made
by any succeeding tenant founded on the delay. In addition thereto, Tenant shall
pay to Landlord a sum equal to two times the then economic market rent and
Additional Rent for each day of holdover, or such then existing statutory
penalty as may be imposed in accordance with Statutory Law of the State of new
Jersey, whichever is greater. The foregoing covenant shall not be deemed as a
consent by Landlord to any such holdover nor shall it be construed to constitute
consent to the creation of a tenancy or to permitted use and occupancy by
Tenant.
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29. SIGNS
The Tenant shall only be permitted to install signage at the
leased premises in accordance with Building standard, and at such designated
locations as Landlord shall direct. The Tenant shall not have the right to put
any identifying signs on the exterior of the Building or roof thereof.
30. ESTOPPEL CERTIFICATE
Tenant agrees, from time to time as may be requested by
Landlord, to execute, acknowledge and deliver to Landlord all or any of the
following: an estoppel letter certifying to such party as Landlord reasonably
may designate, including any mortgagee, that this lease is in full force and
effect and has not been amended, modified or superceded, that Landlord has
satisfactorily completed all construction work required by this lease (subject
to completion of punchlist items), that Tenant has accepted the leased premises
and is now in possession thereof, that Tenant has no defense offsets or
counterclaims hereunder or otherwise against Landlord with respect to this lease
or the leased premises and Landlord is not in default hereunder (or if any of
the foregoing not be the case, specifying in reasonable detail the extent and
nature thereof, that Tenant has no knowledge of any pledge or assignment of this
lease or rentals hereunder, that rent is accruing under this lease but has not
been paid more than one month in advance and the date to which rent has been
paid; and any other instrument as may be reasonably requested to be executed by
Tenant by any mortgagee of the Property or Building or any interest therein, so
long as the rights of Tenant as provided for by this lease are not materially
affected by any much other instrument. Tenant's estoppel letter shall be in the
form as Landlord or its mortgagee shall hereafter prescribe.
31. TRANSFER BY LANDLORD
The term "Landlord" as used in this lease means only the
owner, or the mortgagee in possession, for the time being of the Building or
Property (or the owner of a lease of the Building or of the Property) so that in
the event of any transfer of title or to lease of said Building or Property, the
said Landlord shall be and hereby is entirely freed and relieved of all
covenants and obligations of Landlord hereunder thereafter accruing, and it
shall be deemed and construed as a covenant running with the land without
further agreement between the Landlord and Tenant or their successors in
interest, or between the Landlord and Tenant and the transferee of title to or
lessee of the Building or property, that the transferee or the lessee has
assumed and agreed to carry out any and all covenants and obligations of
Landlord hereunder.
32. LIMIT OF LANDLORD'S LIABILITY
In case the Landlord shall be a joint venture, partnership,
tenancy in common, association or other form of joint ownership, the individual
members or entities thereof shall have absolutely no personal liability or
obligation with respect to any provision of this lease, or any obligation or
liability arising therefrom or in connection therewith, which covenant
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hereinabove referred to, shall be deemed effective as of the date Landlord
completes and delivers the leased premises in accordance with the terms and
conditions of the lease and the plans and specifications herein provided, and
any liability or obligation of Landlord shall be satisfied out of Landlord's
equity in the Property.
33. LANDLORD'S RIGHT OF ENTRY AND ALTERATIONS
Landlord, or its agents, shall have the right at any time,
upon reasonable notice (except in the event of emergency), to enter upon the
leased premises to examine the same, to clean windows, or to make such repairs,
alterations or improvements as Landlord may deem necessary or proper, and during
such operations, may close entrances, doors, corridors, elevators and other
facilities, all without any liability to Tenant by reason of interference,
inconvenience or annoyance; provided, however, that such work shall not
materially reduce area of the leased premises; but if the leased premises are
reduced in any amount, the rent paid by Tenant shall be proportionately reduced,
and further provided, that such work will be done in such a manner as to cause
the least possible interference, inconvenience and annoyance to Tenant. However,
this Article shall not be deemed as imposing any duty of Landlord to undertake
any of the acts specified herein.
34. LANDLORD'S REMEDIES AND EXPENSES
34.1 All rights and remedies of Landlord herein enumerated shall be
cumulative, and none shall exclude any other right or remedy allowed by law. For
the purposes of any suit brought or based hereon, this lease shall be construed
to be a divisible contract, to the end that successive actions may be maintained
on this lease on successive periodic sums which mature hereunder.
Notwithstanding the foregoing, Landlord agrees that all cognizable claims shall
be filed in one action.
34.2 Tenant shall pay, upon demand, all of the Landlord's
reasonable costs, charges and expenses, including the reasonable fees of
counsel, agents and others retained by Landlord, incurred in enforcing Tenant's
obligation hereinunder.
35. LANDLORD'S RESERVED RIGHTS
Landlord reserves the following rights:
(a) To have access for Landlord and other tenants of the
Building to any mail chutes located on the premises according to the rules of
the United States Post Office.
(b) During the last ninety (90) days of the term, if prior to
that time Tenant vacates the leased premises, to decorate, remodel, repair,
alter or otherwise prepare the leased premises for re-occupancy.
(c) To show the leased premises to prospective tenants or
brokers during the last six (6) months of the term of this lease as extended and
to prospective purchasers at all reasonable times, provided prior reasonable
notice to Tenant in each case is given and Tenant's
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use and occupancy of the leased premises shall not be materially inconvenienced
by any such action of Landlord. Landlord may enter upon the leased premises and
may exercise any or all of the foregoing rights hereby reserved without being
deemed guilty of an eviction or disturbance of Tenant's use or possession and
without being liable in any manner to tenant. Notwithstanding the foregoing,
Landlord agrees that it shall arrange said visitation only by appointment with
Tenant.
36. RULES AND REGULATIONS
Tenant, it employees, agents, servants, licensees and visitors
agree to comply with the rules and regulations with respect to the leased
premises and Building (hereinafter called the "Rules") as the same shall be
applicable to all tenants of the Building. The Rules are set forth at the end of
this lease and are expressly made a part hereof as Schedule "F". Landlord shall
have the right to make reasonable additions and amendments thereto from time to
time; and Tenant, its employees, agents and servants, agree to comply with such
additions and amendments after notice from Landlord. All notices with respect to
the Rules shall be in writing. The Rules shall not deny Tenant access to the
leased premises in excess of the regular work week hours defined in Article 7.
Tenant further agrees to furnish to Landlord license and car information as to
its employees who may be using the parking lot as may be required by the
Landlord, and Tenant further agrees to comply with such reasonable Rules or
requirements in connection with the use of the parking facilities as shall be
made applicable to all tenants of the Building.
37. WAIVERS
No delay or forbearance by Landlord in exercising any right or
remedy hereunder or undertaking or performing any act or matter which is not
expressly required to be undertaken by Landlord shall be construed,
respectively, to be a waiver of Landlord's rights or to represent any agreement
by Landlord to undertake or perform such act or matter thereafter.
38. WAIVER OF TRIAL BY JURY
It is mutually agreed by and between Landlord and Tenant that
the respective parties hereto shall and they hereby do waive trial by jury in
any action, proceeding or counterclaim brought by either of the parties against
the other on any matter whatsoever arising out of or in any way connected with
this lease, the relationship of Landlord and Tenant, Tenant's use of or
occupancy of the leased premises and/or any claim of injury or damage and any
emergency or any other statutory remedy. It is further mutually agreed that in
the event Landlord commences any summary proceeding for non-payment of Annual
Basic Rent, Tenant will not interpose any counterclaim of whatever nature or
description in any such proceeding.
39. SEVERABILITY
Each covenant and agreement in this lease shall for all
purposes be construed to be a separate and independent covenant or agreement. If
any provision in this lease or the
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application thereof shall to any extent be invalid, illegal or unenforceable,
the remainder of this lease, and the application of such provision, other than
as invalid, illegal or unenforceable, shall not be affected thereby; and such
provisions in this lease shall be valid and enforceable to the fullest extent
permitted by law.
40. QUIET ENJOYMENT
The Landlord covenants and represents that the Landlord is the
owner of the leased premises and has the right and authority to enter into,
execute and deliver this lease, and does further covenant that the Tenant on
paying the rent and performing the conditions and covenants herein contained,
shall and may peaceable and quietly have, hold and enjoy the leased premises for
the term aforementioned.
41. LEASE CONSTRUCTION
This lease shall be construed pursuant to the laws of the
State of New Jersey.
42. BINDING EFFECT
The terms, covenants and conditions of the within lease shall
be binding upon and inure to the benefit of each of the parties hereto, and
their respective heirs, successors, executors, administrators and assigns.
43. DEFINITIONS
The neuter gender, when used herein and in the acknowledgment
hereafter set forth, shall include all persons, firms and corporations, and
words used in the singular shall include words in the plural where the text of
the instrument so requires.
44. PARAGRAPH HEADING
The paragraph headings herein are inserted only as a matter of
convenience and for reference, and in no way to define, limit or describe the
scope of this lease nor the intent of any provision hereof.
45. AMENDMENT AND MODIFICATIONS
This lease contains the entire agreement between the parties
hereto, and shall not be amended, modified or supplemented unless by agreement
in writing signed by both the Landlord and Tenant and the same shall not be
valid unless approved in writing by all mortgagees and holders of any estate or
interest in the Building or the Property by virtue or leases or other
instruments expressly referred to herein or which are then of record.
46. SCHEDULES
The following Schedules are referred to in this Lease:
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SCHEDULE "A" - Legal Description
SCHEDULE "B" - Plan
SCHEDULE "C" - Intentionally omitted
SCHEDULE "D" - Intentionally omitted
SCHEDULE "E" - Janitorial Services
SCHEDULE "F" - Building Rules and Regulations
47. BROKERAGE
The parties hereto mutually represent, one to the other, that
neither party engaged the services of a real estate broker in connection with
the negotiation and consummation of the within transaction.
48. NO OPTION
The submission of the within lease by Landlord to Tenant for
review and approval shall not be deemed an option to lease, an offer to lease,
or a reservation of the leased premises in favor of Tenant, it being intended
that no rights or obligations shall be created by Landlord or Tenant until the
execution and delivery of the within lease by Landlord and Tenant one to the
other.
49. RELOCATION
From time to time, or at any time during the term of this
lease, and on not less than ninety (90) days' notice to Tenant, Landlord shall
have the right to move the Tenant out of the leased premises and into comparable
space of at least equal area on one single floor in the Building and with no
interruption of Tenant's business, except for the normal interruptions that will
result form actually moving. In such event, Landlord shall remove, relocate and
reinstall Tenant's equipment, furniture and fixtures and redecorate the new
space similar and equivalent to the old space, all of which shall be done at
Landlord's sole cost and expense. For the balance of the lease term, this lease
shall continue in full force and effect and shall apply to the new space as
though this lease had originally been for such new space, including, but not
limited to, the same obligations to pay Annual Basic Rent and Additional Rent as
in this lease now provided.
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IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
or caused these presents to be signed by its proper corporate officers and
caused it proper corporate seal to be hereunto affixed, the day and year first
above written.
WITNESS: FREEHOLD-CRAIG ROAD PARTNERSHIP,
a New Jersey partnership
BY: /s/
---------------------------------------------
Partner
ATTEST:
BY: /s/ James K.T. Lu
---------------------------------------------
Diamond Entertainment President
ATTEST:
BY: /s/ Jeffrey I. Schillen
---------------------------------------------
Diamond Entertainment Vice President
26
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SCHEDULE "A"
ALL that certain tract or parcel of land and premises described, situate, lying
and being in the Township of Freehold, County of Monmouth, State of New Jersey,
known as Lot 46.03, Block 4 and more particularly described as follows:
BEGINNING at a point in the westerly right of way line of Route 9 distant four
hundred seventy-nine and sixty-one hundredths (479.61) feet northerly of the
northeasterly corner of lands now or formerly of Tak Yin and Nei Lee Wong, and
running thence (1) along an arc to the left with a radius of thirty (30) feet a
distance of fifty-five and forty-two hundredths (55.42) feet to a point of
tangency, and thence (2) south eighty two degrees west (S 82' 00' 00" W) four
hundred seventy-nine and sixty-one hundredths (479.61) feet a distance of one
hundred four and seventy-eight hundredths (104.78) feet to a point, and thence
(3) north eight degrees west (N 8' 00' 00" W) a distance of fifty (50.00) feet
to a point, and thence (4) south eighty-two degrees west (S 82' 00' 00" W) a
distance of two hundred thirty-five (235.00) feet to a point, and thence (5)
north eight degrees west (N 8' 00' 00" W) a distance of four hundred sixty-eight
(468.00) feet to a point which is the southwesterly corner of lands now or
formerly of Jessie Whelan, and thence (6) along the line of lands of Whelan,
North eighty two degrees east (N 82' 00' 00" E) a distance of five hundred
(500.00) feet to a point in the westerly right of way line of route 9, and
thence (7) southerly along an arc forming the westerly right of way line of
Route 9 with a radius of five thousand six hundred sixty-nine and fifty-eight
hundredths (5669.58) feet a distance of five hundred thirty-seven and thirty-six
hundredths (537.36) feet to a point of tangency, and thence (B) further along
the westerly right of way line of Route 9, south seven degrees fifty minutes
twenty-three seconds west (S 7' 50' 23" W) a distance of thirty-four and
thirty-five hundredths (34.35) feet to the point and place of beginning.
COMPRISING five and two hundredths (5.02) acres. PREPARED by Walter W. Lyon,
Jr., P.E. & L.S.
BEING known and designated as Lot 46.03 as shown on subdivision map Block 4, Lot
46, Freehold Township, Monmouth County, NJ made by Walter w. Lyon, Jr., dated
July 18, 1984, and revised to October 12, 1984, and filed in the Monmouth County
Clerk's Office January 25, 1985, in Case 197-24.
<PAGE>
SCHEDULE "E"
JANITORIAL MAINTENANCE SPECIFICATIONS
for
FREEHOLD EXECUTIVE CENTER
Daily Janitorial Services Monday through Friday
Entrance Lobby and all Offices
1. Entrance lobby will be damp mopped and/or vacuumed nightly.
2. Remove fingerprints and smudges from all entrance glass doors.
3. Empty and clean waste receptacles, ashtrays. Remove waste to designated
area.
4. Sweep and dust mop all flooring.
5. Vacuum clean all carpeting.
6. Dust and wipe clean furniture: desks, chairs, tables, bookcases,
filing cabinets, etc.
7. Dust all telephone equipment.
8. Dust all synthetic plastic on chairs and sofas.
9. Dust all paneling, mouldings, baseboards, chair rails.
10. Wash clean and disinfect all water coolers and fountains.
11. Sweep daily and wet mop as needed all stairways and rails.
12. Vacuum clean all elevators nightly.
13. Maintain slop sinks and storage locker in clean and orderly condition.
Lavatory Areas
Thorough scour, disinfect, wash and rinse clean: basins, bowls, urinals and
toilet seats including undersides and underlip of bowls and urinals.
Clean, disinfect, and polish all bright work, enameled surfaces, and stainless
steel fixtures.
Mirrors and cabinets will be cleaned and polished.
Remove spots and stains from lavatory walls and partitions. Waste receptacles
will be washed and disinfected.
Sweep, wash and rinse clean, using disinfectant cleaning solution, all lavatory
flooring, daily. Special attention will be given to area of flooring directly
under urinals and behind toilet bowls.
Refill all soap, tissue, and towel dispensers.
<PAGE>
SCHEDULE "E" (CONT'D)
Security
Notify owner of any faulty locks, lighting and electrical equipment and any
irregularities.
Upon completion of work, extinguish all lights (except those requested to be
left on), close all windows, lock all doors, and reset any alarm systems.
The Contractor will sign and be responsible for keys to the building, and the
keys will be maintained by a person on the job.
General Conditions
Our employees will immediately report to the proper management, any fires, items
in need of repair, hazardous conditions, leaky faucets, burned out lights, or
any other irregularities. All lost items which may be found, will be turned in
immediately. All company and building regulations will be strictly adhered to by
our employees and they will be instructed not to disturb any paper on desks or
cabinets of the clients. They will stay out of all areas which are not under
service and restricted or prohibited to their use.
Lobby and Front Entrance
Constant attention will be given to keeping the lobby and front
entrance areas as clean and attractive as possible. Floors will be vacuumed/damp
mopped daily. Furniture in waiting rooms or lobby will be dusted and/or washed.
Glass inserts of main entrance doors will be cleaned daily. Entrance glass will
be thoroughly washed inside and out once per month.
Corridors and Stairwells
All hallway corridors will be cleaned daily. Stairwells will be given special
attention. They will be swept and/or vacuumed daily. Washing will be performed
as needed.
Elevators
All elevators will be thoroughly vacuumed daily. Paneled walls will be polished
as often as needed. Door grooves will be vacuumed out as needed. Stainless steel
will be polished.
Floors (VAT)
All VAT flooring will be spray-buffed once per month.
<PAGE>
SCHEDULE "E" (CONT'D)
Dust Mopping
All floors will be dust mopped nightly, with special treated long strand cotton
mops. These treated mops are replaced regularly with freshly treated and
laundered mop heads. This procedure insures the removal of all dust, leaving a
dust free floor. Special attention is given to out of the way areas, such as
corners and baseboards.
Carpeting
All carpetings are to be vacuumed, nightly, using a Hoover beater type vacuum
cleaner.
Room Trim
All windows sills, chair rails, baseboards, mouldings partitions picture frames,
etc. below six foot heights, shall be dusted with a specially treated dust cloth
at regular intervals. Over six foot heights, shall be dusted on schedule,
including tops of partitions, transoms and doors.
Waste Receptacles
Waste receptacles will be emptied, waste removed and placed at assigned
locations, nightly, plastic liners will be placed in all waste baskets and
replaced as needed.
Furniture and Equipment
All furniture and equipment shall be dusted and polished with specially treated
dust cloths and dusting tools.
Ash Trays
All ash trays will be emptied, and damp wiped nightly.
Drinking Fountains
All drinking fountains will be thoroughly cleaned nightly, using a neutral
cleaning agent with disinfectant added to assure bacteria free drinking
fountains.
Storage, Space and Service Closet
Space will be assigned for the storage of all bulk supplies and equipment
necessary for the performance of the work under this contract. All service areas
will be kept in a clean and orderly condition.
<PAGE>
SCHEDULE "E" (CONT'D)
Window Cleaning
All exterior windows will be cleaned inside and outside, twice per year.
Insurance
Cleaning Service shall carry the following insurance:
Workman's compensation - Statutory Limits
Public Liability Insurance - Bodily Injury $500,000/$1,000.000.
Umbrella Wrap-Around all Inclusive - $2,000,000. Personal Bond in case
of theft - $25,000 minimum per incident.
<PAGE>
SCHEDULE "F"
BUILDING RULES AND REGULATIONS
1. Tenant shall not obstruct or permit its agents, clerks or
servants to obstruct, in any way, the sidewalks, entry passages, corridors,
halls, stairways or elevators of the Building, or use the same in any other way
than as a means of passage to and from the offices of Tenant; bring in, store,
test or use any materials in the Building which could cause a fire or an
explosion or produce any fumes or vapor' make or permit any improper noises in
the Building; smoke in the elevators; throw substances of any kind out of the
windows or doors, or down the passages of the Building, or in the halls or
passageways; sit on or place anything upon the window sills; or clean the
windows.
2. Waterclosets and urinals shall not be used for any purpose
other than those for which they are constructed; and no sweepings, rubbish,
ashes, newspaper or any other substances of any kind shall be thrown into them.
Waste and excessive unusual use of electricity or water is prohibited.
3. The windows, doors, partitions and lights that reflect or
admit light into the halls or other places of the Building shall not be
obstructed. NO SIGNS, ADVERTISEMENTS OR NOTICES SHALL BE INSCRIBED, PAINTED
AFFIXED OR DISPLAYED IN, ON, UPON OR BEHIND ANY WINDOWS, except as may be
required by law or agreed upon by the parties; and no sign, advertisement or
notice shall be inscribed painted or affixed on any doors, partitions or other
part of the inside of the Building, without the prior written consent of
Landlord. If such consent be given by Landlord, any such sign, advertisement, or
notice shall be inscribed, painted or affixed by Landlord, but the cost of the
same shall be charged to and be paid by Tenant, and Tenant agrees to pay the
same promptly, on demand. Landlord agrees that Tenant shall be suitably
identified.
4. No contract of any kind with any supplier of towels, water,
etc., toilet articles, waxing, rug shampooing, venetian blind washing, furniture
polishing, lamp servicing, cleaning of electrical fixtures, removal of waste
paper, rubbish or garbage, or other like service shall be entered by Tenant, nor
shall any vending machine of any kind be installed in the Building, without the
prior written consent of Landlord.
5. When electric wiring of any kind is introduced, it must be
connected as directed by Landlord, and no stringing or cutting of wires will be
allowed, except within the prior written consent of Landlord, and shall be done
only by contractors approved Landlord. The number and location of telephones,
telegraph instruments, electric appliances call boxes, etc., shall be approved
by Landlord. No tenant shall lay linoleum or other similar floor covering so
that the same shall be in direct contact with the floor of the premises; and if
linoleum or other similar floor covering is desired to be used, an interlining
of builder's deadening felt shall be first affixed to the floor by a paste or
other material, the use of cement or other similar adhesive material being
expressly prohibited.
<PAGE>
SCHEDULE "F" (CONT'D)
6. Landlord shall have the right to prescribe the weight, size
and position of all safes and other bulky or heavy equipment and all freight
brought into the Building by the Tenant; and also the times of moving the same
in and out of the Building; and all such moving must be done under the
supervision of the Landlord. Landlord will not be responsible for loss of or
damage to any such equipment or freight from any cause; but all damage done to
the Building by moving or maintaining any such equipment or freight shall be
repaired at the expense of Tenant. All safes shall stand on a base of such size
as shall be designated by the Landlord. The Landlord reserves the right to
inspect all freight to be brought into the building and to exclude from the
building all freight which violates the lease.
7. No machinery of any kind or articles of unusual weight or size
will be allowed in the Building without the prior written consent of Landlord.
Business machines and mechanical equipment shall be placed and maintained by
Tenant, at Tenant' expense, in settings sufficient in Landlord's judgement to
absorb and prevent vibration, noise and annoyance.
8. No additional lock or locks shall be placed by Tenant on any
door in the Building, without prior written consent of Landlord. Two keys will
be furnished Tenant by Landlord; two additional keys will be supplied to Tenant
by Landlord, upon request, without charge; any additional keys requested by
Tenant shall be paid for by Tenant at a charge of $1.00 per key. Tenant, its
agents and employees, shall not change any locks. All keys to doors and
washrooms shall be returned to Landlord at the termination of the tenancy, and
in the event of loss of any keys furnished, Tenant shall pay Landlord the cost
thereof.
9. Tenant shall not employ any person or persons other than
Landlord's janitors for the purpose of cleaning the premised, without prior
written consent of Landlord. Landlord shall not be responsible to Tenant for any
loss due to theft or vandalism from the Leased Premised however occasioned.
Landlord, however, shall be responsible for any damage caused or due to the
carelessness or negligence of the Landlord, its agents, servants or employees in
connection with any such cleaning, subject to the terms and conditions of
Article 21 of the within lease.
10. No animals of any kind shall be brought into or kept in or
about the Premises.
11. The requirements of Tenant will be attended to only upon the
application at the office of the Building. Employees of Landlord shall not
perform any work for Tenant or do anything outside of their regular duties,
unless under special instruction from the office of the Landlord. Landlord
agrees to keep Tenant advised at all times of how to contact the Building
Manager.
12. The Premises shall not be used for lodging or sleeping
purposes, and cooking therein is prohibited. Vending machines for coffee and
rolls are permitted.
<PAGE>
SCHEDULE "F" (CONT'D)
13. Tenant shall not conduct, or permit any other person to
conduct any auction on the premises, manufacture or store goods, wares or
merchandise upon the Premises, without the prior written approval of Landlord,
except the storage of usual supplies and inventory to be used by Tenant in the
conduct of its business; permit the Premises to be used for gambling, make any
unusual noises in the Building; permit to be played any radio, television,
recorded or wire music in such a loud manner so as to disturb or annoy other
tenants; or permit any unusual odors to be produced upon the Premises. Tenant
shall not occupy or permit any portion of Premised leased to him to be occupied
as an office for a public stenographer or for the possession, storage
manufacture or sale of intoxicating beverages, tobacco in any form, or as a
barber or manicure shop.
14. After 6:00 P.M. until 8:00 A.M. on weekdays, and at all hours
on Sundays and legal holidays, the Building is closed. Landlord reserves the
right to exclude from the Building during such periods, all persons who do not
present a pass to the Building signed by Tenant. Each Tenant shall be
responsible for all persons for whom he issues such pass and shall be liable to
Landlord for all acts of such persons.
15. No awnings or other projections shall be attached to the
outside walls of the Building. No curtains, blinds, shades or screens shall be
attached or hung in, or used in connection with any window or door of the
Premises, without the prior written consent of Landlord. Such curtains, blinds
and shades must be of a quality, type, design, and color and attached in a
manner approved by Landlord.
16. Canvassing, soliciting and peddling in the Building are
prohibited, and Tenant shall cooperate to prevent the same.
17. There shall not be used in the Premises or in the Building,
either by Tenant or by others, in the delivery or receipt of merchandise, any
hand trucks except those equipped with rubber tires and side guards, and not
hand trucks will be allowed in passenger elevators.
18. Each Tenant, before closing and leaving the Premises, shall ensure
that all windows are closed and all entrance doors locked.
19. Landlord shall have the right to prohibit any advertising by
Tenant which in Landlord's opinion tends to impair the reputation of the
Building or its desirability as a building for offices, and upon written notice
from Landlord, Tenant shall refrain from or discontinue such advertising.
20. Landlord hereby reserves to itself any and all rights not
granted to Tenant hereunder, including, but not limited to, the following rights
which are reserved to Landlord for its purposed in operating the Building.
<PAGE>
SCHEDULE "F" (CONT'D)
(a) the exclusive right to the use of the name of the Building for
all purposes, except that Tenant may use the name as its
business address and for no other purpose;
(b) the right to change the name or address of the Building,
without incurring any liability to Tenant for so doing;
(c) the right to install and maintain a sign or signs on the
exterior of the building;
(d) the exclusive right to use or dispose of the use of the roof
of the building;
(e) the right to limit the space on the directory of the Building
to be allotted to Tenant;
(f) the right to grant to anyone the right to conduct any
particular business or undertaking in the Building.
<PAGE>
Exhibit 10.13(1)
STANDARD SUBLEASE
1. Parties. This Sublease, dated, for reference purposes only, November
13, 1998, is made by and between Diamond Entertainment Corporation, Inc., a
California Corporation ("Sublessor") and Vigor Sports Inc., a California
Corporation ("Sublessee").
2. Premises. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain real property, including all
improvements therein, and commonly known by the street address of 16818
Marquardt, Cerritos located in the County of Los Angeles, State of California
and generally described as (describe briefly the nature of the property)
approximately 22,080 square feet, part of a larger 50,416 square foot building
(Exhibit "A") ("Premises").
3. Term.
3.1 Term. The term of this Sublease shall be for twenty-seven (27)
commencing on January 1, 1999 and ending on March 31, 2001 unless sooner
terminated pursuant to any provision hereof.
3.2 Delay in Commencement. Sublessor agrees to use its best
commercially reasonable efforts to deliver possession of the Premises by the
commencement date. If, despite said efforts, Sublessor is unable to deliver
possession as agreed, Sublessor shall not be subject to any liability therefor,
nor shall such failure effect the validity of this Sublease. Sublessee shall
not, however, be obligated to pay Rent or perform its other obligations until it
receives possession of the Premises. If possession is not delivered within sixty
days after the commencement date, Sublessee may, at its option, by notice in
writing within ten days after the end of such sixty day period, cancel this
Sublease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Sublessor within said ten
day period, Sublessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Sublessee when required and Sublessee
does not terminate this Sublease, as aforesaid, any period of rent abatement
that Sublessee would otherwise have enjoyed shall run from the date of delivery
of possession and continue for a period equal to what Sublessee would otherwise
have enjoyed under the terms hereof, but minus any days of delay caused by the
acts or omissions of Sublessee. If possession is not delivered within 120 days
after the commencement date, this Sublease shall automatically terminate unless
the Parties agree, in writing, to the contrary.
4. Rent.
4.1 Base Rent. Sublessee shall pay to Sublessor as Base Rent for the
Premises equal monthly payments of $9,494.40 in advance, on the first day of
each month of the term hereof. Sublessee shall pay Sublessor upon the execution
hereof $9,494.00 as Base
<PAGE>
Rent for March 1-31, 1999. Base Rent for any period during the term hereof which
is for less than one month shall be a pro rata portion of the monthly
installment.
4.2 Rent Defined. All monetary obligations of Sublessee to Sublessor
under the terms of this Sublease (except for the Security Deposit) are deemed to
be rent ("Rent"). Rent shall be payable in lawful money of the United States to
Sublessor at the address stated herein or to such other persons or at such other
places as Sublessor may designate in writing.
5. Security Deposit. Sublessee shall deposit with Sublessor upon execution
hereof $10,000.00 as security for Sublessee's faithful performance of
Sublessee's obligations hereunder. If Sublessee fails to pay Rent or other
charges due hereunder, or otherwise defaults with respect to any provision of
this Sublease, Sublessor may use, apply or retain all or any portion of said
deposit for the payment of any Rent or other charge in default or for the
payment of any other sum to which Sublessor may become obligated by reason of
Sublessee's default, or to compensate Sublessor for any loss or damage which
Sublessor may suffer thereby. If Sublessor so uses or applies all or any portion
of said deposit, Sublessee shall within ten days after written demand therefore
forward to Sublessor an amount sufficient to restore said Deposit to the full
amount provided for herein and Sublessee's failure to do so shall be a material
breach of this Sublease. Sublessor shall not be required to keep said Deposit
separate from its general accounts. If Sublessee performs all of Sublessee's
obligations hereunder, said Deposit, or so much thereof as has not therefore
been applied by Sublessor, shall be returned, without payment of interest to
Sublessee (or at Sublessor's option, to the last assignee, if any, of
Sublessee's interest hereunder) at the expiration of the term hereof, and after
Sublessee has vacated the Premises. No trust relationship is created herein
between Sublessor and Sublessee with respect to said Security Deposit.
6. Use.
6.1 Agreed Use. The Premises shall be used and occupied only for
general office and the importing and wholesale of bicycle and motorcycle helmets
and related uses and for no other purpose.
6.2 Compliance. Sublessor warrants that the improvements on the
Premises comply with all applicable covenants or restrictions of record and
applicable building codes, regulations and ordinances ("Applicable
Requirements") in effect on the commencement date. Said warranty does not apply
to the use to which Sublessee will put the Premises or to any alterations or
utility installations made or to be made by Sublessee. NOTE: Sublessee is
responsible for determining whether or not the zoning is appropriate for its
intended use, and acknowledges that past uses of the Premises may no longer be
allowed. If the Premises do not comply with said warranty, Sublessor shall,
except as otherwise provided, promptly after receipt of written notice from
Sublessee setting forth with specificity the nature and extent of such
non-compliance, rectify the same at Sublessor's expense. If Sublessee does not
give Sublessor written notice of a non-compliance with this warranty within six
months following the commencement date, correction of that non-compliance shall
be the obligation of Sublessee at its sole cost and expense. If the Applicable
Requirements are hereafter changed so as to
<PAGE>
require during the term of this Sublease the construction of an addition to or
an alteration of the Building, the remediation of any Hazardous Substance, or
the reinforcement or other physical modification of the Building ("Capital
Expenditure"), Sublessor and Sublessee shall allocate the cost of such work as
follows:
(a) If such Capital Expenditures are required as a result of the
specific and unique uses of the Premises by Sublessee as compared with uses by
tenants in general, Sublessee shall be fully responsible for the cost thereof
provided, however, that if such Capital Expenditure is required during the last
two years of this Sublease and the cost thereof exceeds six months' Base Rent,
Sublessee may instead terminate this Sublease unless Sublessor notifies
Sublessee in writing, within ten days after receipt of Sublessee's termination
notice that Sublessor has elected to pay the difference between the actual cost
thereof and the amount equal to six months' Base Rent. If the Parties elect
termination, Sublessee shall immediately cease the use of the Premises which
requires such Capital Expenditure and deliver to Sublessor written notice
specifying a termination date at least ninety days thereafter. Such termination
date shall, however, in no event be earlier then the last day that Sublessee
could legally utilize the Premises without commencing such Capital Expenditure.
(b) if such Capital Expenditure is not the result of the specific and
unique use of the Premises by Sublessee (such as governmentally mandated seismic
modifications, then Sublessor shall pay for said Capital Expenditure and the
cost thereof shall be prorated between the Sublessor and Sublessee and Sublessee
shall only be obligated to pay, each month during the remainder of the term of
this Sublease, on the date on which Rent is due, an amount equal to the product
of multiplying the cost of such Capital Expenditure by a fraction, the numerator
of which is one, and the denominator of which is the number of months of the
useful life of such Capital Expenditure as such useful life is specified
pursuant to Federal Income tax regulations or guidelines for depreciation
thereof (including interest on the unamortized balance as is then commercially
reasonable in the judgment of Sublessor's accountant), with Sublessee reserving
the right to prepay its obligation at any time. Provided, however, that if such
Capital Expenditure is required during the last two years of this Sublease or if
Sublessor reasonably determines that it is not economically feasible to pay its
share thereof, Sublessor shall have the option to terminate this Sublease upon
ninety days prior written notice to Sublessee unless Sublessee notifies
Sublessor, in writing, within ten days after receipt of Sublessor's termination
notice that Sublessee will pay for such Capital Expenditure. If Sublessor does
not elect to terminate, and fails to tender its share of any such Capital
Expenditure, Sublessee may advance such funds and deduct same, with interest,
from Rent until Sublessor's share of such costs have been fully paid. If
Sublessee is unable to finance Sublessor's share, or if the balance of the Rent
due and payable for the remainder of this Sublease is not sufficient to fully
reimburse Sublessee on an offset basis, Sublessee shall have the right to
terminate this Sublease upon ten days written notice to Sublessor.
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Sublessee as a result of an actual or proposed change in use, change in
intensity of use, or modification to the Premises
<PAGE>
then, and in that event, Sublessee shall be fully responsible for the cost
thereof, and Sublessee shall not have any right to terminate this Sublease.
6.3 Acceptance of Premises and Lessee. Sublessee acknowledges that:
(a) it has been advised by Brokers to satisfy itself with respect to
the condition of the Premises (including but not limited to the electrical, HVAC
and fire sprinkler systems, security, environmental aspects, and compliance with
Applicable Requirements), and their suitability for Sublessee's intended use,
(b) Sublessee has made such investigation as it deems necessary with
reference to such matters and assumes all responsibility therefor as the same
relate to its occupancy of the Premises, and
(c) neither Sublessor, Sublessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Sublease.
In addition, Sublessor acknowledges that:
(a) Broker has made no representations, promises or warranties
concerning Sublessee's ability to honor the Sublease or suitability to occupy
the Premises, and
(b) It is Sublessor's sole responsibility to investigate the financial
capability and/or suitability of all proposed tenants.
7. Master Lease
7.1 Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter the "Master Lease", a copy of which is attached hereto marked
Exhibit 1, wherein Marquardt Associates is the lessor, hereinafter the "Master
Lessor".
7.2 This Sublease is and shall be at all times subject and subordinate
to the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor and
Sublessee to each other under this Sublease shall be the terms and conditions of
the Master Lease except for those provisions of the Master Lease which are
directly contradicted by this Sublease in which event the terms of this Sublease
document shall control over the Master Lease. Therefore, for the purposes of
this Sublease, wherever in the Master Lease the word "Lessor" is used it shall
be deemed to mean the Sublessor herein and wherever in the Master Lease the word
"Lessee" is used it shall be deemed to mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods subsequent for
obligations which have arisen prior to the termination of this Sublease,
Sublessee does hereby
<PAGE>
expressly assume and agree to perform and comply with, for the benefit of
Sublessor and Master Lessor, each and every obligation of Sublessor under the
Master Lease except for the following paragraphs which are excluded therefrom:
7.5 The obligations that Sublessee has assumed under Paragraph 7.4
hereof are hereinafter referred to as the "Sublessee's Assumed Obligations". The
obligations that Sublessee has not assumed under Paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
7.6 Sublessee shall hold Sublessor free and harmless from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the entire
term of this Sublease, subject, however, to any earlier termination of the
Master Lease without the fault of the Sublessor, and to comply with or perform
Sublessor's Remaining Obligations and to hold Sublessee free and harmless from
all liability, judgments, costs, damages, claims or demands arising out of
Sublessor's failure to comply with or perform Sublessor's Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in full
force and effect and that no default exists on the part of any Party to the
Master Lease.
8. Assignment of Sublease and Default.
8.1 Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease, subject however to the provisions of
Paragraph 6.2 hereof.
8.2 Master Lessor, by executing this document, agrees that until a
Default shall occur in the performance of Sublessor's Obligations under the
Master Lease, that Sublessor may receive, collect and enjoy the Rent accruing
under this Sublease. However, if Sublessor shall Default in the performance of
its obligations to Master Lessor then Master Lessor may, at its option, receive
and collect, directly from Sublessee, all Rent owing and to be owed under this
Sublease. Master Lessor shall not, by reason of this assignment of the Sublease
nor by reason of the collection of the Rent from the Sublessee, be deemed liable
to Sublessee for any failure of the Sublessor to perform and comply with
Sublessor's Remaining Obligations.
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee upon
receipt of any written notice from the Master Lessor stating that a Default
exists in the performance of Sublessor's obligations under the Master Lease, to
pay to Master Lessor the Rent due and to become due under the Sublease.
Sublessor agrees that Sublessee shall have the right to rely upon any such
statement and request from Master Lessor, and that Sublessee shall pay such Rent
to Master Lessor without any obligation or right to inquire as to whether such
Default exists and notwithstanding any notice from or claim from Sublessor to
the
<PAGE>
contrary and Sublessor shall have no right or claim against Sublessee for any
such Rent so paid by Sublessee.
8.4 No changes or modifications shall be made to this Sublease without
the consent of Master Lessor.
9. Consent of Master Lessor.
9.1 In the event that the Master Lease requires that Sublessor obtain
the consent of Master Lessor to any subletting by Sublessor then, this Sublease
shall not be effective unless, within ten days of the date hereof, Master Lessor
signs this Sublease thereby giving its consent to this Subletting.
9.2 In the event that the obligations of the Sublessor under the Master
Lease have been guaranteed by third parties then neither this Sublease, nor the
Master Lessor's consent, shall be effective unless, within 10 days of the date
hereof, said guarantors sign this Sublease thereby giving their consent to this
Sublease.
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent shall not release Sublessor of its obligations or
alter the primary liability of Sublessor to pay the Rent and perform and comply
with all of the obligations of Sublessor to be performed under the Master Lease.
(b) The acceptance of Rent by Master Lessor from Sublessee or
anyone else liable under the Master Lease shall not be deemed a waiver by Master
Lessor of any provisions of the Master Lease.
(c) The consent to this Sublease shall not constitute a consent to
any subsequent subletting or assignment.
(d) In the event of any Default of Sublessor under the Master
Lease, Master Lessor may proceed directly against Sublessor, any guarantors or
anyone else liable under the Master Lease or this Sublease without first
exhausting Master Lessor's remedies against any other person or entity liable
thereon to Master Lessor.
(e) Master Lessor may consent to subsequent sublettings and
assignments of the Master Lease or this Sublease or any amendments or
modifications thereto without notifying Sublessor or anyone else liable under
the Master Lease and without obtaining their consent and such action shall not
relieve such persons from liability.
(f) In the event that Sublessor shall Default in its obligations
under the Master Lease, then Master Lessor, at its option and without being
obligated to do so, may require Sublessee to attorn to Master Lessor in which
event Master Lessor shall undertake the obligations of Sublessor under this
Sublease from the time of the exercise of said option to
<PAGE>
termination of this Sublease but Master Lessor shall not be liable for any
prepaid Rent nor any Security Deposit paid by Sublessee, nor shall Master Lessor
be liable for any other Defaults of the Sublessor under the Sublease.
9.4 The signatures of the Master Lessor and any Guarantors of Sublessor
at the end of this document shall constitute their consent to the terms of this
Sublease.
9.5 Master Lessor acknowledges that, to the best of Master Lessor's
knowledge, no Default presently exists under the Master Lease of obligations to
be performed by Sublessor and that the Master Lease is in full force and effect.
9.6 In the event that Sublessor Defaults under its obligations to be
performed under the Master Lease by Sublessor, Master Lessor agrees to deliver
to Sublessee a copy of any such notice of default. Sublessee shall have the
right to cure any Default of Sublessor described in any notice of default within
ten days after service of such notice of default on Sublessee. If such Default
is cured by Sublessee then Sublessee shall have the right of reimbursement and
offset from and against Sublessor.
10. Brokers Fee.
10.1 Upon execution hereof by all parties, Sublessor shall pay to LEE &
ASSOCIATES - COMMERCE, INC. a licensed real estate broker, ("Broker"), a fee as
set forth in a separate agreement between Sublessor and Broker, or in the event
there is no such separate agreement, the sum of $ PER SEPARATE AGREEMENT for
brokerage services rendered by Broker to Sublessor in this transaction.
10.2 Sublessor agrees that if Sublessee exercises any option or right
of first refusal as granted by Sublessor herein, or any option or right
substantially similar thereto, either to extend the term of this Sublease, to
renew this Sublease, to purchase the Premises, or to lease or purchase adjacent
property which Sublessor may own or in which Sublessor has an interest, then
Sublessor shall pay to Broker a fee in accordance with the schedule of Broker in
effect at the time of the execution of this Sublease. Notwithstanding the
foregoing, Sublessor's obligation under this Paragraph 10.2 is limited to a
transaction in which Sublessor is acting as a Sublessor, lessor or seller.
10.3 Master Lessor agrees that if Sublessee shall exercise any option
or right of first refusal granted to Sublessee by Master Lessor in connection
with this Sublease, or any option or right substantially similar thereto, either
to extend or renew the Master Lease, to purchase the Premises or any part
thereof, or to lease or purchase adjacent property which Master Lessor may own
or in which Master Lessor has an interest, or if Broker is the procuring cause
of any other lease or sale entered into between Sublessee and Master Lessor
pertaining to the Premises, any part thereof, or any adjacent property which
Master Lessor owns or in which it has an interest, then as to any of said
transactions, Master Lessor shall pay to Broker a fee, in cash, in accordance
with the schedule of Broker in effect at the time of the execution of this
Sublease.
<PAGE>
10.4 Any fee due from Sublessor or Master Lessor hereunder shall be due
and payable under the exercise of any option to extend or renew, upon the
execution of any new lease, or, in the event of a purchase, at the close of
escrow.
10.5 Any transferee of Sublessor's interest in this Sublease, or of
Master Lessor's interest in the Master Lease, by accepting an assignment
thereof, shall be deemed to have assumed the respective obligations of Sublessor
or Master Lessor under this Paragraph 10. Broker shall be deemed to be a
third-party beneficiary of this Paragraph 10.
11. Attorney's Fees. If any party or the Broker named herein brings an
action to enforce the terms hereof or to declare rights hereunder, the
prevailing party in any such action, on trial and appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
Court.
12. Additional Provisions. (If there are no additional provisions, draw
a line from this point to the next printed word after the space left here. If
there are additional provisions place the same here. (See attached Guaranty of
Lease)
<PAGE>
Addendum to Standard Sublease
For the Premises Located at
16818 Marquardt, Cerritos, California
Dated November 25, 1998
- ------------------------------------------------------------------------------
13. Rental Abatement: Sublessee shall receive January 1-31,
1999 and February 1-28, 1999 free of any
rent.
14. Rental Adjustments: March 1-31, 1999 - February 28, 2000
$9,494.40 per month March 1, 2000 - March
31, 2001 $9,936.00 per month
15. Dual Agency: Sublessor and Sublessee acknowledge that
Lee & Associates, Inc. ("Broker")
represents both Sublessee and Sublessor
in this transaction.
16. Tenant Improvements: Sublessor shall provide tenant
improvement allowance of TEN THOUSAND
DOLLARS ($10,000.00). Sublessee shall
provide invoices for the work completed
and Sublessor will reimburse Sublessee.
Reimbursement to Sublessee shall occur
within thirty (30) days of receipt of
invoices for tenant improvements. Any
remainder amount of the tenant
improvement allowance shall be credited
to Sublessee's base rent for May 1999.
17. Notices: The address to forward notices and rental
payments is 16200 A Carmenita, Cerritos,
CA 90703, attn: James Lu.
18. Early Occupancy: Sublessee will be allowed early occupancy
of the Premises once the sublease
agreement has been fully executed and the
Premises has been vacated by the
Sublessor. This early occupancy period
shall occur no later than December 10,
1998. This early occupancy is necessary
in order for the Sublessee to complete
all Tenant Improvements and prepare the
building for Sublessee's full occupancy.
19. Landlord Improvements: Sublessor will repair or replace all
loading
<PAGE>
and access doors on the Premises.
Sublessor shall deliver the premises with
loading & access doors in good working
condition upon sublease commencement.
Sublessee should notify sublessor within
30 days of sublease commencement of any
repair necessary to the doors. Sublessor
shall repair and/or replace any missing
or damaged ceiling tiles in the existing
office area.
20. Modular Warehouse Office: Sublessor will leave the modular office
located in the warehouse in its existing
location and Sublease will be permitted
use of it throughout the Sublease term.
Sublessor reserves the right to remove
this office space from the Premises at
the expiration of the Sublease agreement
and at their sole cost and expense.
21. Addendum No. 1.6(b): In reference to the Memorandum dated
November 25, 1998 regarding 16818
Marquardt, Cerritos (see Exhibit B),
Sublessee shall not be responsible for
the approximately $2,500.00 charge every
six months. Any such charges related to
addendum number 1.6(b) in the Master
Lease shall be paid by Sublessor.
22. Restoration of Lobby
Office: Should the Master Lessor require the
Sublessor to reinstate the office and or
office lobby to its former state during
any of the sublease period (per the
Addendum agreement in the Master Lease),
Sublessor shall take full responsibility
of the reinstatement and not involve the
Sublessee in any way.
Initial:
<PAGE>
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE
TRANSACTION TO WHICH IT RELATES, THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS SUBLEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE
PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE
PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE STRUCTURAL
INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITAILITY
OF THE PREMISES FOR SUBLESSEE'S INTENDED USE.
WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA,
CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE
LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED.
Executed at: DIAMOND ENTERTAINMENT CORPORATION, INC.
------------------------------------------
A CALIFORNIA CORPORATION
on: By: /s/ James Lu
- ------------------------------- ---------------------------------------
Address: By:
------------------------ ---------------------------------------
"Sublessor" (Corporate Seal)
Executed at: VIGOR SPORTS INC. VIGOR SPORTS INC., A CALIFORNIA CORP.
------------------- ------------------------------------------
On: November 25, 1998 By: /s/
-------------------------- ---------------------------------------
Address: 13727 Equitable Rd. By:
----------------------- ---------------------------------------
Cerritos, CA 90703 "Sublessee" (Corporate Seal)
Executed at: MARQUARDT ASSOCIATES
------------------- ------------------------------------------
on: By:
---------------------------- ---------------------------------------
Address: By:
----------------------- ---------------------------------------
"Master Lessor" (Corporate Seal)
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Interest Held State of
Subsidiary Name By Registrant Incorporation
<S> <C> <C>
Diamond Entertainment Corporation 100% California
Jewel Products International, Inc. 100% California
Fun-Time, Inc. 100% California
American Top Real Estate, Inc. 50% California
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED MARCH 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 5,530
<SECURITIES> 0
<RECEIVABLES> 1,648,654
<ALLOWANCES> (467,146)
<INVENTORY> 3,783,672
<CURRENT-ASSETS> 5,113,975
<PP&E> 974,183
<DEPRECIATION> 672,677
<TOTAL-ASSETS> 6,467,146
<CURRENT-LIABILITIES> 7,651,006
<BONDS> 0
0
376,593
<COMMON> 10,417,647
<OTHER-SE> (11,988,057)
<TOTAL-LIABILITY-AND-EQUITY> 6,467,146
<SALES> 8,724,149
<TOTAL-REVENUES> 8,950,018
<CGS> 5,696,810
<TOTAL-COSTS> 3,220,279
<OTHER-EXPENSES> 1,117,788
<LOSS-PROVISION> 152,440
<INTEREST-EXPENSE> 420,583
<INCOME-PRETAX> (1,505,442)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,505,442)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,505,442)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
