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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] Annual Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934 For
the fiscal year ended December 31, 1999
[ ] Transition Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 0-24608
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FOTOBALL USA, INC.
(Name of small business issuer in its charter)
Delaware 33-0614889
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3738 Ruffin Road, San Diego, California 92123
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (858) 467-9900
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Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Preferred Stock Purchase Right
Check whether the registrant (1) has 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
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X]
The Issuer's revenues for the fiscal year ended December 31, 1999 were
$28,690,211.
The aggregate market value of the Issuer's Common Stock held by
non-affiliates, computed by reference to the average bid and ask prices of such
stock, as of March 21, 2000, was $15,183,059.
As of March 21, 2000, the Company had 3,575,368 shares of
Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on May 9, 2000 are incorporated by reference into Part
III of this Form 10-KSB.
Transitional Small Business Disclosure Format: Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Fotoball USA, Inc., a Delaware corporation (the "Company"), designs,
develops, manufactures and markets high quality custom sports and non-sports
related products. These products are sold in the licensed product retail market
through a nationwide network of over 3,000 retailers including Target, Sears,
Wal-Mart, Toys R Us and J.C. Penney. Additionally, the Company provides custom
sports and non-sports related products for corporate promotions and non-licensed
specialty sports products to corporations for resale, including sales to
amusement parks and entertainment-related companies. The Company currently holds
licenses with Major League Baseball Properties and Major League Baseball Players
Association, NHL Enterprises and National Hockey League Players Association,
National Football League Properties and NFL Players Inc., over 300 National
Collegiate Athletic Association ("NCAA") colleges and universities, and certain
entertainment properties including Warner Bros. Looney Tunes(R), Nickelodeon's
"Rugrats" and "Blues Clues" characters, United Media's "Peanuts", The Coca-Cola
Company and Disney's ESPN(R). Pursuant to these licenses, the Company has the
right to use, for commercial purposes, the names and logos of sports leagues,
teams, colleges and universities and the likeness and signature of certain
sports figures and cartoon characters.
The Company sells its products to two distinct types of customers: its
promotions customers, to whom the Company sells custom-designed products
directly to companies, and its retail customers which includes both the sale of
licensed products directly to mass merchants, sports teams and concessionaires
(its "national retail sales" customer) and the sale of non-licensed specialty
sports products to amusement park and entertainment-related companies for resale
and promotional use (its "entertainment" customer).
The Company's national retail sales represents a customer base of over
3,000 retailers, including selected department stores and mass merchants (such
as Target, Sears, Wal-Mart, Toys R Us, J.C. Penney, Kmart and Champs), airport
and hotel concessionaires, various licensed sports specialty and sporting goods
chains, various consumer catalogs, numerous e-commerce sites and professional
sports stadiums (including all 30 Major League Baseball stadiums, the majority
of professional minor league baseball stadiums and football stadiums). The
Company's entertainment business designs, develops and manufactures specialty
products for large companies such as Walt Disney, Warner Bros., QVC, Paramount
and Six Flags theme parks.
The Company's promotion customers, which include large companies such
as General Mills, Castrol, MasterCard and McDonalds, purchase the Company's
products for use in promotional campaigns and in connection with their
sponsorship of sports teams. The Company provides its promotions customers with
a wide range of graphic design, product development and manufacturing services.
These services include assisting customers in the negotiation of corporate
sponsorships with professional sports teams and their associations, in designing
and developing promotions and in procuring product licenses and authorizations.
The Company is responsible for all phases of production, including creative
design, manufacturing, quality control, packaging and shipping.
During 1999, the Company launched the Fotoball Collectors Club,
www.fotoballclub.com, an e-commerce site primarily targeting sports collectors
with exclusive high-end limited edition collectibles. The site offers a variety
of products that relate to baseball, football, hockey and the NCAA. The Company
is exploring different ways of pursuing e-commerce business in the future to
sell high-end collectibles while preserving its relationships with retailers.
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Fotoball USA, Inc., a California corporation and the predecessor to the
Company ("Fotoball California"), was incorporated under the laws of the State of
California on December 13, 1988. The Company then was incorporated under the
laws of the State of Delaware on April 27, 1994, for the purpose of merging and
continuing the business of Fotoball California. On July 29, 1994, Fotoball
California merged with and into the Company, with Fotoball USA, Inc. being the
surviving corporation.
PRODUCTS
The Company offers a variety of custom-imprinted sports and non-sports
products across a broad range of price points. The Company currently markets
over 500 custom-imprinted sports and non-sports related products with general
wholesale prices ranging from approximately $1.00 to $17.95 per item. The
following is a description of each of the Company's main product lines:
Baseball:
The Company uses a synthetic leather, official size and weight
baseball, as well as a synthetic leather, composite core jumbo baseball, on
which it prints or embosses various images. The baseball product line includes
baseballs featuring a players' image and statistics, embroidered baseballs, logo
team baseballs featuring logos of Major League Baseball ("MLB") and minor league
baseball teams (collectively "Professional Baseball"), mini-glove and baseball
gift sets, specialty baseballs including mini-hanging baseballs, soft vinyl
polyester filled baseballs licensed by Professional Baseball, colleges and
universities and several entertainment properties and promotional baseballs
custom-printed and used for promotions.
Football:
The Company uses a synthetic leather football in a variety of sizes and
finishes. The football product line includes Teamball TM and the National
Football League ("NFL") Player Fotoball(R), mini-footballs featuring NFL team
logos and full color images of NFL players, official size footballs featuring
university or college logos, NFL Souvenir official size footballs featuring team
and Super Bowl logos and NFL marks produced in limited edition,
performance/official size footballs featuring color images for specialty
retailers such as Walt Disney and WB Sport and promotional full-size and
miniature footballs custom-printed and used for promotions.
Basketball:
The Company uses a basketball with a high-grade synthetic leather
finish on six panels and white synthetic leather on two panels for its miniature
basketballs. The Company uses an official size basketball constructed of
vulcanized rubber for its brand licensed and college product line and an
official size basketball constructed of synthetic leather. The basketball
product line includes University Teamball(R) made from synthetic leather, both
full and youth-size vulcanized rubber basketballs featuring a full-color image
of a university or college logo and nickname, National Basketball Association
("NBA") team logo ball featuring full-color logos of several NBA teams sold to
individual teams for exclusive sale by the respective team within the arena,
basketball hoop sets with backboards featuring college logos combined with a
mini-basketball, performance/official size basketballs featuring full-color
images for specialty retailers and promotional basketballs in all sizes made
primarily from vulcanized rubber featuring graphic designs of team, college or
corporate logos for promotions.
Soccer Ball:
The Company uses a 16-inch, 12-panel machine stitched synthetic leather
soccer ball for its miniature soccer balls. The Company uses a size 5 machine
stitched soccer ball for its brand-licensed products. The soccer product line
includes performance/size 5 soccer ball featuring color images for specialty
retailers and promotional soccer balls custom-printed and used for promotions.
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Hockey Puck:
The Company uses a hockey puck that is officially licensed with the
National Hockey League ("NHL"). The hockey product line includes team puck
featuring NHL team logos, player images and player facsimile autographs packaged
in a mini-net, chrome puck featuring metallic graphic process designs on a disk
displayed in a hockey net and college puck featuring a full color image of a
university or college logo.
Lapel Pin:
The Company produces a variety of lapel pin styles including
cloisonne, die struck, brass etched and steel for the licensed product retail
market, for corporate promotions and to brand licensed retail customers. The
lapel pin product line includes customized lapel pins for entertainment
customers, NCAA lapel pins for NCAA championship series and Final Four(TM)
tournament licensed by the NCAA and promotional pins custom manufactured and
used for corporate promotions and programs.
Playground Ball:
The company uses a soft vulcanized rubber ball in various sizes for its
entertainment-related licensed products such as for Warner Bros. Looney Tunes
and Scooby Doo and Nickelodeon's "Rugrats" and "Blues Clues" characters. The
Company uses an 8-inch playground ball for its MLB team logo playground ball
featuring all MLB teams, as well as for its NFL team logo playground ball
featuring all NFL teams.
Softee Sports Products:
The Company uses polyester-filled soft vinyl for its "softee" sport
balls. The softee product line includes a Teamball basketball featuring college
and minor league team logos and promotional miniature football and baseball
custom-printed and used for promotions.
MANUFACTURING, SUPPLY AND DISTRIBUTION
Significant portions of all raw materials used in the production of the
Company's retail products are purchased from unaffiliated manufacturers in the
Far East. An increasingly greater percentage of the Company's retail products
are manufactured overseas, requiring only inflation and packaging of the
products to be completed at the Company's San Diego, California facility.
Additionally, the majority of the Company's promotions products are manufactured
according to Company and customer specifications by these same unaffiliated
manufacturers. In 1999, the Company purchased approximately 88% of its raw
materials and finished retail and promotion goods from six companies located in
China, with two manufacturers accounting for 78% of total raw materials and
finished goods purchased. The imprinting process, which involves the application
of an image onto a blank ball, is performed either at the Company's San Diego,
California facility or in China, depending upon the complexity of the printing
process required. The complex four-color process is performed exclusively at the
San Diego facility and the less sophisticated printing can be performed either
at the San Diego facility or in China. The Company's senior management
periodically visits its suppliers to supervise the manufacturing of its products
and to ensure compliance with the Company's quality control standards and
specifications. The Company is not a party to any written contract with any
supplier and relies on its long-standing relationships to ensure quality,
responsiveness and efficiency. All of the Company's products manufactured abroad
are paid for in United States dollars.
Foreign manufacturing is subject to a number of risks, including
production and transportation delays and interruptions, political and economic
disruptions, the imposition of tariffs, quotas and other
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import or export controls, and changes in government policies. China currently
enjoys most favored nation ("MFN") trading status with the United States,
although there can be no assurance that China will continue to enjoy MFN trading
status in the future or that conditions on China's MFN status will not be
imposed. Any conditions imposed by the President of the United States and any
legislation in the United States revoking or placing further conditions on
China's MFN trading status could have a material adverse impact on the cost of
all of the Company's products because products originating from China could be
subjected to substantially higher rates of duty. Although alternative suppliers
may be available in other countries at competitive prices, and the Company
continues to evaluate their ability to compete in terms of cost, quality,
production capacity and other considerations, there can be no assurance that the
Company would be able to find alternative suppliers in a timely manner or that
such suppliers would meet the Company's cost, quality or production capability
standards.
LICENSE AGREEMENTS
The Company's business is based primarily upon its use of the insignia,
logos, names, colors, likeness and other identifying marks and images borne by
many of its products pursuant to license arrangements with MLB, NFL and, to a
lesser extent, Warner Bros., Coca-Cola, Nickelodeon, NHL and colleges and
universities. The Company may acquire additional licenses for new product lines;
however, there can be no assurance that the Company will be successful in
obtaining new licenses. The non-renewal or termination of one or more of the
Company's current material licenses, particularly with the MLB or NFL, could
have a material adverse effect on the Company's business. The following is a
brief description of the Company's material license arrangements with its
licensors:
The Company was granted by National Football League Properties, Inc.
("NFLP") the non-exclusive right to utilize in the United States, United Kingdom
and Japan, the names, symbols, designs and colors of the following: "National
Football League," "NFL," "NFC," "AFC," "Super Bowl," "Pro Bowl," the Member
Clubs of the NFL (including the helmet designs, uniforms, team names, nicknames,
identifying slogans and logos and other member club indicia) (the "Team
license"), and the names, likeness, portraits, pictures, photographs, signatures
and biographical information of the NFL Quarterback Club(TM) and its members
("Quarterback Club" license). The Company also received from NFLP the right to
utilize team and league logos on limited edition, collectible, official size
synthetic-leather footballs. The terms of the licenses extend through March 31,
2000. The Company has received a letter of intent from the NFLP renewing the
license through March 31, 2003. The Company is obligated to pay a royalty based
on net sales of licensed products subject to an annual minimum royalty fee.
There can be no assurance that the Company will be able to renew its license
agreements with the NFLP upon acceptable terms at its expiration.
The Company was granted by the Major League Baseball Players
Association ("MLBPA") the non-exclusive right to utilize in the United States,
its territories and Canada the "MLBPA" and "Major League Baseball Players
Association" trade names, the MLBPA logo and the names, nicknames, likeness,
signatures, pictures, playing records and/or biographical data of all active
baseball players of the National League and the American League who have entered
into a commercial agreement with the MLBPA. The term of the license extends
through December 31, 2000. The Company is obligated to pay a royalty based on
net sales of licensed products, subject to an annual minimum royalty fee. There
can be no assurance that the Company will be able to renew its license
agreements with the MLBPA upon acceptable terms at its expiration.
The Company was granted by Major League Baseball Properties, Inc.
("MLBP") the non-exclusive right to utilize in the United States the names,
symbols, logos, and other similar or related identification of "MLBP." The term
of the license extends through December 31, 2001. The Company is obligated to
pay a royalty based on net sales of licensed products, subject to an annual
minimum royalty fee. There can be no assurance that the Company will be able to
renew its license agreements with the MLBP upon acceptable terms at its
expiration.
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Historically, the Company's licenses have been renewed by its
licensors. Although the Company believes it will be able to renew its licenses
upon their expiration, there can be no assurance that such renewal can be
obtained on terms acceptable to the Company. The inability of the Company to
renew existing licenses and/or acquire additional licenses could have a material
adverse impact on the Company's sales and earnings.
OTHER CONSIDERATIONS
VARIABILITY OF GROSS MARGINS - Historically, the Company has realized
higher gross margins on its retail sales as compared to promotional sales. The
Company realized gross margins of 39% during 1998 and gross margins have
increased to 41% during 1999. The Company's gross margins may fluctuate,
particularly between quarters, based in part on the concentration of promotions,
retail sales and product mix during the reporting period. The types of products
sold, the size of the promotion and the extent of competition also may create
variability in realized gross margins.
VARIABILITY OF OPERATING RESULTS; SEASONALITY - The Company has
historically experienced significant quarter-to-quarter variability in its sales
and net income resulting primarily from two factors. The first factor is the
seasonality of the sporting industry and the effect this has on the Company's
licensed sports product business. The continued introduction of quality product
lines involving a diverse group of sports and entertainment-related products
helps mitigate this seasonality. The second factor, which significantly
contributed to prior years' variability of the Company's operations, was its
dependence on the promotions business. However, the Company has successfully
grown the retail distribution channel of the business to help mitigate this
variability. The Company's retail business during 1999 accounted for
approximately 87% of total sales.
CONCENTRATION ON RETAIL SALES - Retail sales were 87% of total sales
for the year ended December 31, 1999, as compared to 75% of total sales for the
year ended December 31, 1998. One large customer accounted for approximately 25%
of total sales for the year ended December 31, 1999; no other customer accounted
for 10% or more of total sales in 1999 or 1998.
DEPENDENCE UPON KEY PERSONNEL - The success of the Company is largely
dependent on the personal efforts of Michael Favish, its President and Chief
Executive Officer. Mr. Favish has entered into a three-year employment agreement
with the Company, commencing on August 10, 1999, which, among other things,
precludes Mr. Favish from competing with the Company for a period of two years
following termination of his employment with the Company. The loss of the
services of Mr. Favish could have a material adverse effect on the Company's
business and prospects. The Company maintains "key man" life insurance on the
life of Michael Favish.
COMPETITION AND TECHNOLOGICAL CHANGE
The promotions and sports related retail businesses are highly
competitive, diverse and constantly changing. The Company experiences
substantial competition in most of its product categories from a number of
companies, some of which have greater financial resources, marketing and
manufacturing capabilities than the Company.
The Company competes primarily on the basis of customer service,
creativity in product design, quality and uniqueness of products, prompt
delivery and a reputation of reliability. The Company believes that it
successfully competes in each of the above areas and that the Company has an
advantage by offering a full range of services from design through distribution.
The licensed sports-related product industry differentiates itself from
other industries in that the licensors control the extent of competition among
licensees and typically do not grant exclusive licenses. Generally, licensors
allow vendors to use licensed products under non-exclusive license
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agreements, and such licensors may license more than one vendor in a particular
product line. Although the Company has been successful in obtaining and renewing
such licenses, and in being the sole vendor of certain licensed product lines,
there can be no assurance that other competitors will not obtain competing
licenses to sell the same or similar products in the future. The Company's
expansion into recreational vulcanized rubber sports balls and broadened
licensed product lines will result in substantially more competition within
these product categories due to a greater number of well-established companies,
including Franklin Sports Inc., Baden Sports Inc. ("Baden"), Play by Play Inc.,
and Wilson Sporting Goods Co. The Company also competes directly with Rawlings
Sporting Goods Company, Inc. ("Rawlings") in the team logo baseball business and
for certain promotional baseball programs, as noted below.
The technology currently being used by the Company has contributed to
restricting direct competition of its product lines. The future success of the
Company will be dependent, in part, upon its proprietary printing process and
ability to keep pace with advancements in printing and graphic designs. There
can be no assurance that new printing technology will not be developed that
renders the Company's current printing process and products obsolete or
inferior, or that other competitors will not develop the technology currently
used by the Company. The future success of the Company is increasingly dependent
upon the creativity of its design team, its ability to reproduce these designs
onto sports products with high quality output, and new product development.
The domestic promotions business is highly competitive. The Company
competes frequently with the same companies as in its licensed sports product
business, particularly Baden and Rawlings. Additionally, a variety of companies
who outsource sports ball products from China do compete against the Company for
certain promotional orders. However, the Company believes that its creativity,
higher quality and reliable service result in a competitive advantage. The
Company's competitors include companies that have significantly greater
financial and other resources than does the Company. There can be no assurance
that the Company will be able to compete effectively against such companies in
the future.
Within its retail business, the Company competes on the basis of its
quality manufacturing process, its strong relationships with its licensors, its
price point, brand equity of the Fotoball name in the marketplace and its use of
selected distribution channels for retail products. As previously noted, a
significant competitive advantage of the Company is its creative design
capabilities, and its ability to reproduce these designs onto high quality
products.
The Company prepared a plan to be Year 2000 compliant and was
successful in doing so. The costs of achieving Year 2000 compliance did not have
a material impact on the Company's business operations or its financial
condition.
TRADEMARKS, PROPRIETARY INFORMATION AND PATENTS
Fotoball(R) is a registered trademark of the Company. The Company
believes that Fotoball(R) is the best known brand name for baseballs and other
sports balls with imprinted color images. The Company also uses trademarks, such
as Teamball(TM), Fotopuck(TM), Dunk This(TM) and Heads Up(TM), which are
registered with the U.S. Patent and Trademark Office. The Company considers the
Fotoball(R) trademark to be material to its business.
The Company is able to successfully reproduce a variety of intricate
designs on its products with detail and accuracy, using the Company's
proprietary printing process. This process was developed by the Company by
combining several pre-existing techniques that are used in other similar
industries. To the Company's knowledge, no other company currently has the
ability to perform the complete process. The Company does not rely upon any
material patents or licensed technology in the operation of its business. The
Company does not believe that it is possible to be issued a patent on its
proprietary printing process and, accordingly, there can be no assurance that
the Company's techniques,
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processes and formulations will not otherwise become known to, or independently
developed by, competitors of the Company.
The cost of advancing the technology used in its printing process and
research and development costs associated with designing and creating new
products are presently not considered significant.
GOVERNMENTAL REGULATIONS
In the United States, the Company is subject to the provisions of,
among other laws, the Federal Hazardous Substances Act and the Federal Consumer
Products Safety Act. These laws empower the Consumer Product Safety Commission
(the "CPSC") to protect consumers from hazardous toys and other articles. The
CPSC has the authority to exclude from the market articles that are found to be
unsafe or hazardous, and can require a recall of such products under certain
circumstances. Similar laws exist in some states and cities in the United
States, as well as in Canada and Europe. The Company has established a strong
quality assurance program (including the inspection of goods at the factories,
the retention of independent testing laboratories and the independent testing by
certain licensors of which product must pass certain external safety standards
for their own purposes) to ensure compliance with applicable laws. While the
Company believes that its products comply in all material respects with
regulatory standards, there can be no assurance that the Company's products will
not be found to violate applicable laws or rules and regulations which could
have a material adverse effect on the business, financial condition and results
of operations of the Company. In addition, there can be no assurance that more
restrictive laws, rules and regulations will not be adopted in the future, or
that the Company's products will not be marketed in the future in countries with
more restrictive laws, rules and regulations, either of which could make
compliance more difficult or expensive, and which could have a material adverse
effect on the business, financial condition and results of operations of the
Company.
The Company is engaged in a business that could result in possible
claims for injury or damage resulting from its products. The Company is not
currently, nor has it been in the past, a defendant in any product liability
lawsuit. The Company currently maintains product liability insurance coverage in
amounts that it believes are adequate. There can be no assurance that the
Company will be able to maintain such coverage or obtain additional coverage on
acceptable terms, or that such insurance will provide adequate coverage against
all potential claims.
The Company's operations are subject to federal, state and local laws
and regulations relating to the environment, health and safety and other
regulatory matters. Certain processes of the Company's operations may, from time
to time, involve the use of substances that are classified as toxic or hazardous
within the meaning of these laws and regulations. The Company's imprinting
process involves the use of inks, ink thinners, and xylene in the cleaning
process of the ball. The Company believes that is has obtained all material
permits and that its operations are in substantial compliance with all material
applicable environmental laws and regulations. Any non-compliance with
environmental laws and regulations is not likely to have a material adverse
effect on the Company under current operations, its results of operations or its
liquidity due primarily to the small quantities used in the processes. The cost
of compliance with environmental laws and regulations are not considered to be
significant at this time.
EMPLOYEES
As of March 1, 2000, the Company employed 103 persons, all on a
full-time basis, including 7 in executive positions, 10 in sales, 10 in graphic
production, 31 in administrative support positions and 45 in factory production
and shipping. None of the Company's employees are covered by a collective
bargaining agreement. The Company's relationship with its employees is
satisfactory.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters and warehouses are located in approximately
86,000 square feet of leased space at 3738 Ruffin Road and 4000 Ruffin Road, San
Diego, California 92123. The headquarters are leased from an unaffiliated party
under a seven-year lease agreement which commenced in April 1994 and expires
March 2001 with monthly rent increasing incrementally from $8,800 to $18,710,
together with certain common area expenses, during the term of the lease. In
July 1997, the Company began leasing 23,000 square feet of additional
warehousing space from an unaffiliated party under a one-year lease agreement
for a monthly rent of $9,913. In May 1998 and March 1999, the Company added
19,000 and 18,000 square feet, respectively, of additional warehousing space at
its 4000 Ruffin Road facility. The Company now has approximately 60,000 square
feet of warehousing space, of which the lease expires in July 2001, including a
one-year renewal option at a monthly rent of $26,422.
In March 2000, the Company executed a lease for new headquarters and
warehouse space. The new space consists of approximately 101,000 square feet of
leased space at 6740 Cobra Way, San Diego 92121. The new space is being leased
from an unaffiliated party under a lease agreement which provides for a 123
month term commencing in August 2000, with two five-year option periods. Monthly
rent under the lease commences at $79,500 per month, with 5% fixed increases to
occur every two years. The Company will receive a three-month rent credit during
its first three months of occupancy and will receive certain other improvement
allowances from the landlord. The Company anticipates that the new premises will
meet its space requirements for the foreseeable future. The specific timing of
relocation to the new space has not yet been determined, but is expected to take
place within the next six months. The Company expects that it will be able to
terminate its present lease commitments at 4000 Ruffin Road and 3738 Ruffin Road
and does not presently expect to incur any additional material expenses
associated with such lease terminations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation or legal
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of security holders
during the fourth quarter of the year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock ("Common Stock") is traded over-the-counter
on the Nasdaq National Market. The following table sets forth the range of trade
prices for the Common Stock during the periods indicated and represents
inter-dealer prices, without retail mark-ups, mark-downs or commissions to the
broker-dealer, and may not necessarily represent actual transactions.
SYMBOL HIGH LOW
Common Stock: (FUSA) ---- ---
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1998
First Quarter $ 1.75 $ 1.00
Second Quarter $ 3.25 $ 1.38
Third Quarter $ 3.19 $ 1.63
Fourth Quarter $ 3.38 $ 1.88
1999
First Quarter $ 4.38 $ 3.13
Second Quarter $ 5.88 $ 3.44
Third Quarter $ 7.25 $ 3.53
Fourth Quarter $ 8.91 $ 5.63
On March 17, 2000, there were approximately 70 holders of record of the
Common Stock. Based on information provided by the Company's transfer agent and
registrar, the Company believes that there are approximately 1,377 beneficial
owners of the Common Stock.
The Company has never paid dividends on the Common Stock and does not
anticipate paying any dividends in the foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1998 AND 1999:
The following table sets forth certain operating data (in whole dollars
and as a percentage of the Company's sales) for the years ended December 31,
1998 and 1999:
<TABLE>
<CAPTION>
1998 % 1999 %
---------------- -- ---------------- -
<S> <C> <C> <C> <C>
Sales $19,147,728 100 $28,690,211 100
Cost of Sales 11,590,631 61 16,922,249 59
Gross Profit 7,557,097 39 11,767,962 41
Operating Expenses 6,448,168 34 8,939,658 31
Operating Income 1,108,929 6 2,828,304 10
Interest Expense 88,183 1 120,711 --
Interest Income 10,128 1 51,473 --
Income Before Income Tax 1,030,874 5 2,759,066 10
Income Tax Expense 433,000 2 113,000 --
Net Income $ 597,874 3 $ 2,646,066 9
</TABLE>
SALES:
Sales increased $9.5 million, or 50%, for the year ended December 31,
1999 from sales for the year ended December 31, 1998. The increase in sales was
due to an increase in retail sales of $10.6 million, or 74%, offset by a decline
in promotion sales of $1.0 million, or 21%, as compared to the prior year
period. During 1999, the Company realized substantial product sales increases of
footballs (103%), playground balls (255%), basketballs (37%) and lapel pins
(growth percentage is not meaningful as sales in 1998 were insignificant).
The retail sales increase was due to several factors, including the
continued expansion of sales to national mass merchants, significant increases
in entertainment-related sales and significant increases in sales from the
Company's expanding product lines. Retail sales were 87% of total sales for the
year ended December 31, 1999, as compared to 75% of total sales for the year
ended December 31, 1998. The number of retail stores serviced increased during
1999 and the merchandising space allocated to the Company's product within each
store increased. Additionally, retail sales benefited from new entertainment
licenses acquired by the Company and from increases in the Company's team
business, which sells directly to professional sports teams and their respective
concessionaires. While no assurances can be made, several factors support
continued retail sales growth in the future. These factors include expanding
penetration into national retailers, continued growth within the Company's
amusement and entertainment customers, the leveraging of existing licensed
properties, such as Warner Bros. Looney Tunes and Scooby-Doo, Coca-Cola, and
Nickelodeon's "Rugrats" and "Blue Clues" characters, and the addition of new
licensed properties and new products.
The promotion sales decrease was due primarily to one substantial
national corporate promotion in 1998 relating to the record-breaking home run
race between Mark McGuire and Sammy Sosa. The Company has stated its
concentration was to expand the retail business sector to help mitigate its
dependence upon promotion sales to customers. In 1999, promotion sales were 13%
of total sales, compared to 25% of total sales in 1998 and 33% of total sales in
1997. Although reducing its dependence upon promotion sales, the Company will
continue to pursue its objective of expanding its promotions business and its
contribution to operating profits through several strategies. These strategies
include leveraging its relationships with its licensors, including MLB, NFL and
colleges and universities, to secure promotions with corporations who sponsor
these organizations. In addition, the Company will capitalize on the success of
its entertainment business by pursuing promotional opportunities within the same
customer base, leveraging current and future licensing rights by using these
properties and characters in value-added, corporate promotions.
11
<PAGE>
GROSS PROFIT:
Gross profit increased 56% for the year ended December 31, 1999 from
gross profit for the year ended December 31, 1998, reflecting the increase in
total sales in 1999. Gross margins as a percentage of sales for the year ended
December 31, 1999 increased to 41% from 39% for the prior year period. The
Company's gross margins as a percentage of sales increased from 1998 to 1999 due
primarily to a greater percentage of higher margin retail sales, combined with
the introduction of new higher margin product lines.
OPERATING EXPENSES:
Total operating expenses increased 39% for the year ended December 31,
1999 from total operating expenses for the year ended December 31, 1998.
Operating expenses as a percentage of sales decreased to 31% in 1999 from 34% in
1998 due to the fixed components of operating expenses being allocated over
significantly higher sales volume. Operating expenses increased in absolute
terms due primarily to an increase in variable operating expenses, reflective of
the Company's increased retail sales contribution. The Company anticipates that
operating expenses will increase in absolute terms in 2000.
Royalty expense increased 27% for the year ended December 31, 1999 from
royalty expense for the year ended December 31, 1998 due to a significant
increase in overall sales. Royalty expense as a percentage of sales decreased to
7% in 1999 from 8% in 1998 due primarily to an increase in sales of non-royalty
bearing entertainment-related programs. The Company expects that, in absolute
terms, royalty expense will increase in 2000 reflecting the anticipated increase
in retail sales. As previously noted, the Company is dependent upon its
licensing arrangements and their successful renewals. To broaden the Company's
scope of product lines and expand market share, the Company will continue to
pursue additional license agreements with various organizations and licensors in
the future.
Marketing expenses increased 30% for the year ended December 31, 1999
from marketing expenses for the year ended December 31, 1998. Marketing expenses
as a percentage of sales decreased to 10% in 1999 from 12% in 1998, reflecting
the absorption of the fixed components of marketing expenses over significantly
higher sales volumes. Marketing expenses increased in absolute terms due
primarily to increases in variable costs including independent sales
representative commissions and performance bonuses correlating directly to the
significant increase in retail sales, in addition to increased salary-related
expenses due to increased personnel. The Company anticipates that marketing
expenses will increase in absolute terms in 2000, reflecting increases in
variable costs resulting from expected higher sales volumes and the growth of
the Company as a whole.
General and administrative expenses increased 57% for the year ended
December 31, 1999 from general and administrative expenses for the year ended
December 31, 1998. General and administrative expenses as a percentage of sales
increased slightly to 13% in 1999 from 12% in 1998. General and administrative
expenses increased in absolute terms in 1999 from 1998 due in part to increases
in professional services and legal fees, facility costs and salary-related
expenses due to increased personnel. The Company anticipates that general and
administrative expenses for 2000 will increase in absolute terms as compared to
1999 due to the anticipated growth of the business as a whole and the corporate
infrastructure required to manage such growth.
OTHER INCOME (EXPENSE):
Interest expense was $120,711 for the year ended December 31, 1999, an
increase of $32,528 from interest expense of $88,183 for the year ended December
31, 1998 due to the increased utilization of the Company's revolving credit line
during 1999. As of December 31, 1999, there were no borrowings under the line of
credit.
12
<PAGE>
Interest income was $51,473 for the year ended December 31, 1999, an
increase of $41,345 from interest income of $10,128 for the year ended December
31, 1998. This increase is due to the Company's average cash balances available
for investment being substantially higher in 1999 as compared to 1998, primarily
from the proceeds received from warrant exercises, as more fully explained in
"Liquidity and Capital Resources" below. Excess cash is deposited into an
interest-bearing depository account.
INCOME TAX EXPENSE:
Income tax expense of $113,000 was recorded for the year ended December
31, 1999, compared to $433,000 for the year ended December 31, 1998. The Company
realized income tax benefits in 1999 related primarily to the elimination of its
deferred tax valuation allowance established in prior years for uncertainty
relating to the utilization of its net operating loss carryforwards. As of
December 31, 1999, the Company utilized all of its net operating loss
carryforwards. Had the Company been taxed at a combined Federal and state
effective tax rate of 40% in 1999 and 1998, then diluted earnings per share
would have been as follows:
1998 1999
---------- ----------
Income before income taxes $1,030,874 $2,759,066
Proforma income tax expense (40% tax rate) 412,350 1,103,626
------- ---------
Proforma net income $ 618,524 $1,655,440
========= ==========
Proforma diluted earnings per share $.22 $.52
==== ====
LIQUIDITY AND CAPITAL RESOURCES
The Company's net working capital increased by $5.7 million, or 116%,
from December 31, 1999 to December 31, 1998, to net working capital of $10.6
million at December 31, 1999 from net working capital of $4.9 million at
December 31, 1998.
Cash flow provided by operations increased $2.5 million from cash used
in operations of ($.9) million for the year ended December 31, 1998 to cash
provided by operations of $1.6 million for the year ended December 31, 1999.
This increase was primarily the result of a $2.0 million, or 343%, increase in
net income in 1999 from 1998, partially offset by increases in accounts
receivable and inventory. Accounts receivable and inventory both increased by
$.7 million from December 31, 1998 to December 31, 1999. The increase in
accounts receivable is due primarily to higher sales in 1999 as compared to 1998
and due to a greater percentage of total sales derived from national retail
accounts which typically require longer repayment terms than the Company's
normal thirty-day credit terms. Since the Company expects to maintain or
increase the contribution levels from national retailers in the future, it
expects a corresponding increase in its accounts receivable days sales
outstanding, therefore maintaining higher accounts receivable balances. The
allowance for doubtful accounts, which offsets accounts receivable, increased in
1999 due to the higher accounts receivable trade balance and the higher
percentage of mass merchant retail business that existed in 1999 as compared to
1998. The Company's increase in inventory is due primarily to the rapid growth
in its retail business requiring on-hand inventory items, as the Company
generally fulfills retail orders in one to four weeks, its expanding line of
products and its expectation of increasing demand for these products in future
periods.
Cash and equivalents aggregated $3.8 million at December 31, 1999, an
increase of $3.8 million from approximately no cash and equivalents at December
31, 1998. This increase is primarily due to the net proceeds received from the
exercise of warrants, as more fully explained below, combined with the net cash
provided by operating activities. Also during 1999, the Company purchased
property and equipment of approximately $.6 million, of which $.3 million was
acquired under capital leases. For the next twelve months, the Company
anticipates that its capital expenditure requirements will approximate $.7
million, which will be used to purchase additional product molds, production
machinery, office furniture, leasehold improvements and computer equipment.
13
<PAGE>
At December 31, 1999, the Company has commitments for minimum
guaranteed royalties under licensing agreements totaling approximately $.7
million in the aggregate through 2002, of which approximately $.4 million is due
at various times in 2000. Based upon the net income realized by the Company in
1999 and the expectation of continuing increases in its business as a whole,
management expects these guaranteed royalties to be funded from normal operating
cash flows.
On June 24, 1999, the Company announced that it reduced the exercise
price of its publicly traded redeemable common stock purchase warrants from
$6.50 to $4.00 and extended the term of the warrants to August 27, 1999. During
the special exercise price period of June 24, 1999 through August 27, 1999,
warrantholders who exercised each warrant for $4.00 received one share of
Fotoball common stock. When the special exercise period expired at the close of
business on August 27, 1999, the unexercised warrants expired in accordance with
its terms. A total of 686,167 warrants, or 49% of the total warrants originally
issued and outstanding were exercised on or before August 27, 1999. Gross
proceeds received by the Company in the offering were $2.7 million (solicitation
fees and other costs associated with the offering were approximately $.1 million
as of December 31, 1999). Net proceeds received by the Company will be retained
for working capital purposes to finance the Company's continued rapid growth in
all areas and possible acquisitions. Separately, 22,000 shares of common stock
were issued to the underwriter in a cash-free, negotiated transaction.
The Company currently has a one-year credit agreement with Scripps Bank
with a credit line of $3.5 million, which expires April 15, 2000. This credit
line is collateralized by the assets of the Company and actual borrowings are
limited to available collateral, as defined in the agreement. Borrowings under
the credit line bear interest at the bank's prime rate plus .75%. The credit
line contains financial covenants requiring the Company to maintain minimum net
worth levels, minimum working capital and debt to equity ratios. The Company is
in compliance with the covenants through December 31, 1999. There were no
outstanding borrowings under the credit line as of December 31, 1999 as compared
to $.4 million at December 31, 1998. The Company is presently reviewing its
options, including an extension and other alternatives, relating to its line of
credit arrangement for the period after April 15, 2000.
The Company has a $3 million line of credit facility (the "facility")
with Merrill Lynch International Bank Limited at an interest rate of 1.75% above
the London Interbank Offering Rate term that the Company chooses to select. Any
borrowing under the line of credit, which is used solely to collateralize the
issuance of stand-by letters of credit to manufacturers, are required to be
secured by cash collateral deposited with Merrill Lynch equal to the credit
outstanding. The line of credit extends until December 10, 2001. There were no
borrowings under the line of credit as of December 31, 1999 and 1998.
In March 2000, the Company executed a lease for new headquarters and
warehouse space. The new space consists of approximately 101,000 square feet of
leased space at 6740 Cobra Way, San Diego 92121. The new space is being leased
from an unaffiliated party under a lease agreement which provides for a 123
month term commencing in August 2000, with two five-year option periods. Monthly
rent under the lease commences at $79,500 per month, with 5% fixed increases to
occur every two years. The Company will receive a three-month rent credit during
its first three months of occupancy and will receive certain other improvement
allowances from the landlord. The Company anticipates that the new premises will
meet its space requirements for the foreseeable future. The specific timing of
relocation to the new space has not yet been determined, but is expected to take
place within the next six months. The Company expects that it will be able to
terminate its present lease commitments at 4000 Ruffin Road and 3738 Ruffin Road
and does not presently expect to incur any additional material expenses
associated with such lease terminations.
14
<PAGE>
Although nothing is imminent at this time, the Company is contemplating
certain strategic acquisitions. Such acquisitions, if made, may have an impact
on liquidity depending on the size of the acquisition and the type of
consideration used to make such acquisitions.
Management believes that the Company's existing cash position, credit
facilities, combined with internally generated cash flows, will be adequate to
support the Company's liquidity and capital needs at least through 2000.
CAUTIONARY STATEMENTS PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995:
This report contains "forward-looking statements" within the meaning of
the federal securities laws. These forward-looking statements include, among
others, statements concerning the Company's outlook for 2000, its ability to
realize increasing profitability in 2000, overall sales trends, gross margin
trends, operating cost trends and cost reduction strategies and their results,
the Company's expectations as to funding its capital expenditures and operations
during 2000, the Company's ability to consummate strategic acquisitions and
other statements of expectations, beliefs, future plans and strategies,
anticipated events or trends, and similar expressions concerning matters that
are not historical facts. The forward-looking statements in this report are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed in or implied by the statements.
2000 OUTLOOK
Looking forward to 2000, although no assurances can be made that the
Company's revenues will continue to grow, the Company expects increased revenues
over fiscal year 1999 results. The ability of the Company to continue to realize
increased sales in 2000 and future periods is dependent upon, in large measure,
its ability to realize continued growth in its retail business and to continue
to expand its promotion business through customer and product diversification.
The Company will only be able to increase income over fiscal year 1999 results
if it is able to maintain or increase its gross profits and control its overall
cost structure. There is no assurance that the Company will be able to
successfully increase its income in 2000. The most important factors that could
prevent the Company from achieving these goals - and cause actual results to
differ materially from those expressed in the forward-looking statements -
include, but are not limited to, the following:
o the ability of the Company to maintain the growth momentum of its
retail division by continuing to expand its national mass merchant
relationships, maintain the appeal and desirability of its existing
product lines and continue to develop new product offerings
o increasing competition from other sports product licensed
companies, including companies that have or may receive the same or
similar licensing rights as the Company's and may have
substantially greater financial resources than the Company
o the ability to maintain and renew its significant licensing
arrangements
o the popularity of current or future licensing properties and the
ability of the Company to leverage these properties to produce
sales
o continued rapid growth in the popularity of licensed sports
products
o the effectiveness of the independent sales representative
organizations to expand the breadth of the Company's customer base
and significantly increase sales
o the employment and retention of high producing sales staff
o the ability to increase its overall gross margins, or its inability
to maintain the higher level of gross margins realized from its
sports related products
o potential negative impact on operating margins resulting from an
expansion of the Company's cost infrastructure at a rate that
exceeds its growth in sales and gross margins
15
<PAGE>
o the ability to source products from China or the Far East at
competitive prices without delays, increased tariffs, other
restrictions or unanticipated costs
o the ability to effectively meet customer demands regarding timely
delivery and order fulfillment.
These and other risks and uncertainties affecting the Company are
discussed in greater detail in this report and in other filings by the Company
with the Securities and Exchange Commission.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Financial Statements referred to in the
accompanying index setting forth the financial statements of Fotoball USA, Inc.,
together with the report, dated February 9, 2000, of Hollander, Lumer & Co. LLP,
the Company's independent auditor.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth-certain information as of March 15, 2000
concerning the executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Salvatore T. DiMascio 1,2 60 Director
Michael Favish 51 President, Chief Executive Officer and Director
Nicholas A. Giordano(2) 57 Director
Joel K. Rubenstein(1) 63 Director
John J. Shea 62 Director
Clifford A. Lyon 34 Senior Vice President, Finance and Chief Financial Officer
Carl E. Francis 41 Senior Vice President, Sales and Marketing
Karen M. Betro 49 Vice President, Operations
Steven B. Katzke 33 Vice President, Specialty Sales and Marketing
Kathryn McDonald 37 Vice President, Promotions
</TABLE>
- --------
1. Member of compensation committee
2. Member of audit committee
SALVATORE T. DIMASCIO has served as a director of the Company since
August 1997. Since 1986, Mr. DiMascio has been President of DiMascio Venture
Management, Inc., a management and investment firm. Additionally, from 1994 to
1997, Mr. DiMascio was Executive Vice President of Anchor Gaming, Inc., a public
gaming company. From 1978 to 1986, Mr. DiMascio was Senior Vice President and
Chief Financial Officer of Conair Corporation, a public manufacturer of health
and beauty products. Mr. DiMascio's previous business experience includes Audit
Manager with Arthur Young & Co., a national CPA firm, and as Controller of
Revlon Inc. Mr. DiMascio is currently serving on the Board of Directors of
H.E.R.C. Products Inc., a publicly held corporation.
MICHAEL FAVISH has served as President and a director of the Company
since his founding of the Company in December 1988 and as President, Chief
Executive Officer and a director of the Company since March 1994. Mr. Favish has
over 27 years of product design, manufacturing and sourcing experience and has
established a number of strategic international sourcing alliances.
NICHOLAS A. GIORDANO has served as a director of the Company since July
1998. In July 1998, Mr. Giordano was appointed interim President of LaSalle
University for a one-year term. Additionally, from 1971 through August 1997, Mr.
Giordano held various positions at The Philadelphia Stock Exchange, including
from 1981 to 1997 as President and Chief Executive Officer. He also served as
Chairman of the Board of the exchange's two subsidiaries: Stock Clearing
Corporation of Philadelphia and Philadelphia Depository Trust Company. Mr.
Giordano's previous business experience includes serving as Chief Financial
Officer at two brokerage firms (1968-1971) and as a Certified Public Accountant
at Price Waterhouse (1965-1971). Mr. Giordano is currently serving on the Board
of Directors of W.T. Trust, a mutual fund, and Independence Blue Cross of
Philadelphia.
JOEL K. RUBENSTEIN has served as a director of the Company since August
1994. From April 1990 through April 1992 and from March 1994 to present, Mr.
Rubenstein has been a partner of the Contrarian Group, Inc., an operating
management company. In addition, from April 1994 to present, Mr. Rubenstein has
been a principal of Oracle One Partners, Inc., a marketing management company.
17
<PAGE>
From April 1992 through March 1994, Mr. Rubenstein served as the Senior Project
Manager, Business & Economic Development for Rebuild L.A., the recovery
organization created after the Los Angeles riots. Prior to such time, from
January 1985 through April 1990, Mr. Rubenstein served as the Vice President,
Corporate Marketing for Major League Baseball, Office of the Commissioner.
JOHN J. SHEA has served as Director of the Company since August 1999.
Mr. Shea served as President and Chief Executive Officer of Spiegel, Inc. from
1985 through 1997 and Vice Chairman of Spiegel from 1989 to 1997. Before joining
Spiegel, Mr. Shea worked 21 years at the John Wanamaker Company, Philadelphia,
serving ultimately as Senior Vice President and a member of the Executive Board.
Mr. Shea also served as Chairman of the Board of the National Retail Federation,
the world's largest retail trade association. Mr. Shea also serves as the
Chairman of the Board of Trustees of LaSalle University and a member of the
Advisory Board of the Kellogg Graduate School of Management at Northwestern
University. Mr. Shea is currently serving on the Board of Directors of Pulte
Corporation and Home Place of America, both of which are publicly-held
corporations.
CLIFFORD A. LYON has served as Senior Vice President, Finance and Chief
Financial Officer of the Company since July 1999. Prior to joining Fotoball,
from January 1996 through July 1999, Mr. Lyon was the Director of Finance at
Remedy Temp Inc., a $500 million publicly-traded business services provider. Mr.
Lyon previously was employed at The Walt Disney Company and with the CPA firm of
Deloitte & Touche. Mr. Lyon is a certified public accountant and has an MBA in
finance from The Wharton School, University of Pennsylvania.
CARL E. FRANCIS has served as Senior Vice President, Sales and
Marketing since January 1998, as Vice President, Retail Development of the
Company from January 1996 through December 1997 and as Director of Retail
Development from November 1994 through December 1995. Prior to such time, he was
a Customer Service Analyst for Prudential Mutual Funds Services, a mutual funds
service company, and Charmont, a Japanese eyewear company. From June 1987
through December 1990, Mr. Francis was employed as Retail Sales Manager for
Major League Baseball Properties in New York City. Prior to this, from January
1981 through May 1987, Mr. Francis was a retail buyer for J.C. Penney Company
(1982-1987) and Abraham & Straus (1981-1982), of which both are retail
department store chains.
KAREN M. BETRO has served as Vice President, Operations of the Company
since January 1996 and previously served as Controller of the Company from its
organization in December 1988. During this time, Ms. Betro was responsible for
the administration and operation systems of the Company. Ms. Betro has served as
Controller and Administrative Manager of several large corporations, including
Hill & Knowlton.
STEVEN B. KATZKE has served as Vice President, Specialty Sales and
Marketing since January 1998, and as Manager of Retail Sales since January 1993.
From 1989 through 1992, Mr. Katzke was employed as the sales manager of Robert
Katzke and Associates.
KATHRYN MCDONALD has served as Vice President, Promotions of the
Company since September 1999. From October 1996 through March 1999, Ms. McDonald
was Vice President of Sales and Marketing for Lulirama/McMason International, a
premiums and promotions company. From May 1993 through October 1996, Ms.
McDonald was Vice President of Worldwide Premium Sales for Alcone Marketing
Group.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by reference
to the section labeled "Executive Compensation" in the Company's definitive
Proxy Statement in connection with the Company's 2000 Annual Meeting of
Stockholders.
18
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated herein by reference
to the section labeled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement in connection with the
Company's 2000 Annual Meeting of Stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated herein by reference
to the section labeled "Election of Directors" and "Executive Compensation" in
the Company's definitive Proxy Statement in connection with the Company's 2000
Annual Meeting of Stockholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A). Exhibits
EXHIBIT
NUMBER DESCRIPTION
-------------- --------------------
1.1(P) Form of Underwriting Agreement (incorporated by
reference to Exhibit 1.1 of the Registration Statement
on Form SB-2 (File No. 33-80508) (the "Form SB-2")).
3.1(2)(P) Amended and Restated Certificate of Incorporation
of Fotoball USA, Inc., a Delaware corporation
(incorporated herein by reference to Exhibit 3.1(2) of
the Registration Statement on Form SB-2).
3.2(2)(P) Amended and Restated By-laws of Fotoball USA, Inc.,
a Delaware corporation (incorporated herein by
reference to Exhibit 3.2(2) of the Form SB-2).
4.4(P) Specimen Stock Certificate (incorporated herein by
reference to Exhibit 4.4 of the Form SB-2).
4.5(1) Specimen Form of Rights Certificate (incorporated
herein by reference to Exhibit 2.1 of the Registration
Statement on Form 8-A/A No. 1 (File No. 0-21239) (the
"Amended Form 8-A").
4.5(2) Form of Amended and Restated Rights Agreement, dated as
of August 19, 1996, as amended and restated as of May
18, 1999, between Fotoball USA, Inc. and Continental
Stock Transfer & Trust Company (incorporated herein by
reference to Exhibit 2.2 of the Amended Form 8-A).
4.5(3) Form of Certificate of Designation, Preferences and
Rights of Series A Preferred Stock (incorporated herein
by reference to Exhibit 2.3 of the Registration
Statement on Form 8-A (File No. 0-21239).
4.5(4) Summary of Rights Plan (incorporated herein by
reference to Exhibit 2.4 of the Amended Form 8-A).
10.1(1) License Agreement with Major League Baseball
Properties, Inc., dated May 14, 1997 (incorporated
herein by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997).
10.1(2) Amended License Agreement with Major League Baseball
Properties, Inc., dated December 11, 1998 (incorporated
herein by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1998).
10.1(3) License Agreement with Major League Baseball Players
Association dated March 29, 1997 (incorporated herein
by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997).
10.1(4) License Agreement with National Football League
Properties, Inc., dated April
19
<PAGE>
14, 1998 (incorporated herein by reference to the
Company's Annual Report on Form 10-KSB for the year
ended December 31, 1998).
10.3(5)* Stock Option Agreement dated January 30, 1998 with
Salvatore T. DiMascio (incorporated herein by reference
to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997).
10.3(6)* 1998 Stock Option Plan of the Company (incorporated
herein by reference to Exhibit 4.1 of the Form S-8
filed on July 23, 1998).
10.3(7)* Form of Stock Option Agreement (incorporated herein by
reference to Exhibit 4.2 of the Form S-8 filed on July
23, 1998).
10.4(1)* Form of Employment Agreement with Michael Favish dated
August 10, 1999 (incorporated herein by reference to
the Form 10-QSB for the period ended September 30,
1999).
10.5(P) Lease, dated February 4, 1994, by and between the
Company and George and Marcel Jach, with respect to
3738 Ruffin Road, San Diego, California (incorporated
herein by reference to Exhibit 10.5 of the Form SB-2).
10.5(1) Sublease, dated June 19, 1997 by and between the
Company and General Textiles, with respect to 4000
Ruffin Road, San Diego, California (incorporated herein
by reference to Exhibit 10.5(1) of the 1997 Form
10-KSB).
10.5(2) Second and Third Amendment dated June 1, 1998, and
September 29, 1998, respectively, to sublease between
the Company and General Textiles, with respect to 4000
Ruffin Road, San Diego, California (incorporated herein
by reference to Exhibit 10.5(2) of the 1998 Form
10-KSB).
10.6 Lease, dated March 13, 2000, by and between the Company
and LBA VF-II, LLC, with respect to 6740 Cobra Way, San
Diego, California.
10.9(2) Merrill Lynch International Bank Limited irrevocable
stand-by letter of credit dated December 1, 1995
(incorporated herein by reference to Exhibit 10.9(2) of
the Form SB-2).
10.10 Revolving Credit Agreement dated November 13, 1996
between Fotoball USA, Inc., and Scripps Bank
(incorporated herein by reference to Exhibit 10.10(1)
of the Form SB-2).
10.10(1) Amended Revolving Credit Agreement dated February 19,
1998 between Fotoball USA, Inc., and Scripps Bank
(incorporated herein by reference to Exhibit 10.10(1)
of the 1997 Form 10-KSB).
10.10(2) Amended Revolving Credit Agreement dated December 28,
1998 between Fotoball USA, Inc., and Scripps Bank
(incorporated herein by reference to Exhibit 10.10(2)
of the 1998 Form 10-KSB)
11 Statement re: computation of per share earnings.
27 Financial data schedule.
* Indicates exhibits relating to executive compensation.
(P) Indicates that document was originally filed with the Securities
and Exchange Commission in paper form and that there have been no
changes or amendments to the document which would require filing
of the document electronically with this Form 10-KSB.
(B). Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of the year ended December 31, 1999.
20
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Fotoball USA, Inc.
------------------
(Registrant)
Dated: March 29, 2000
By: /s/ Michael Favish
-------------------------------------
Michael Favish
President and Chief Executive 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.
Dated: March 29, 2000 By: /s/ Michael Favish
-------------------------------------
Michael Favish
President and Chief Executive Officer
Dated: March 29, 2000 By: /s/ Clifford A. Lyon
-------------------------------------
Clifford A. Lyon
Senior Vice President - Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
Dated: March 29, 2000 By: /s/ Salvatore T. DiMascio
-------------------------------------
Salvatore T. DiMascio
Director
Dated: March 29, 2000 By: /s/ Nicholas A. Giordano
-------------------------------------
Nicholas A. Giordano
Director
Dated: March 29, 2000 By: /s/ Joel K. Rubenstein
-------------------------------------
Joel K. Rubenstein
Director
Dated: March 29, 2000 By: /s/ John J. Shea
-------------------------------------
John J. Shea
Director
21
<PAGE>
FOTOBALL USA, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
10.6 Lease, dated March 13, 2000, by and between the Company and
LBA VF-II, LLC with respect to 6740 Cobra Way, San Diego,
California.
11 Statement re: computation of per share earnings.
27 Financial Data Schedule.
22
<PAGE>
FOTOBALL USA, INC.
INDEX TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors F-1
Balance Sheets at December 31, 1998 and 1999 F-2
Statements of Operations for the years ended December 31, 1998 and 1999 F-3
Statement of Stockholders' Equity for the years ended December 31, 1998 and 1999 F-4
Statements of Cash Flows for the years ended December 31, 1998 and 1999 F-5
Notes to Financial Statements F-6 to F-15
</TABLE>
23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
FOTOBALL USA, INC.
We have audited the accompanying balance sheets of FOTOBALL USA, INC. as of
December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FOTOBALL USA, INC. as of
December 31, 1998 and 1999, and the results of operations, stockholders' equity
and cash flows for the years then ended in conformity with generally accepted
accounting principles.
HOLLANDER, LUMER & CO. LLP
Los Angeles, California
February 9, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
FOTOBALL USA, INC.
1998 1999
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 8,498 $ 3,797,918
Accounts receivable less allowances of $146,812 in 1998 and $250,000 in
in 1999 3,041,633 3,713,015
Inventories 3,438,552 4,105,675
Prepaid expenses and other 157,608 253,659
Deferred income taxes 90,000 661,000
------ -------
TOTAL CURRENT ASSETS 6,736,291 12,531,267
--------- ----------
PROPERTY AND EQUIPMENT, net 1,126,551 1,263,626
--------- ---------
OTHER ASSETS
Deposits and other 31,767 29,985
------ ------
TOTAL OTHER ASSETS 31,767 29,985
------ ------
$ 7,894,609 $ 13,824,878
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank $ 400,000 $ --
Current portion of capital leases 95,970 135,197
Accounts payable and accrued expenses 1,315,831 1,671,035
Income taxes payable 39,800 158,185
------ -------
TOTAL CURRENT LIABILITIES 1,851,601 1,964,417
LONG TERM LIABILITIES
Capital leases, net of current portion 154,503 271,740
------- -------
TOTAL LIABILITIES 2,006,104 2,236,157
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
Authorized - 1,000,000 shares; issued and outstanding-none
Common stock, $.01 par value; authorized - 15,000,000 shares;
Issued and outstanding - 2,699,242 shares in 1998 and
3,566,536 shares in 1999 26,992 35,665
Additional paid-in capital 8,590,994 11,636,471
Accumulated deficit (2,729,481) (83,415)
---------- -------
TOTAL STOCKHOLDERS' EQUITY 5,888,505 11,588,721
--------- ----------
$ 7,894,609 $ 13,824,878
============ ============
</TABLE>
F-2
The accompanying notes are an integral part of these statements.
<PAGE>
FOTOBALL USA, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1999
1998 1999
---- ----
SALES $ 19,147,728 $ 28,690,211
COST OF SALES 11,590,631 16,922,249
---------- ----------
GROSS PROFIT 7,557,097 11,767,962
--------- ----------
OPERATING EXPENSES
Royalties 1,568,909 1,993,212
Marketing 2,259,680 2,932,889
General and administrative 2,300,536 3,610,320
Depreciation and amortization 319,043 403,237
------- -------
TOTAL OPERATING EXPENSES 6,448,168 8,939,658
--------- ---------
INCOME FROM OPERATIONS 1,108,929 2,828,304
--------- ---------
OTHER INCOME (EXPENSE)
Interest expense (88,183) (120,711)
Interest income 10,128 51,473
------ ------
TOTAL OTHER (EXPENSE) (78,055) (69,238)
------- -------
INCOME BEFORE INCOME TAX 1,030,874 2,759,066
INCOME TAX EXPENSE 433,000 113,000
------------ ------------
NET INCOME $ 597,874 $ 2,646,066
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
BASIC 2,694,242 3,011,044
========= =========
DILUTED 2,774,170 3,201,494
========= =========
NET INCOME PER COMMON SHARE:
BASIC $ .22 $ .88
============ ============
DILUTED $ .22 $ .83
============ ============
F-3
The accompanying notes are an integral part of these statements.
<PAGE>
FOTOBALL USA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 2,676,742 $ 26,767 $ 8,568,494 $ (3,327,355) $ 5,267,906
Stock-based compensation expense 9,900 9,900
Exercise of stock options 22,500 225 12,600 12,825
Net income 597,874 597,874
--------- ----------- ------------ ------------ ------------
BALANCE, December 31, 1998 2,699,242 26,992 8,590,994 (2,729,481) 5,888,505
Stock-based compensation expense 36,613 36,613
Exercise of stock options 159,127 1,591 369,731 371,322
Common stock issued to underwriter 22,000 220 (220) --
Exercise of warrants 686,167 6,862 2,639,353 2,646,215
Net income 2,646,066 2,646,066
--------- ----------- ------------ ------------ ------------
BALANCE, December 31, 1999 3,566,536 $ 35,665 $ 11,636,471 $ (83,415) $ 11,588,721
========= ============ ============ ============ ============
</TABLE>
F-4
The accompanying notes are an integral part of these statements.
<PAGE>
FOTOBALL USA, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 597,874 $ 2,646,066
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment 335,381 427,907
Amortization of stock compensation expense 9,900 36,613
Changes in operating assets and liabilities:
Accounts receivable (1,639,026) (671,382)
Inventories (961,737) (667,123)
Prepaid expenses and other (8,753) (96,051)
Deferred income taxes 361,000 (571,000)
Accounts payable and accrued expenses 526,443 355,204
Income taxes payable 39,800 118,385
Settlement liability (200,000) --
-------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (939,118) 1,578,619
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (215,888) (564,982)
Decrease in long-term deposits 83,615 1,782
------ -----
NET CASH USED IN INVESTING ACTIVITIES (132,273) (563,200)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (net of repayments) from capitalized leases (97,791) 156,464
Net additions (reductions) of short term credit facilities 400,000 (400,000)
Proceeds from exercise of warrants -- 2,646,215
Proceeds from exercise of stock options 12,825 371,322
------ -------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 315,034 2,774,001
------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (756,357) 3,789,420
CASH AND EQUIVALENTS, Beginning of period 764,855 8,498
------- -----
CASH AND EQUIVALENTS, End of period $ 8,498 $ 3,797,918
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 83,149 $ 120,711
Income taxes paid $ -- $ 532,800
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITES:
Equipment acquired under capital leases $ 28,152 $ 292,207
</TABLE>
F-5
The accompanying notes are an integral part of these statements.
<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS - The Company designs,
develops, manufactures and markets high quality custom sports and non-sports
related products. These products are sold in the licensed product retail
market through a nationwide network of over 3,000 retail stores including
Target, Sears, Wal-Mart, Toys R Us and J.C. Penney. Additionally, the
Company provides custom sports and non-sports related products for corporate
promotions and non-licensed specialty sports products to corporations for
resale, including sales to amusement parks and entertainment-related
companies. The Company currently holds licenses with Major League Baseball
Properties and Major League Baseball Players Association, NHL Enterprises
and National Hockey League Players Association, National Football League
Properties and NFL Players Inc., over 300 National Collegiate Athletic
Association colleges and universities, and certain entertainment properties
including Warner Bros. Looney Tunes(R), Nickelodeon's "Rugrats" and "Blues
Clues" characters, United Media's "Peanuts", The Coca-Cola Company and
Disney's ESPN(R).
CASH AND EQUIVALENTS - Cash and equivalents include money market funds and
marketable securities that are highly liquid and have original maturities of
three months or less at the date of purchase. Such cash equivalents are
carried at cost, which approximates fair value.
CONCENTRATION OF CREDIT RISK - The Company invests its excess cash in
various investment grade instruments such as treasury bills, certificates of
deposit, commercial paper, and money market funds. The Company invests its
cash in what it believes to be credit-worthy financial institutions and has
established guidelines relative to diversification and maturities with the
objectives of maintaining safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends and interest
rates. The Company has not experienced any losses on its cash equivalents or
short-term investments.
Concentrations of credit risk with respect to accounts receivable are
mitigated in part due to the large number of customers to which the
Company's retail products are sold, including over 3,000 retail stores.
Additionally, a significant percentage of the Company's retail and promotion
sales are sold to Fortune 500 companies. One large customer accounted for
approximately 25% of total sales in 1999, while no customer accounted for
more than 10% of total sales in 1998. The accounts receivable related to the
large customer was collected subsequent to December 31, 1999. Any increase
to the allowance for doubtful accounts, which offsets accounts receivable,
is charged to the statement of operations, net of actual accounts receivable
write-offs.
INVENTORIES - Inventories have been valued at the lower of cost (first-in,
first-out) or market.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost, and is
depreciated on the straight-line method over their estimated useful lives as
follows:
Office equipment and furniture 5 to 7 years
Show exhibit 7 years
Machinery and equipment 7 years
Molds 5 years
Leasehold improvements 7 years
The Company reviews for impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
F-6
<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATMENTS (CONTINUED)
STOCK-BASED COMPENSATION - The Company adopted only the disclosure
requirements of SFAS No. 123 and continues to recognize the intrinsic
value-based method, providing pro forma footnote disclosures of net income
and earnings per share as if the fair value accounting provisions of this
statement had been adopted.
ROYALTIES AND LICENSING ARRANGEMENTS - Royalties due to licensors are
generally provided for based upon a negotiated percentage of related net
sales, as defined contractually, frequently subject to a minimum guaranteed
royalty over the term of the contract. Prepaid license costs are charged to
operations over the term of the contractual agreement, also based upon a
percentage of related net sales.
REVENUE RECOGNITION - Sales of goods domestically are recognized when such
goods are shipped from the Company's facility. Sales of imported goods,
which are drop shipped directly to the customer, are recognized at the time
shipments are received at the customer's designated location. Consignment
sales, which are generally not significant, are recorded net of an estimated
allowance for returns against sales, which are periodically reviewed and
adjusted as necessary.
NET INCOME PER COMMON SHARE - The FASB issued statement No. 128, "Earning
per Share", requiring its adoption effective for the Company's fiscal year
ended December 31, 1997. FAS No. 128 simplifies the computation of EPS by
requiring companies with complex capital structures to report basic EPS
instead of primary EPS, and replaces fully diluted EPS with diluted EPS.
Basic EPS is calculated by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted EPS is
calculated by dividing net income by the number of common shares outstanding
increased by exercisable or convertible securities. The dilutive effect of
rights to purchase preferred or common shares under the Company's
Stockholder Rights Plan (Note 8) have not been included in the weighted
average share amounts as the conditions necessary to cause these rights to
be exercised were not met. However, all warrants exercised during the
Company's recall period in 1999 are included in the diluted share
calculation. Any unexercised warrants expired in accordance with their
terms, thereby not having a dilutive effect.
RECLASSIFICATION - Certain 1998 balances have been reclassified to conform
to the current year's presentation.
SEGMENT INFORMATION - As of January 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", (SFAS No. 131) issued by the FASB. SFAS
No. 131 requires that public companies report certain information about
operating segments, products, services and geographical areas of which they
operate and their major customers. The Company has one operating segment,
the sale of custom sports products to two economically similar customer
bases - retail and promotion customers. These customers have similar
characteristics in the nature of products sold, production processes and
methods of distribution. As such, the Company's financial statements reflect
this one operating segment and no additional segment information has been
provided.
2. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
SIGNIFICANT 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 the disclosure of contingent assets and liabilities as
of the date of the financial statements, as well as the reported amounts of
revenue and expenses during the period. Significant estimates have been made
by management with respect to the realizability of the Company's deferred
tax assets, allowance for doubtful accounts and the provision for
discontinued inventories. Actual results could differ from these estimates
making it reasonably possible that a change in these estimates could occur
in the near term.
F-7
<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATMENTS (CONTINUED)
DEPENDENCE UPON LICENSING ARRANGEMENTS - The Company's business is based
primarily upon its use of the insignia, logos, names, colors, likeness and
other identifying marks and images borne by many of its products pursuant to
license arrangements with numerous licensors. The Company's licensing
arrangements expire at various times in the future. The following table
summarizes the Company's significant license agreements expiring before June
30, 2000 and their renewal periods, in expiration date order:
<TABLE>
<CAPTION>
Licensor Product Expiration Date Renewal Period
-------- ------- --------------- --------------
<S> <C> <C> <C>
MLBP Baseball December 31, 1999 In process
Nickelodeon Rugrats (USA) December 31, 1999 In process
NFL Team Logo Football March 31, 2000 In process
</TABLE>
The Company is currently finalizing the above agreements with each licensor.
The Company believes that its relationships with these licensors are
satisfactory and anticipates that each of the expiring license agreements
will be renewed on acceptable terms and conditions. The Company has received
signed letters of interest from MLBP and NFL, and is currently awaiting
renewal license agreements from each. The non-renewal or termination of one
or more of the Company's current material licenses could have a material
adverse effect on the Company's business.
VARIABILITY OF GROSS MARGINS - Historically, the Company has realized higher
gross margins on its retail sales as compared to promotional sales. The
Company realized gross margins of 39% during 1998 and gross margins have
increased to 41% as of December 31, 1999. The Company's gross margins may
fluctuate, particularly between quarters, based in part on the concentration
of promotions, retail sales and product mix during the reporting period. The
types of products sold, the size of the promotion and the extent of
competition also may create variability in realized gross margins.
VARIABILITY OF OPERATING RESULTS; SEASONALITY - The Company has historically
experienced significant quarter-to-quarter variability in its sales and net
income resulting primarily from two factors. The first factor is the
seasonality of the sporting industry and the effect this has on the
Company's licensed sports product business. The continued introduction of
quality product lines involving a diverse group of sports and
entertainment-related products helps mitigate this seasonality. The second
factor, which significantly contributed to prior years' variability of the
Company's operations, was its dependence on the promotions business.
However, the Company has successfully grown the retail distribution channel
of the business to help mitigate this variability. The Company's retail
business during 1999 accounted for approximately 87% of total sales.
CONCENTRATION ON RETAIL SALES - Retail sales were 87% of total sales for the
year ended December 31, 1999, as compared to 75% of total sales for the year
ended December 31, 1998. One large customer accounted for approximately 25%
of total sales for the year ended December 31, 1999; no other customer
accounted for 10% or more of total sales in 1999 or 1998.
DEPENDENCE UPON KEY PERSONNEL - The success of the Company is largely
dependent on the personal efforts of Michael Favish, its President and Chief
Executive Officer. Mr. Favish has entered into a three-year employment
agreement with the Company, commencing on August 10, 1999, which, among
other things, precludes Mr. Favish from competing with the Company for a
period of two years following termination of his employment with the
Company. The loss of the services of Mr. Favish could have a material
adverse effect on the Company's business and prospects. The Company
maintains "key man" life insurance on the life of Michael Favish.
F-8
<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATMENTS (CONTINUED)
DEPENDENCE ON SUPPLIERS - In 1999, the Company purchased approximately 88%
of its raw material and finished goods, consisting primarily of synthetic
baseballs, footballs, basketballs, hockey pucks and playground balls, from
six companies located in China, with two manufacturers accounting for 78% of
total raw materials and finished goods purchased. China currently holds most
favored nation ("MFN") trading status with the United States. Any conditions
imposed by the President of the United States and any legislation in the
United States revoking or placing further conditions on China's MFN trading
status could have a material adverse effect on the cost of the Company's
products primarily because products originating from China could be
subjected to substantially higher rates of duty.
3. INVENTORIES
Inventories consisted of the following at December 31, 1998 and 1999:
1998 1999
---- ----
Finished goods $ 1,700,148 $ 2,382,025
Raw material 1,738,404 1,723,650
--------- ---------
$ 3,438,552 $ 4,105,675
=========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment, inclusive of machinery and equipment under capital
leases (see Note 7), less accumulated depreciation consisted of the
following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Office equipment $ 289,873 $322,678
Computer equipment & software 657,366 891,079
Show exhibits 195,543 254,669
Molds 214,185 223,120
Machinery and equipment 797,315 991,519
Leasehold improvements 379,154 406,373
------- -------
2,533,436 3,089,438
Less: accumulated depreciation and
amortization (1,406,885) (1,825,812)
---------- ----------
$ 1,126,551 $1,263,626
=========== ==========
</TABLE>
5. LINES OF CREDIT
The Company currently has a one-year credit agreement with Scripps Bank
including a credit line of $3,500,000, which expires April 15, 2000. This
credit line is collateralized by the assets of the Company and actual
borrowings are limited to available collateral, as defined in the agreement.
Borrowings under the credit line bear interest at the bank's prime rate plus
.75%. The credit line contains financial covenants requiring the Company to
maintain minimum net worth levels, minimum working capital and debt to
equity ratios. The Company is in compliance with the covenants through
December 31, 1999. There were no outstanding borrowings under the credit
line as of December 31, 1999 as compared to $400,000 at December 31, 1998.
The Company is presently reviewing its options, including an extension and
other alternatives, relating to its line of credit arrangement for the
period after April 15, 2000.
F-9
<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATMENTS (CONTINUED)
The Company has a $3,000,000 line of credit facility (the "facility") with
Merrill Lynch International Bank Limited at an interest rate of 1.75% above
the London Interbank Offering Rate term that the Company chooses to select.
Any borrowing under the line of credit, which is used solely to
collateralize the issuance of stand-by letters of credit to manufacturers,
are required to be secured by cash collateral deposited with Merrill Lynch
equal to the credit outstanding. The line of credit extends until December
10, 2001. There was no borrowing under the line of credit as of December 31,
1998 and 1999.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at December
31, 1998 and 1999:
1998 1999
---- ----
Accounts payable $ 859,895 $ 893,646
Accrued payroll and related 93,750 116,680
Accrued commissions and bonuses 124,700 275,500
Royalties payable 35,795 103,424
Customer deposits 72,972 138,253
Other 128,719 143,532
------- -------
$ 1,315,831 $ 1,671,035
=========== ===========
7. COMMITMENTS AND CONTINGENCIES
ROYALTIES - At December 31, 1999, the Company has commitments for minimum
guaranteed royalties under licensing agreements through 2002 as follows:
YEARS ENDING DECEMBER 31,
-------------------------
2000 $ 400,282
2001 231,500
2002 56,000
------
$ 687,782
=========
CAPITAL LEASES - The Company is obligated under various capital leases that
expire at various dates through February 2004. Minimum annual payments
including imputed interest under capital lease agreements are as follows at
December 31, 1999:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
<S> <C>
2000 $168,237
2001 132,724
2002 90,995
2003 57,038
2004 27,514
------
Total minimum lease payments 476,508
Less interest component (69,571)
-------
Present value of net minimum lease payments 406,937
Less current portion of capital leases (135,197)
--------
Capital leases, net of current portion $ 271,740
=========
</TABLE>
F-10
<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATMENTS (CONTINUED)
The following property and equipment acquired under capital leases
categorized below is included in the property and equipment listed above at
December 31, 1998 and 1999 (see Note 4):
1998 1999
--------- ---------
Office equipment $ 84,801 $ 28,567
Computer equipment & software 45,627 153,467
Machinery and equipment 314,775 482,473
Less accumulated amortization (159,891) (220,085)
-------- --------
$ 285,312 $ 444,422
========= =========
Amortization of capitalized leases is included in depreciation and
amortization expense.
The Company leases certain machinery, equipment and office and warehouse
facilities under operating leases, of which one of the facility leases'
includes a cost escalation clause, and all expire on various dates through
2001. Total rental expense charged to operations was $480,300 in 1998 and
$628,369 in 1999. At December 31, 1999, the minimum future rental
commitments under noncancellable leases payable over the remaining lives of
the leases are:
YEARS ENDING DECEMBER 31, MINIMUM FUTURE
------------------------- --------------
2000 394,503
2001 75,040
------
$ 469,543
=========
8. STOCKHOLDERS' EQUITY
WARRANT CONVERSION - In connection with the Company's initial public
offering in 1994, the Company issued to public investors and the underwriter
1,411,673 warrants which entitled the holder to purchase one share of the
Company's common stock for $6.50. On June 24, 1999, the Company announced
that it reduced the exercise price of its publicly traded redeemable common
stock purchase warrants from $6.50 to $4.00 and extended the term of the
warrants to August 27, 1999. During the special exercise price period of
June 24, 1999 through August 27, 1999, warrant holders who exercised each
warrant for $4.00 received one share of Fotoball common stock. When the
special exercise period expired at the close of business on August 27, 1999,
the unexercised warrants expired in accordance with their terms.
A total of 686,167 warrants, or 49% of the total warrants originally issued
and outstanding, were exercised on or before August 27, 1999. Gross proceeds
received by the Company in the offering were $2,744,668 (solicitation fees
and other costs associated with the offering were $98,453 as of December 31,
1999). Net proceeds received by the Company will be retained for working
capital purposes to finance the Company's continued rapid growth in all
areas and possible acquisitions. Separately, 22,000 shares of common stock
were issued to the underwriter in a cash-free, negotiated transaction.
EMPLOYEE STOCK OPTION PLAN - In 1998, the Board of Directors of the Company
adopted and the Company's stockholders subsequently approved the 1998 Stock
Option Plan (the "1998 Plan"). The 1998 Plan in effect provides for awards
of common stock to employees and non-employee directors of the Company up to
an aggregate of 700,000 shares of common stock.
The 1998 Plan authorizes the issuance of incentive stock options ("ISOs"),
and non-qualified stock options ("NQSOs"). Under the 1998 Plan, officers,
directors and key employees may be granted options to purchase the Company's
common stock at no less than 100% of the market price on the date the option
is granted. Options become 100% vested during a three-year period and
options are
F-11
<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATMENTS (CONTINUED)
exercisable in installments of 33% per year on each of the first through the
third anniversaries of the grant date and have a maximum term of ten years.
The 1998 Plan also provided for the termination of the Company's 1994 Plan
and the re-issuance of an identical number of options under the 1998 Plan,
at the then current market price, to the holders of options under the 1994
Plan.
A total of 225,050 and 145,000 options were granted in 1998 and 1999,
respectively, under the 1998 Plan, excluding the cancellation and
re-issuance of 242,500 options from the 1994 Plan occurring in 1998.
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees and related interpretations in accounting for
its stock options. Accordingly, no compensation expense has been recognized
for the options granted under the 1998 Plan. Compensation cost is based upon
the fair value at the grant date consistent with the methodology prescribed
under SFAS No. 123, "Accounting for Stock-Based Compensation". The Company's
net income and earnings per share would have been reduced by approximately
$41,000 and $161,000, or $.01 per share and $.06 per share, for 1999 and
1998, respectively, had compensation expense been recognized. The fair value
of the options granted during 1999 is estimated to range from $1.87 to $3.67
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions: dividend yield 0%, volatility of 81%, risk-free
interest rate of 5.25%, assumed forfeiture rate of 4%, and an expected life
of 3 years.
The following table summarizes information concerning all currently
outstanding and exercisable options as of December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE REMAINING AVERAGE AVERAGE
OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
----------- ----------- ------------ -------- ----------- ---------
$1-$2 246,222 6.27 $ 1.69 174,855 $ 1.67
$2-$3 43,167 8.66 $ 2.58 20,833 $ 2.52
$3-$5 131,000 9.47 $ 4.54 39,376 $ 4.44
$5-$7 100,200 9.85 $ 5.92 51,200 $ 5.25
------- -------
520,589 286,264
======= =======
The following table summarizes the Company's Employee Stock Option Plan
activity for the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
NUMBER PRICE WEIGHTED AVERAGE
OF PER PRICE
SHARES SHARE PER SHARE
------ ----- ----------------
<S> <C> <C> <C>
January 1, 1998 267,000 $5.25 to $8.00 $6.23
Canceled 1994 Plan (242,500) $5.25 to $8.00 $6.23
Reissued 1998 Plan 242,500 $1.69 $1.69
Granted 225,050 $1.69 to $2.69 $1.89
Exercised (7,500) $1.69 $1.69
Canceled (25,000) $1.69 to $8.00 $5.97
-------
December 31, 1998 459,550 $1.69 to $2.69 $1.81
-------
Granted 145,000 $3.38 to $6.63 $5.34
Exercised (117,827) $1.69 to $2.50 $1.72
Canceled (52,334) $1.69 to $2.69 $1.96
-------
December 31, 1999 434,389
=======
</TABLE>
F-12
<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATMENTS (CONTINUED)
OTHER STOCK OPTIONS - On August 1, 1995, the Company entered into an
agreement with ADR Management Group Ltd. ("ADR" and "ADR Agreement") for the
purpose of providing the Company independent financial relations management
services. Pursuant to the ADR Agreement, the Company agreed to pay ADR over
the term of the agreement a monthly fee plus reasonable out-of-pocket
expenses through July 1997. As further compensation, the Company granted to
ADR options to purchase an aggregate of 75,000 shares of common stock of the
Company at $5.25 per share. The options vested in amounts of 9,375 at the
end of each three-month period following August 1, 1995. As of December 31,
1997, 75,000 options issued under the stock option agreement were vested. In
August 1997, the Company entered into a new agreement with ADR whereby ADR
agreed to provide independent financial relations management services to the
Company through July 31, 1998. In consideration of the services rendered by
ADR, the Company granted ADR options to purchase an aggregate of 15,000
shares of common stock of the Company at $2.6875 per share. The options
vested in amounts of 1,250 each month commencing September 1997 until and
including August 1998, all of which are exercisable from the date of their
vesting until August 2000. The Company terminated the ADR Agreement in 1999.
In accordance with FAS 123, the Company valued the options at $16,200 using
the Black-Scholes option-pricing model, of which $9,900 and $0 was
recognized as compensation expense during 1998 and 1999. During 1999, ADR
exercised 38,800 shares and, as of December 31, 1999, 51,200 ADR stock
options remained unexercised.
On April 1, 1999, the Company entered into an agreement with Integrated
Corporate Relations, Inc., ("ICR" and "ICR Agreement") for the purpose of
providing the Company independent financial relations management services.
Pursuant to the ICR Agreement, the Company agreed to pay ICR over the term
of the agreement a monthly fee plus reasonable out-of-pocket expenses
through March 31, 2001. As further compensation, the Company granted to ICR
options to purchase an aggregate of 25,000 shares of common stock of the
Company at $4.20 per share, 120% above of the market closing price of the
Company's common stock on March 31, 1999. The options vest in amounts of
3,125 at the end of each three-month period commencing June 30, 1999 until
and including March 31, 2001 and may be exercised until March 31, 2004. The
ICR Agreement may be terminated by either party at any time and for any
reason by delivering to the other party written notice of its desire to
terminate the Agreement sixty (60) days prior to such termination. Any stock
options granted under this Agreement shall cease to be exercisable thirty
(30) days after the date of termination of the Agreement and any unvested
stock options may not be exercised. As of December 31, 1999, 9,375 options
issued under the ICR Agreement were vested, of which no options had been
exercised. In accordance with FAS 123, the Company valued the options at
$30,250 using the Black-Scholes option-pricing model, of which $11,340 was
recognized as compensation expense during 1999.
On April 16, 1999, the Company entered into an agreement with W.A.B. Growth
Equity Research, ("WAB" and "WAB Agreement") for the purpose of providing
the Company independent financial relations management services. Pursuant to
the WAB Agreement, the Company granted to WAB options to purchase an
aggregate of 10,000 shares of common stock of the Company at $4.00 per
share, 15% above of the market closing price of the Company's common stock
on April 16, 1999. The options vest in amounts of 2,500 on the 16th of each
three-month period commencing April 16, 1999 until and including January 16,
2000 and may be exercised until April 16, 2004. As of December 31, 1999,
7,500 shares issued under the WAB Agreement were vested, of which no options
had been exercised. In accordance with FAS 123, the Company valued the
options at $9,800 using the Black-Scholes option-pricing model, of which
$9,148 was recognized as compensation expense during 1999.
F-13
<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATMENTS (CONTINUED)
STOCKHOLDER RIGHTS PLAN - In August 1996, the Company implemented a
stockholder rights plan to protect stockholders' rights in the event of a
proposed takeover of the Company. Under the stockholder rights plan, each
share of the Company's outstanding Common Stock carries one right to
purchase one one-thousandth (1/1000) of Series A preferred stock (a "Right")
at an exercise price of $30, subject to certain anti-dilution adjustments.
Each Right entitles the holder, under certain circumstances, to purchase
Common Stock of the Company or the acquiring company at a substantially
discounted price ten days after a person or group publicly announces it has
acquired or has tendered an offer for 15% or more of the Company's
outstanding Common Stock. The Rights are redeemable by the Company at $.01
per Right and expire in 2006. The Company has 1,000,000 shares of preferred
stock authorized, of which 75,000 shares of Series A preferred stock have
been reserved for issuance upon exercise of the Rights.
9. TRANSACTIONS WITH RELATED PARTIES
EMPLOYMENT AGREEMENTS - The Company is party to an employment agreement with
Michael Favish, which provides that Mr. Favish will serve as President and
Chief Executive Officer for a renewal term of three years beginning August
10, 1999. His base salary during 1998 was $165,000 and it was increased to
$190,000 in 1999. In 1998, in conjunction with the adoption of the 1998
Stock Option Plan, Mr. Favish received 110,000 options with an exercise
price of $1.69 per share. Mr. Favish was also granted 10,000 stock options
in December 1998, vesting over a three-year period, at an exercise price of
$2.39 per share. In December 1999, Mr. Favish was granted 7,000 stock
options, vesting over a three-year period, with an exercise price of $6.63
per share. All options have a ten-year life from the date of grant.
10. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan pursuant to Section 401(k) of
the Internal Revenue Code that is available to substantially all employees.
In 1998 and 1999, the Company matched $.50 of each $1.00 of employee
contributions up to two and three percent, respectively, of covered payroll.
Employees are automatically fully vested in their personal contribution
amounts and vest in the Company's contribution ratably over a five-year
period. The Company's contribution expense for the year ended December 31,
1998 and December 31, 1999 was $32,345 and $39,476, respectively.
11. INCOME TAXES
The components of income tax expense (benefit) were as follows for the year
ended December 31, 1998 and 1999:
1998: FEDERAL STATE TOTAL
----- ------- ----- -----
Current $ 49,000 $ 23,000 $ 72,000
Deferred 350,000 11,000 361,000
------- ------ -------
$ 399,000 $ 34,000 $ 433,000
========= ======== =========
1999:
-----
Current $439,000 $245,000 $684,000
Deferred (445,000) (126,000) (571,000)
-------- -------- --------
$ (6,000) $ 119,000 $ 113,000
======== ========= =========
F-14
<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATMENTS (CONTINUED)
Income tax benefits recognized during 1999 relate primarily to the
elimination of the deferred tax valuation allowances established in prior
years for uncertainty relating to the utilization of its net operating loss
carryforwards. As of December 31, 1999, the Company utilized all of its
available net operating loss carryforwards.
The components of net deferred tax assets were as follows at December 31,
1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 498,000 $ ---
Employee benefit plans 18,000 31,000
Uniform capitalization of inventory cost 84,000 126,000
Bad debt reserves 63,000 278,000
Inventory reserves 435,000 119,000
Impairment loss 46,000 46,000
State income taxes 15,000 47,000
Other 22,000 30,000
------ ------
Total gross deferred tax assets 1,181,000 677,000
Valuation allowance (1,045,000) ---
---------- -------
Net deferred tax assets 136,000 677,000
------- -------
Deferred tax liabilities:
Depreciation 46,000 16,000
------ ------
Total deferred tax liability 46,000 16,000
------ ------
Net deferred tax asset $ 90,000 $ 661,000
======== =========
</TABLE>
The valuation allowance at December 31, 1998 is primarily attributable to
the net operating loss and deferred expenses created in prior years. The
Company evaluates a variety of factors determining the amount of the
deferred income tax assets to be recognized including the Company's earnings
history and its near-term earnings expectations. Based upon the net income
realized in 1998 and 1999, and the expectation of continuing increases in
its retail business, it is probable that future taxable income will be
sufficient to realize all of the Company's existing deferred tax assets on
future tax returns.
The actual tax expense differs from the expected tax expense, computed by
applying the Federal corporate tax rate of 34% to income before income
taxes, as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Expected statutory tax expense (benefit) $ 350,000 $ 938,000
Net tax effect of permanent differences 8,000 12,000
State income taxes, net of Federal tax effect 22,000 79,000
Adjustment to deferred tax asset (33,000) ---
Valuation allowance 37,000 (916,000)
Alternative minimum tax 49,000 ---
--------- ---------
Actual tax expense $ 433,000 $ 113,000
========= =========
</TABLE>
F-15
<PAGE>
SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS
This SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS ("SUMMARY") is hereby
incorporated into and made a part of the attached Single-Tenant Lease which
pertains to the Premises described in Section 1.3 below. All references in the
Lease to the "LEASE" shall include this Summary. All references in the Lease to
any term defined in this Summary shall have the meaning set forth in this
Summary for such term. Any initially capitalized terms used in this Summary and
any initially capitalized terms in the Lease which are not otherwise defined in
this Summary shall have the meaning given to such terms in the Lease.
1.1 LANDLORD'S ADDRESS:
LBA VF-II, LLC
c/o Layton Belling & Associates
4440 Von Karman Avenue, Suite 150
Newport Beach, California 92660
Attn: Mr. Steven R. Layton
Telephone: (949) 833-0400
Facsimile: (949) 553-1211
1.2 TENANT'S ADDRESS: Prior to Commencement Date:
FOTOBALL USA, Inc.,
a Delaware corporation
3738 Ruffin Road
San Diego, California 92123
Attn: Michael Favish
Telephone: (858) 467-9900
Facsimile: (858) 467-9947
After Commencement Date:
FOTOBALL USA, Inc.,
a Delaware corporation
6740 Cobra Way
San Diego, California 92121
1.3 PREMISES: The real property located at 6740 Cobra Way, in the City of
San Diego, County of San Diego, State of California, as shown on the
site plan attached hereto as Exhibit "A" and more particularly
described in Exhibit "B" attached hereto (the "PROPERTY"), together
with (i) all buildings, improvements and facilities, now or
subsequently located on the Property from time to time, including,
without limitation, the building containing 100,630 rentable square
feet (the "BUILDING") and (ii) all rights, easements, appurtenances,
rights-of-way, parking and common areas belonging or appertaining to
the Property, including, without limitation, the exclusive use of all
parking spaces from time-to-time located upon the Property.
1.4 COMMENCEMENT DATE: The date that is the earlier to occur of (i) the
date Tenant commences business operations from the Premises or (ii)
August 1, 2000.
1.5 LEASE EXPIRATION DATE: One Hundred Twenty-Three (123) months following
the Commencement Date, subject to two (2) extension options of five (5)
years each pursuant to Section 2.4 below. If the Commencement Date
occurs on a day other than the first day of a month, then for purposes
of determining the Lease Expiration Date, the One Hundred Twenty-Three
(123) month period shall be measured from the first day of the month
following the month in which the Commencement Date occurs.
1.6 RENT
PERIOD MONTHLY RENT
------ ------------
1-24* $79,497.70
25-48 $83,472.59
49-72 $87,646.22
73-96 $92,028.53
97-120 $96,629.96
121-123 $101,461,46
*Including any partial month at the beginning of the Term.
<PAGE>
1.7 SECURITY DEPOSIT: $238,493.10 subject to the terms of Section 5 below.
1.8 PERMITTED USE: Subject to Section 6.1 below, the Premises may be used
only for general office, warehouse, light manufacturing and
distribution of lifestyle/souvenir consumer products.
1.9 BROKERS: Burnham Real Estate Services, Inc. representing Landlord and
Tenant.
1.10 INTEREST RATE: The lesser of: (a) the prime rate announced from time to
time by Wells Fargo Bank or, if Wells Fargo Bank ceases to exist or
ceases to publish such rate, then the rate announced from time to time
by the largest (as measured by deposits) chartered operating bank
operating in California, plus five percent (5%) per annum; or (b) the
maximum rate permitted by law.
-2-
<PAGE>
SINGLE-TENANT LEASE
This LEASE ("LEASE"), which includes the preceding Summary of Basic Lease
Information and Definitions ("SUMMARY") attached hereto and incorporated herein
by this reference, is made as of the _____ day of March, 2000, by and between
LBA VF-II, LLC, a California limited liability company ("LANDLORD"), and
FOTOBALL USA, Inc., a Delaware corporation ("TENANT").
1. LEASE OF PREMISES. Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord the Premises upon and subject to the terms, covenants and
conditions contained in this Lease to be performed by each party.
2. TERM.
2.1 TERM; NOTICE OF LEASE DATES. This Lease shall be effective upon the
date first above written (the "EFFECTIVE DATE"). Subject to Section 2.4(a)
below, the term of this Lease (the "TERM") shall commence upon the Commencement
Date and shall expire on the Lease Expiration Date, unless sooner terminated or
extended as permitted herein, and if extended, the "Term" will include the
Option Period. Within ten (10) days after determination of the Commencement
Date, Landlord and Tenant shall execute a written confirmation of the
Commencement Date as set forth in the Notice of Lease Term Dates attached hereto
as Exhibit "D". The Notice of Lease Term Dates shall be binding upon Landlord
and Tenant unless one of the parties objects thereto within such ten (10) day
period.
2.2 EARLY OCCUPANCY. Landlord shall allow Tenant to enter the Premises
one (1) business day after this Lease is fully executed by Landlord and Tenant
(the "EARLY OCCUPANCY DATE") for purposes of allowing Tenant to complete the
Tenant Improvements (as defined in Exhibit "C") and installation of Tenant's
furniture, fixtures and equipment. Such early occupancy shall be subject to all
of the terms and conditions of this Lease except that Tenant will not be
obligated to pay Monthly Rent or any other costs or expenses (except for trash
removal and utilities) during the period of such early occupancy.
2.3 OPTION TO EXTEND. Tenant shall have two (2) options (each, an
"EXTENSION OPTION") to extend the Term for a period (each, an "OPTION PERIOD")
of five (5) years each, commencing upon the Lease Expiration Date upon the same
terms and conditions previously applicable, except for the grant of any
exercised Extension Option and Monthly Rent (which shall be determined as set
forth below). An Extension Option may be validly exercised only by notice in
writing received by Landlord not later than three hundred sixty (360) calendar
days prior to commencement of the Option Period; provided, however, that the
Extension Option may be validly exercised only if no uncured Tenant default
exists as of the date of exercise and, at Landlord's option, as of the
commencement of the Option Period. If Tenant does not exercise the Extension
Option during the exercise period set forth above in strict accordance with the
provisions hereof, the Extension Option shall forever terminate and be of no
further force or effect.
Monthly Rent during each Option Period shall be equal to Fair Market Rental as
of the commencement of the Option Period. For purposes hereof, "FAIR MARKET
RENTAL" shall mean the base rent payable during the Option Period to a willing
landlord by a willing tenant having a similar financial responsibility, credit
rating and capitalization as Tenant then has, taking into account all other
relevant factors for like and comparable space, improved with tenant
improvements of like and comparable quality to those then existing in the
Premises in the Sorrento Mesa area of San Diego, California. At least eleven
(11) months prior to the Option Period, Landlord shall notify Tenant of the Fair
Market Rental as determined by Landlord. Any dispute between the parties hereto
with respect to the amount so determined shall be resolved by arbitration, as
set forth below; provided, however, that there shall be deemed not to be such a
dispute unless Tenant notifies Landlord thereof in writing within one (1) month
after Landlord so notifies Tenant of the Fair Market Rental and Tenant sets
forth in such notice Tenant's determination of Fair Market Rental. If, in the
event of a dispute, the arbitrators have not determined the Fair Market Rental
by commencement of the Option Period, Tenant shall pay as Monthly Rent the
amount determined by Landlord until such time as the Fair Market Rental has been
determined by arbitration, whereupon Tenant shall pay any additional amount due
to Landlord based upon such subsequent determination of Fair Market Rental. If
the Monthly Rent so paid by Tenant is higher than that ultimately determined by
the arbitration process, then Landlord shall reimburse such difference to
Tenant.
If Tenant timely notifies Landlord in writing of Tenant's dispute regarding
Landlord's determination of the Fair Market Rental, then Fair Market Rental
shall be determined as follows. Landlord and Tenant shall each appoint one
arbitrator who shall by profession be a real estate appraiser active over the
five (5) year period ending on the date of such appointment in the appraisal of
commercial properties in San Diego, California and who shall not have been
employed or engaged by either party during said five (5) year period. Each such
arbitrator shall be appointed within five (5) days after Tenant notifies
Landlord of Tenant's dispute of Landlord's determination of Fair Market Rental.
The two arbitrators so appointed shall within five (5) days of the date of the
appointment of the last appointed arbitrator agree upon and appoint a third
arbitrator who shall be qualified under the same criteria set forth above. The
three arbitrators shall, within twenty (20) days of the appointment of the third
arbitrator, reach a decision as to whether the parties shall use Landlord's or
Tenant's submitted Fair Market Rental for the Premises, and shall notify
Landlord and Tenant thereof. Such decision shall be based upon the criteria and
variables set forth above. The new Annual Rent shall thereafter be equal to the
Fair Market Rental of the Premises so selected by the arbitrators. The decision
of the majority of the three arbitrators shall be binding upon Landlord and
Tenant. If either Landlord or Tenant fails to appoint an arbitrator within the
time period
<PAGE>
specified hereinabove, the arbitrator appointed by one of them shall
reach a decision, notify Landlord and Tenant thereof, and such arbitrator's
decision shall be binding upon Landlord and Tenant. If the two arbitrators fail
to agree upon and appoint a third arbitrator, both arbitrators shall be
dismissed and the matter to be decided shall be forthwith submitted to
arbitration under the provisions of the American Arbitration Association in
accordance with the method described above. The cost of arbitration shall be
paid by Landlord and Tenant equally.
2.4 CONDITIONS PRECEDENT. Landlord will not be obligated to deliver
possession of the Premises to Tenant (but Tenant will be liable for Rent if
Landlord can otherwise deliver the Premises, or the applicable portion thereof,
to Tenant as required hereunder) until Landlord has received from Tenant all of
the following: (i) a copy of this Lease fully executed by Tenant; (ii) evidence
satisfactory to Landlord of the deposit of the Security Deposit in accordance
with Section 5 below, and the first installment of Monthly Rent in accordance
with Section 3.1 below; and (iii) copies of policies of insurance or
certificates thereof as required under Section 20 of this Lease.
3. RENT.
3.1 MONTHLY RENT. Tenant agrees to pay Landlord, as rent for the
Premises, the Monthly Rent designated in Section 1.6 of the Summary. The Monthly
Rent shall be paid by Tenant in advance on the first day of each and every
calendar month commencing upon the Commencement Date, except that the first full
month's Monthly Rent for the Premises shall be paid upon execution of this Lease
by Tenant. Monthly Rent for any partial month shall be prorated in the
proportion that the number of days this Lease is in effect during such month
bears to the actual number of days in such month.
3.2 ADDITIONAL RENT. All amounts and charges payable by Tenant under
this Lease in addition to the Monthly Rent described in Section 3.1 above shall
be considered additional rent for the purposes of this Lease, and the word
"RENT" in this Lease shall include such additional rent unless the context
specifically or clearly implies that only the Monthly Rent is referenced. Rent
shall be paid to Landlord as provided in Section 7, without any prior demand
therefor and without any deduction or offset except as specified elsewhere in
the Lease, in lawful money of the United States of America.
3.3 MANAGEMENT FEE. Tenant shall pay to Landlord, as additional rent, a
monthly management fee equal to Six Hundred Dollars ($600.00) (the "MANAGEMENT
FEE"). The Management Fee shall be payable on the first day of each and every
calendar month commencing on the Commencement Date.
3.4 LATE PAYMENTS. Late payments of Rent will be subject to interest
and a late charge as provided in Sections 22.6 and 22.7 below.
3.5 RENT ABATEMENT. Notwithstanding anything to the contrary contained
herein and provided that Tenant faithfully performs all of the terms and
conditions of this Lease, Landlord agrees to abate Tenant's obligation to pay
Monthly Rent for the first three (3) months of the initial Term (the "ABATEMENT
PERIOD"). During the Abatement Period, Tenant shall still be responsible for the
payment of all of its other monetary obligations under this Lease; provided,
however that if the Commencement Date shall occur on or before July 1, 2000,
then Landlord also agrees to abate during the Abatement Period Tenant's
obligation to pay the Management Fee and Real Property Taxes and any insurance
costs incurred by Landlord under Section 20.4 and any other costs and expenses
relating to the Premises (except for trash removal and utilities) accruing
during such Abatement Period. In the event of a default by Tenant under the
terms of this Lease that results in early termination pursuant to the provisions
of Section 22.2 of this Lease, then as a part of the recovery set forth in
Section 22.2 of this Lease, Landlord shall be entitled to the recovery of the
Rent that was abated under the provisions of this Article 3.
4. TRIPLE-NET LEASE.
4.1 TENANT'S OBLIGATIONS. Except as otherwise provided herein, all Rent
shall be absolutely net to Landlord so that this Lease shall yield net to
Landlord, the Rent to be paid each month during the Term of this Lease.
Accordingly, and except as otherwise provided herein, all costs, expenses and
obligations of every kind or nature whatsoever relating to the maintenance,
repair and operation of the Premises which may arise or become due during the
Term of this Lease shall be paid by Tenant. Nothing herein contained shall be
deemed to require Tenant to pay or discharge any liens or mortgages of any
character whatsoever which may exist or hereafter be placed upon the Premises by
an affirmative act or omission of Landlord.
4.2 LANDLORD'S CONTRIBUTION TO CERTAIN EXPENDITURES. If any repair or
replacement obligation of Tenant under Section 11.1, or any alteration or
improvement obligation of Tenant under Section 6.1 not resulting from the
specific or unique use or alteration of the Premises by Tenant, with respect to
a Basic Element would normally be capitalized under normal accounting practice
and is in excess of Twenty-Five Thousand Dollars ($25,000.00), and if as a
result of such expenditure the useful life of the Basic Element, or the
alteration or improvement thereof, as applicable (as such useful life is based
on the estimated actual life pursuant to generally accepted accounting
practices), will extend beyond the Term, then, subject to the requirements set
forth in this Section 4.2, Landlord will reimburse Tenant for Landlord's prorata
share thereof within thirty (30) days following the expiration or sooner
termination of this Lease; provided, however, Landlord will have no such
reimbursement obligation if this Lease terminates as a result of an uncured
default by Tenant. Landlord's pro rata share of such
-2-
<PAGE>
expenditure shall be a fraction, the numerator of which is the number of months
remaining on the useful life of the Basic Element, or the alteration or
improvement thereof, as applicable, after the expiration or sooner termination
of this Lease, and the denominator of which is the total number of months of the
useful life of the Basic Element, or the alteration or improvement thereof, as
applicable. As a condition precedent to Landlord's obligation to reimburse
Tenant for a prorata share of any such expenditure, Tenant shall first obtain
Landlord's prior written approval of the contractor, the plans and
specifications, the amount of any such expenditure and the useful life resulting
from such expenditure, which approval shall not be unreasonably withheld or
delayed. If Landlord fails to respond to Tenant's request for approval within
ten (10) days after receipt of the same, Landlord shall be deemed to have
approved Tenant's expenditure so long as Tenant informed Landlord in its request
for approval (or thereafter but within such ten (10) day period) that Landlord's
failure to respond within such ten (10) day period would result in Landlord's
deemed approval. Upon such approval, either party shall, at the other party's
request, enter into an amendment of this Lease identifying the amount subject to
reimbursement by Landlord. The "Basic Elements" are the foundations and
structural walls of the Premises, HVAC equipment and the roof.
5. SECURITY DEPOSIT.
5.1 CASH SECURITY. Concurrently with Tenant's execution of this Lease,
Tenant shall deposit with Landlord two thirds (2/3rds) of the amount specified
in Section 1.7 of the Summary, as security for the full and faithful performance
by Tenant of all of the terms, covenants and conditions of this Lease to be
performed by Tenant during the Term (the "CASH SECURITY DEPOSIT"). The Cash
Security Deposit is not, and may not be construed by Tenant to constitute, rent
for the last month or any portion thereof. If Tenant defaults with respect to
any of its obligations under this Lease, Landlord may (but shall not be required
to) use, apply or retain all or any part of the Cash Security Deposit for the
payment of any rent or any other sum in default, or for the payment of any other
amount, loss or damage which Landlord may spend, incur or suffer by reason of
Tenant's default. If any portion of the Cash Security Deposit is so used or
applied, Tenant shall, within ten (10) days after demand therefor, deposit cash
with Landlord in an amount sufficient to restore the Cash Security Deposit to
its original amount. Landlord shall not be required to keep the Cash Security
Deposit separate from its general funds; however, Tenant shall be entitled to
earn interest on the Cash Security Deposit at a simple rate of five percent (5%)
per annum. If at the end of the first year of the Term, Tenant shall have fully
and faithfully performed every provision of this Lease to be performed by it and
Tenant's financial condition has not deteriorated from the date hereof as
reasonably determined by Landlord, then one half (1/2) of the Cash Security
Deposit, together with the interest earned thereon, shall be returned to Tenant
within two (2) weeks following Landlord's receipt of written request therefor.
If at the end of the second year of the Term, Tenant shall have fully and
faithfully performed every provision of this Lease to be performed by it and
Tenant's financial condition has not deteriorated from the date hereof as
reasonably determined by Landlord, then the remainder of the Cash Security
Deposit, together with the interest earned thereon, shall be returned to Tenant
within two (2) weeks following Landlord's receipt of request therefor.
Notwithstanding the foregoing, Landlord shall not be obligated to return any
portion of the Cash Security Deposit at any time Tenant is in default hereunder
or a circumstance exists that, with the giving of notice, the lapse of time, or
both, would constitute a default hereunder. If Landlord sells its interest in
the Building during the Term and if Landlord deposits with the purchaser the
Cash Security Deposit (or balance thereof), and such purchaser acknowledges
receipt thereof and assumes all of Landlord's obligations under this Lease
arising from and after such sale, then, upon such sale, Landlord shall be
discharged from any further liability with respect to the Cash Security Deposit.
5.2 CERTIFICATE OF DEPOSIT. In addition, Tenant hereby grants to
Landlord a lien and security interest in and to (i) that certain certificate of
deposit account of Tenant held at Scripps Bank (the "BANK") located at 9005
Complex Drive, San Diego, California 92123, bearing account number 55003387 (the
"CD"), (ii) all funds on deposit in the CD now and at any time after the date
hereof, (iii) all renewals and replacements thereof (whether or not any such
renewal or replacement is evidenced by a certificate or other evidence of
deposit), (iv) any and all certificates of deposit or other instruments that may
constitute a part of or an investment of funds in, or that may replace all of or
part of, the CD, and (v) all proceeds of any of the foregoing. Landlord shall
have no security interest in the interest accrued on the funds on deposit in the
CD. The CD shall at all times during the Term of this Lease have a balance of
not less than an amount equal to one-third (1/3) of the amount specified in
Section 1.7 of the Summary and so long as such balance is maintained at all
times, Tenant shall be entitled to withdraw interest accrued on the funds in the
CD if permitted by the terms of the CD.
Tenant represents and warrants that Tenant is the owner of the CD free and clear
of all liens, charges, encumbrances and security interests, other than the
security interest granted to Landlord pursuant hereto and Tenant covenants that
Tenant will not (i) redeem, liquidate or modify the CD without the prior written
consent of Landlord, (ii) permit any other liens or security interests to attach
to the CD, (iii) permit a levy or execution upon the CD under any legal process,
(iv) transfer all or any interest in the CD or (v) permit anything to be done
that may impair the value of the CD or the security interest granted to Landlord
pursuant hereto.
The CD (and any proceeds thereof and the Replacement Funds) shall be held as
security for the faithful performance by Tenant of all of the terms, covenants
and conditions of this Lease. The CD is not and may not be construed by Tenant
to constitute rent for the last month or any portion thereof. If Tenant commits
a default with respect to any provision of this Lease, Landlord may, (but shall
not be required to) (i) redeem or liquidate the CD and (ii) exercise any other
rights and remedies available to a secured party under the California Uniform
Commercial Code or other applicable law or under the terms of this Lease,
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including, without limitation, the right (a) to take such other measures as
Landlord may deem necessary for the protection, preservation and maintenance of
the CD and Landlord's security interest therein and (b) to use, apply or retain
all or any part of the proceeds for the payment of any sum which is in default,
or for the payment of any other amount which Landlord may spend or become
obligated to spend by reason of Tenant's default or to compensate Landlord for
any loss or damage which Landlord may suffer by reason of Tenant's default.
Tenant waives any right to contest Landlord's redemption or liquidation of the
CD pursuant to this Section 5.2; provided, however, Tenant reserves its rights
against Landlord with respect to any unlawful redemption or liquidation made by
Landlord. If the CD is so redeemed or liquidated, Tenant shall, within ten (10)
days after demand therefor, deliver to Landlord cash in an amount equal to the
difference between the initial principal amount of the CD required above and any
proceeds remaining after Landlord has used or applied the proceeds of the CD as
permitted above (the "REPLACEMENT FUNDS"). Landlord shall not be required to
keep any proceeds from the CD or the Replacement Funds separate from its general
funds but Tenant shall be entitled to earn interest on such proceeds or the
Replacement Funds at a simple rate of five percent (5%) per annum. Should
Landlord sell its interest in the Premises during the Term, and if Landlord
transfers its interest in the CD, any proceeds of the CD or the Replacement
Funds to the purchaser thereof and such purchaser acknowledges receipt thereof
and assumes all of Landlord's obligations under this Lease arising from and
after such sale, then upon such sale Landlord shall be discharged from any
further liability with respect to the CD, said proceeds and the Replacement
Funds.
Tenant agrees to execute such additional agreements, assignments or documents
deemed necessary or advisable by Landlord to perfect or continue the perfection
of Landlord's security interest in the CD. In addition, concurrently with
Tenant's execution of this Lease, Tenant shall execute and deliver to Landlord
an acknowledgment by and among the Bank, Tenant and Landlord in form and
substance of Exhibit "H" attached hereto, in which the Bank and Tenant
acknowledge receipt of notice of Landlord's security interest in the CD.
6. USE.
6.1 GENERAL. Tenant shall use the Premises solely for the Permitted Use
specified in Section 1.8 of the Summary, and shall not use or permit the
Premises to be used for any other use or purpose whatsoever, without Landlord's
prior written consent. Landlord shall not unreasonably withhold or delay its
consent to any written request for a modification of the Permitted Use so long
as the same (i) will not materially impair the structural integrity of the
improvements on the Premises or the mechanical or electrical systems therein,
(ii) is not significantly more burdensome to the Premises and (iii) will not
expose the Premises or neighboring property to any meaningful risk of
environmental contamination or damage or expose Landlord to any liability
therefor. Tenant shall, at its sole cost and expense (but subject to Section
4.2), observe and comply with all requirements of any board of fire underwriters
or similar body relating to the Premises, all recorded covenants, conditions and
restrictions now or hereafter affecting the Premises and all laws, statutes,
codes, rules and regulations now or hereafter in force relating to or affecting
the condition, use, occupancy, alteration or improvement (whether structural or
non-structural, including unforeseen and/or extraordinary alterations or
improvements, and regardless of the period of time remaining in the Term) of the
Premises, including, without limitation, the provisions of the Americans with
Disabilities Act ("ADA") as it pertains to the condition, use, occupancy,
improvement and alteration (whether structural or non-structural, including
unforeseen and/or extraordinary alterations or improvements, and regardless of
the period of time remaining in the Term) of the Premises. Tenant shall not use
or allow the Premises to be used (a) in violation of any recorded covenants,
conditions and restrictions affecting the Premises or of any law or governmental
rule or regulation, or of any certificate of occupancy issued for the Premises,
or (b) for any improper, immoral, unlawful or reasonably objectionable purpose.
Tenant shall not cause, maintain or permit any nuisance in, on or about the
Premises, nor commit or suffer to be committed any waste in, on or about the
Premises.
6.2 SIGNS, AWNINGS AND CANOPIES. Tenant shall have the right to install
upon the Premises a parapet sign on at least two (2) sides of the Building and a
monument-type sign in front of the Building, provided Tenant complies with any
covenants of record and obtains approval from all governmental authorities
having jurisdiction over the Premises and from Landlord, which approval shall
not be unreasonably withheld. If Landlord fails to respond to Tenant's request
for approval within ten (10) days after receipt of the same, Landlord shall be
deemed to have approved Tenant's request so long as Tenant informed Landlord in
its request for approval (or thereafter but within such ten (10) day period)
that Landlord's failure to respond within such ten (10) day period would result
in Landlord's deemed approval. If Tenant requires Landlord's assistance in
connection with obtaining approvals from any governmental authorities, Landlord
agrees to assist Tenant at Tenant's sole cost and expense. Tenant agrees to
maintain any such sign, awning, canopy, decoration, lettering or advertising
matter as may be approved by Landlord in good condition and repair at all times.
At the expiration or earlier termination of this Lease, at Landlord's election,
Tenant shall remove all signs (except for the monument sign), awnings, canopies,
decorations, lettering, including, without limitation, the lettering on the
monument sign, and advertising installed by or at the direction of Tenant and
shall repair any damage to the Premises resulting therefrom all at Tenant's sole
cost and expense. If Tenant fails to maintain any such approved sign, awning,
decoration, lettering, or advertising, Landlord may do so at Tenant's cost after
providing Tenant with ten (10) days written notice and Tenant shall reimburse
Landlord for such cost plus a ten percent (10%) overhead fee. If, without
Landlord's prior written consent, Tenant installs any sign, awning, decoration,
lettering or advertising, or fails to remove any such item(s) at the expiration
or earlier termination of this Lease, Landlord may, after providing Tenant with
ten (10) days prior written notice, have such item(s)
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removed and stored and may repair any damage to the Premises at Tenant's
expense. The removal, repair and/or storage costs shall bear interest until
paid at the Interest Rate.
6.3 HAZARDOUS MATERIALS.
6.3.1 TENANT'S ENVIRONMENTAL REPRESENTATIONS AND INDEMNIFICATION.
Tenant will (i) obtain and maintain in full force and effect all Environmental
Permits that may be required from time to time under any Environmental Laws
applicable to Tenant or the Premises and (ii) be and remain in compliance with
all terms and conditions of all such Environmental Permits and with all other
limitations, restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in all Environmental Laws
applicable to Tenant or the Premises. As used in this Lease, the term
"ENVIRONMENTAL LAW" means any past, present or future federal, state or local
statutory or common law, or any regulation, ordinance, code, plan, order,
permit, grant, franchise, concession, restriction or agreement issued, entered,
promulgated or approved thereunder, relating to (a) the environment, human
health or safety, including, without limitation, emissions, discharges, releases
or threatened releases of Hazardous Materials (as defined below) into the
environment (including, without limitation, air, surface water, groundwater or
land), or (b) the manufacture, generation, refining, processing, distribution,
use, sale, treatment, receipt, storage, disposal, transport, arranging for
transport, or handling of Hazardous Materials. "ENVIRONMENTAL PERMITS" means,
collectively, any and all permits, consents, licenses, approvals and
registrations of any nature at any time required pursuant to, or in order to
comply with, any Environmental Law. Except for ordinary and general office
supplies, such as copier toner, liquid paper, glue, ink and common household
cleaning materials and, to the extent approved in writing by Landlord (which
shall not be unreasonably withheld), materials reasonably necessary for the
conduct of Tenant's business that are used and stored in compliance with all
Environmental Laws (some or all of which may constitute "Hazardous Materials" as
defined in this Lease), Tenant agrees not to cause or permit any Hazardous
Materials to be brought upon, stored, used, handled, generated, released or
disposed of on, in, under or about the Premises by Tenant, its agents,
employees, subtenants, assignees, licensees, contractors or invitees
(collectively, "TENANT'S PARTIES"), without the prior written consent of
Landlord, which consent Landlord may withhold in its sole and absolute
discretion. Concurrently with the execution of this Lease, Tenant agrees to
complete and deliver to Landlord an Environmental Questionnaire in the form of
Exhibit "E" attached hereto. Upon the expiration or earlier termination of this
Lease, Tenant agrees to promptly remove from the Premises, at its sole cost and
expense, any and all Hazardous Materials, including any equipment or systems
containing Hazardous Materials which are installed, brought upon, stored, used,
generated or released upon, in, under or about the Premises by Tenant or any of
Tenant's Parties or other persons or entities. To the fullest extent permitted
by law, Tenant agrees to promptly indemnify, protect, defend and hold harmless
Landlord and Landlord's partners, officers, directors, employees, agents,
successors and assigns (collectively, "LANDLORD INDEMNIFIED PARTIES") from and
against any and all claims, damages, judgments, suits, causes of action, losses,
liabilities, penalties, fines, expenses and costs (including, without
limitation, clean-up, removal, remediation and restoration costs, sums paid in
settlement of claims, attorneys' fees, consultant fees and expert fees and court
costs) which arise or result from the presence of Hazardous Materials on, in,
under or about the Premises and which are caused or permitted by Tenant or any
of Tenant's Parties. Tenant agrees to promptly notify Landlord of any release of
Hazardous Materials which Tenant becomes aware of during the Term of this Lease,
whether caused by Tenant or any other persons or entities. In the event of any
release of Hazardous Materials caused or permitted by Tenant or any of Tenant's
Parties or any other persons or entities, Landlord shall have the right, but not
the obligation, to cause Tenant to immediately take all steps Landlord deems
necessary or appropriate to remediate such release and prevent any similar
future release to the satisfaction of Landlord and Landlord's mortgagee(s). At
all times during the Term of this Lease, Landlord will have the right, but not
the obligation, to enter upon the Premises to inspect, investigate, sample
and/or monitor the Premises to determine if Tenant is in compliance with the
terms of this Lease regarding Hazardous Materials. If Landlord has reason to
believe that Tenant has violated the provisions of this Section 6.3.1, Tenant
will, upon the request of Landlord, cause to be performed an environmental audit
of the Premises at Tenant's expense by an environmental consulting firm
reasonably acceptable to Landlord. Notwithstanding the foregoing, if such audit
reveals that there has been no violation of Environmental Laws, then Landlord
shall be responsible for the full cost of such audit. As used in this Lease, the
term "HAZARDOUS MATERIALS" shall mean and include any hazardous or toxic
materials, substances or wastes as now or hereafter designated or regulated
under any law, statute, ordinance, rule, regulation, order or ruling of any
agency of the State, the United States Government or any local governmental
authority, including, without limitation, asbestos, petroleum, petroleum
hydrocarbons and petroleum based products, urea formaldehyde foam insulation,
polychlorinated biphenyls ("PCBS"), and freon and other chlorofluorocarbons. The
provisions of this Section 6.3.1 will survive the expiration or earlier
termination of this Lease.
6.3.2 LANDLORD'S ENVIRONMENTAL INDEMNIFICATION. Landlord shall
indemnify, protect, defend and hold Tenant, its successors, assigns, subtenants,
agents, employees, officers and directors harmless from any and all losses,
damages, liabilities, judgments, costs, claims, expenses, penalties, including,
but not limited to, attorneys' fees, court costs and consultant fees arising out
of or involving any Hazardous Materials existing on the Premises to the extent
caused or knowingly permitted by Landlord, its agents, employees or contractors.
The provisions of this Section 6.3.2 will survive the expiration or earlier
termination of this Lease.
6.3.3 LANDLORD TERMINATION OPTION FOR CERTAIN ENVIRONMENTAL PROBLEMS.
If Hazardous Materials are present at the Premises that are required by
Environmental Law to be remediated and Tenant is not responsible therefor
pursuant to Section 6.3.1, Landlord shall, at its option,
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either (i) remediate such Hazardous Materials at its expense, in which event
this Lease shall continue in full force and effect or (ii) if the estimated cost
to remediate such Hazardous Materials exceeds twelve (12) times the then Monthly
Rent or One Hundred Thousand Dollars ($100,000.00), whichever is greater, give
written notice to Tenant, within thirty (30) days after receipt by Landlord of
knowledge of the existence of such Hazardous Materials, of Landlord's desire to
terminate this Lease as of the date one hundred eighty (180) days following the
date of such notice. In the event Landlord elects to give such a termination
notice, Tenant may, within ten (10) days thereafter, give written notice to
Landlord of Tenant's commitment to pay the amount by which the cost of the
remediation of such Hazardous Materials exceeds an amount equal to twelve (12)
times the then Monthly Rent or One Hundred Thousand Dollars ($100,000.00),
whichever is greater. Tenant shall provide Landlord with such funds or
satisfactory assurance thereof within thirty (30) days following such
commitment. In such event, this Lease shall continue in full force and effect,
and Landlord shall proceed to make such remediation as soon as reasonably
possible after the required funds are available. If Tenant does not give such
notice and provide the required funds or assurance thereof within the time
provided, this Lease shall terminate as of the date specified in Landlord's
termination notice. There shall be no Rent abatement resulting from the
existence of such Hazardous Materials or performance of Landlord's remediation.
Notwithstanding the foregoing, in the event that Tenant cannot
reasonably use, and does not use, the Premises or any portion thereof, as a
result of the remediation by Landlord (the "REMEDIATION") for a period of three
(3) consecutive business days after written notice thereof to Landlord (the
"ELIGIBILITY PERIOD"), then the Monthly Rent shall be abated or reduced, as the
case may be, after the expiration of the Eligibility Period for such time that
Tenant continues to be so prevented from using, and does not use, the Premises
or a portion thereof, in the proportion that the rentable area of the portion of
the Premises that Tenant is prevented from using, and does not use, bears to the
total rentable area of the Premises; provided, however, in the event that Tenant
is prevented from using, and does not use, a portion of the Premises for a
period of time in excess of the Eligibility Period and the remaining portion of
the Premises is not sufficient to allow Tenant to effectively conduct its
business therein or if the portion of the Premises that Tenant is prevented from
using renders the rest of the Premises unusable, and if Tenant does not conduct
its business from such remaining portion, then for such time after expiration of
the Eligibility Period during which Tenant is so prevented from effectively
conducting its business therein, the Monthly Rent shall be abated for such time
as Tenant continues to be so prevented from using, and does not use, the entire
Premises. If, however, Tenant reoccupies any portion of the Premises during such
period, the Monthly Rent allocable to such reoccupied portion, based on the
proportion that the rentable area of such reoccupied portion of the Premises
bears to the total rentable area of the Premises, shall be payable by Tenant
from the date Tenant reoccupies such portion of the Premises.
6.4 REFUSE AND SEWAGE. Tenant agrees not to keep any trash, garbage,
waste or other refuse on the Premises except in sanitary containers and agrees
to regularly and frequently remove same from the Premises. Tenant shall keep all
containers or other equipment used for storage of such materials in a clean and
sanitary condition. Tenant shall, at Tenant's sole cost and expense, properly
dispose of all sanitary sewage and shall not use the sewage disposal system for
the disposal of anything except sanitary sewage. Tenant shall keep the sewage
disposal system free of all obstructions and in good operating condition. Tenant
shall contract directly for all trash disposal services at Tenant's sole cost
and expense.
7. PAYMENTS AND NOTICES. All Rent and other sums payable by Tenant to Landlord
hereunder shall be paid to Landlord at the address designated in Section 1.1 of
the Summary, or to such other persons and/or at such other places as Landlord
may hereafter designate in writing. Any notice required or permitted to be given
hereunder must be in writing and given by personal delivery (including delivery
by nationally recognized overnight courier or express mailing service),
facsimile transmission sent by a machine capable of confirming transmission
receipt, with a hard copy of such notice delivered no later than one (1)
business day after facsimile transmission by another method specified in this
Section 7, or by registered or certified mail, postage prepaid, return receipt
requested, addressed to Tenant at the address(es) designated in Section 1.2 of
the Summary, or to Landlord at the address(es) designated in Section 1.1 of the
Summary. Either party may, by written notice to the other, specify a different
address for notice purposes. Notice given in the foregoing manner shall be
deemed given (i) upon confirmed transmission if sent by facsimile transmission,
provided such transmission is prior to 5:00 p.m. on a business day (if such
transmission is after 5:00 p.m. on a business day or is on a non-business day,
such notice will be deemed given on the following business day), (ii) when
actually received or refused by the party to whom sent if delivered by a carrier
or personally served or (iii) if mailed, on the day of actual delivery or
refusal as shown by the certified mail return receipt or the expiration of three
(3) business days after the day of mailing, whichever first occurs. For purposes
of this Section 7, a "business day" is Monday through Friday, excluding holidays
observed by the United States Postal Service.
8. BROKERS. Landlord has entered into an agreement with the real estate broker
specified in Section 1.9 of the Summary as representing Landlord and Tenant
("BROKER"), and Landlord shall pay any commissions or fees that are payable to
Broker with respect to this Lease in accordance with the provisions of a
separate commission contract. Landlord shall have no further or separate
obligation for payment of commissions or fees to any other real estate broker,
finder or intermediary. Tenant represents that it has not had any dealings with
any real estate broker, finder or intermediary with respect to this Lease, other
than Broker. Each party represents and warrants to the other, that, to its
knowledge, no other broker, agent or finder (a) negotiated or was instrumental
in negotiating or consummating this Lease on its behalf, or (b) is or might be
entitled to a commission or compensation in connection with this Lease. Tenant
shall indemnify, protect, defend (by counsel reasonably approved in writing by
Landlord)
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and hold Landlord harmless from and against any and all claims, judgments,
suits, causes of action, damages, losses, liabilities and expenses (including
attorneys' fees and court costs) resulting from any breach by Tenant of the
foregoing representation, including, without limitation, any claims that may be
asserted against Landlord by any broker, agent or finder undisclosed by Tenant
herein. Landlord shall indemnify, protect, defend (by counsel reasonably
approved in writing by Tenant) and hold Tenant harmless from and against any and
all claims, judgments, suits, causes of action, damages, losses, liabilities and
expenses (including attorneys' fees and court costs) resulting from any breach
by Landlord of the foregoing representation, including, without limitation, any
claims that may be asserted against Tenant by any broker, agent or finder
undisclosed by Landlord herein. The foregoing indemnities shall survive the
expiration or earlier termination of this Lease.
9. SURRENDER; HOLDING OVER.
9.1 SURRENDER OF PREMISES. Upon the expiration or sooner termination of
this Lease, Tenant shall surrender all keys for the Premises to Landlord, and
Tenant shall deliver exclusive possession of the Premises to Landlord broom
clean and in first-class condition and repair, reasonable wear and tear excepted
(and casualty damage and environmental problems excepted if this Lease is
terminated as a result thereof pursuant to Section 18 or Section 6.3.3,
respectively), with all of Tenant's personal property (and those items, if any,
of Tenant Improvements and Tenant Changes identified by Landlord pursuant to
Section 12.2 below) removed therefrom and all damage caused by such removal
repaired, as required pursuant to Sections 12.2 and 12.3 below. If, for any
reason, Tenant fails to surrender the Premises on the expiration or earlier
termination of this Lease, with such removal and repair obligations completed,
then, in addition to the provisions of Section 9.3 below and Landlord's rights
and remedies under Section 12.4 and the other provisions of this Lease, Tenant
shall indemnify, protect, defend (by counsel reasonably approved in writing by
Landlord) and hold Landlord harmless from and against any and all claims,
judgments, suits, causes of action, damages, losses, liabilities and expenses
(including attorneys' fees and court costs) resulting from such failure to
surrender, including, without limitation, any claim made by any succeeding
tenant based thereon. The foregoing indemnity shall survive the expiration or
earlier termination of this Lease.
9.2 HOLDING OVER. If Tenant holds over after the expiration or earlier
termination of the Term, then, without waiver of any right on the part of
Landlord as a result of Tenant's failure to timely surrender possession of the
Premises to Landlord, Tenant shall become a tenant at sufferance only, upon the
terms and conditions set forth in this Lease so far as applicable (including
Tenant's obligation to pay all costs, expenses and any other additional rent
under this Lease), but at a Monthly Rent equal to one hundred twenty-five
percent (125%) of the Monthly Rent applicable to the Premises immediately prior
to the date of such expiration or earlier termination. Acceptance by Landlord of
rent after such expiration or earlier termination shall not constitute a consent
to a hold over hereunder or result in an extension of this Lease. Tenant shall
pay an entire month's Monthly Rent calculated in accordance with this Section
9.2 for any portion of a month it holds over and remains in possession of the
Premises pursuant to this Section 9.2.
9.3 NO EFFECT ON LANDLORD'S RIGHTS. The foregoing provisions of this
Section 9 are in addition to, and do not affect, Landlord's right of re-entry or
any other rights of Landlord hereunder or otherwise provided at law or in
equity.
10. TAXES.
10.1 REAL PROPERTY TAXES. Tenant agrees to pay all general and special
real property taxes, assessments (including, without limitation, change in
ownership taxes or assessments), liens, bond obligations, license fees or taxes,
commercial rent taxes and any similar impositions in-lieu of other impositions
now or previously within the definition of real property taxes or assessments
and any and all assessments under any covenants, conditions and restrictions
affecting the Premises (collectively "REAL PROPERTY TAXES") which may be now or
hereafter levied or assessed against the Premises applicable to the period from
the Commencement Date, until the expiration or sooner termination of this Lease.
Real Property Taxes shall include, by way of illustration but not limitation,
the following: (a) any tax on Landlord's "right" to rent or "right" to other
income from the Premises or as against Landlord's business of leasing the
Premises; (b) any assessment, tax, fee, levy or charge in substitution,
partially or totally, of any assessment, tax, fee, levy or charge previously
included within the definition of real property tax, it being acknowledged by
Tenant and Landlord that Proposition 13 was adopted by the voters of the State
of California in the June, 1978 election and that assessments, taxes, fees,
levies and charges may be imposed by governmental agencies for such services as
fire protection, street, sidewalk and road maintenance, refuse removal and for
other governmental services formerly provided without charge to property owners
or occupants. It is the intention of Tenant and Landlord that all such new and
increased assessments, taxes, fees, levies and charges be included within the
definition of "real property taxes" for the purposes of this Lease; (c) any
assessment, tax, fee, levy or charge allocable to or measured by the area of the
Premises or the Rent payable by Tenant hereunder, including, without limitation,
any gross receipts tax or excise tax levied by state, city or federal
government, or any political subdivision thereof, with respect to the receipt of
such Rent, or upon or with respect to the possession, leasing, operation,
management, maintenance, alteration, repair, use or occupancy by Tenant and of
the Premises; (d) any assessment, tax, fee, levy or charge upon this transaction
or any document to which Tenant is a party, creating or transferring an interest
or an estate in the Premises; and/or (e) any assessment, tax, fee, levy or
charge by any governmental agency related to any transportation plan, fund or
system (including assessment districts) instituted within the geographic area of
which the Premises make a part. Nothing
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herein shall require Tenant to pay corporation, franchise, income, estate, gift
and inheritance taxes which may be levied or assessed against Landlord or its
successors or assigns.
All Real Property Taxes for the tax year in which the Commencement Date occurs
and for the tax year in which this Lease terminates shall be apportioned and
adjusted so that Tenant shall not be responsible for any Real Property Taxes for
a period of time occurring prior to the Commencement Date or subsequent to the
expiration of the Lease term.
Tenant agrees to pay to the taxing authority entitled thereto the total Real
Property Taxes due. Any of said payments to be made directly to the taxing
authority shall be made at least fifteen (15) days prior to the delinquency date
established by the taxing authority, and Tenant shall, concurrently with such
payment, deliver evidence of such payment to Landlord. Failure of Tenant to pay
said Real Property Taxes as and when herein specified shall, in addition to all
other rights and remedies of Landlord hereunder, subject Tenant to any fine,
penalty, interest, or cost which Landlord may incur as a result thereof. Tenant
shall, within thirty (30) days after demand, reimburse Landlord for any such
fine, penalty, interest, or cost, together with interest thereon at the Interest
Rate.
Notwithstanding the foregoing provisions, if the Premises are not separately
assessed but are included in a larger tax parcel for purposes of the assessment
of Real Property Taxes, then Tenant shall pay to Landlord, within thirty (30)
days following and invoice therefor, Tenant's pro rata share of all Real
Property Taxes that are assessed against such larger tax parcel. Tenant's pro
rata share under such circumstances shall be apportioned according to the
rentable square footage of the Premises as it relates to the total rentable
square footage of all of the buildings (including the Premises) situated in the
separate tax parcel.
10.2 PERSONAL PROPERTY TAXES. Tenant shall be liable for, and shall pay
before delinquency, all taxes and assessments (real and personal) levied against
(a) any personal property or trade fixtures placed by Tenant in or about the
Premises (including any increase in the assessed value of the Premises based
upon the value of any such personal property or trade fixtures); and (b) any
Tenant Improvements or alterations in the Premises (whether installed and/or
paid for by Landlord or Tenant). If any such taxes or assessments are levied
against Landlord or Landlord's property, Landlord may, after written notice to
Tenant (and under proper protest if requested by Tenant) pay such taxes and
assessments, and Tenant shall reimburse Landlord therefor within thirty (30)
days after demand by Landlord; provided, however, Tenant, at its sole cost and
expense, shall have the right, with Landlord's cooperation, to bring suit in any
court of competent jurisdiction to recover the amount of any such taxes and
assessments so paid under protest.
11. REPAIRS.
11.1 TENANT'S REPAIR OBLIGATIONS. Except for Landlord's obligations
under Sections 4.2, 6.3.3 (remediation of environmental problems) and 11.3 below
Tenant shall at all times and at Tenant's sole cost and expense, keep, maintain,
clean, repair, renovate, retrofit, replace and preserve the Premises and all
parts thereof, structural and non-structural, including, without limitation,
utility meters, plumbing, pipes and conduits, all heating, ventilating and air
conditioning systems located within the Premises, all fixtures, furniture and
equipment, Tenant's signs, if any, locks, closing devices, security devices,
windows, window sashes, casements and frames, floors and floor coverings,
shelving, restrooms, ceilings, interior walls, roof, skylights, interior and
demising walls, doors, electrical and lighting equipment, sprinkler systems,
parking areas, driveways, walkways, parking lots, loading dock areas and doors,
rail spur areas, fences, signs, lawns and landscaping, if any, all Tenant
Improvements, Tenant Changes or other alterations, additions and other property
and/or fixtures located within the Premises in good condition and repair,
reasonable wear and tear excepted. Tenant's repair and maintenance obligations
shall include, but not be limited to, slurry coating the parking areas every
thirty (30) months if deemed necessary by a licensed paving contractor
reasonably acceptable to Landlord; parking area and driveway sweeping and
repairing; and responsibility for painting. Subject to Landlord's obligation to
contribute to certain expenses under Sections 4.2, 6.3.3 and 11.3, Tenant shall
at all times during the Term make all structural and non-structural changes,
repairs and improvements to the Premises of every kind and nature, whether
ordinary or extraordinary, foreseen or unforeseen, which may be required by any
Laws or for the safety of the Premises. Tenant agrees to procure and maintain
maintenance contracts for all heating, ventilating and air conditioning systems
with reputable contractors reasonably approved by Landlord. Such maintenance and
repairs shall be performed with due diligence, lien-free and in a good and
workmanlike manner, by licensed contractor(s) which are selected by Tenant and
approved by Landlord, which approval Landlord shall not unreasonably withhold or
delay. Except with respect to those warranties, service contracts or other
similar guarantees pertaining to matters for which Landlord is responsible
hereunder, for purposes of this Lease, Landlord hereby assigns to Tenant all of
its rights under any warranty, service contracts or other similar guarantees
furnished to Landlord with regard to the original construction of the Premises
and agrees to cooperate with Tenant in order to effectuate any repairs to be
performed by such third parties pursuant thereto.
11.2 LANDLORD'S REPAIR RIGHTS AND OBLIGATIONS. Except as provided in
Sections 4.2, 6.3.3 and 11.3 below, Landlord has no obligation whatsoever to
alter, remodel, improve, repair, renovate, retrofit, replace, redecorate or
paint all or any part of the Premises. Tenant waives the right to make repairs
at Landlord's expense under any law, statute or ordinance now or hereafter in
effect (including the provisions of California Civil Code Section 1942 and any
successive sections or statutes of a similar nature). If Tenant fails to perform
Tenant's obligations under Section 11.1 hereof, or under any other
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provision of this Lease, then Landlord shall have the option (but not the
obligation) to enter upon the Premises after ten (10) days' prior written notice
to Tenant, or in the case of an emergency immediately without prior notice, to
perform such obligations on Tenant's behalf necessary to return the Premises to
good order, condition and repair, whereupon the costs incurred by Landlord shall
become due and payable to Landlord, upon demand, together with a fee of ten
percent (10%) of the costs of such work for Landlord's managing agent.
11.3 CONDITION OF PREMISES; WARRANTY. Landlord shall deliver the
Premises broom clean and free of debris on the Early Occupancy Date and warrants
that the existing electrical, plumbing, fire sprinkler, lighting, loading doors,
if any, and all other such elements of the Building, other than those
constructed by Tenant, shall be in good operating condition on said date and
that the surface and structural elements of the roof, bearing walls, drainage
systems and foundation of the Building shall be free of material defects and
leak-free. If a non-compliance with said warranty exists as of the Early
Occupancy Date, Landlord shall, except as otherwise provided in this Lease,
promptly after receipt of written notice from Tenant setting forth with
specificity the nature and extent of such non-compliance, rectify same at
Landlord's expense (and without offset or reduction of the Allowance or the
Additional Allowance). If, Tenant does not give Landlord written notice of any
non-compliance with this warranty within thirty (30) days after the Early
Occupancy Date, correction of such non-compliance shall be the obligation of
Tenant at Tenant's sole cost and expense.
In addition, Landlord warrants that the improvements, including the Building
shell, on the Premises comply with all applicable laws, covenants or
restrictions of record, building codes, regulations and ordinances including but
not limited to the ADA ("APPLICABLE REQUIREMENTS") in effect on the Early
Occupancy Date. Said warranty does not apply to the use to which Tenant will put
the Premises or to any alterations made or to be made by Tenant. Tenant is
responsible for determining whether or not the zoning is appropriate for
Tenant's intended use. If the Premises do not comply with said warranty,
Landlord shall, except as otherwise provided, promptly after receipt of written
notice from Tenant setting forth with specificity the nature and extent of such
non-compliance, rectify the same at Landlord's expense (and without offset or
reduction of the Allowance or the Additional Allowance). If Tenant does not give
Landlord written notice of a non-compliance with this warranty within thirty
(30) days following the Early Occupancy Date, correction of that non-compliance
shall be the obligation of Tenant at Tenant's sole cost and expense.
Tenant acknowledges and agrees that, except to the extent specifically set forth
in this Lease, Landlord has not made, does not make and specifically negates and
disclaims any representations, warranties, promises, covenants, agreements or
guarantees of any kind or character whatsoever concerning or with respect to (a)
the value, nature, quality or condition of the Premises; (b) the suitability of
the Premises for any and all activities and uses which Tenant may conduct
thereon; (c) the compliance of the Premises with any laws, rules, ordinances or
regulations of any applicable governmental authority or body, including, without
limitation, environmental laws (collectively, "LAWS"); (d) the habitability,
merchantability, marketability, profitability or fitness for a particular
purpose of the Premises; (e) the manner or quality of the construction or
materials incorporated into the Premises; (f) the manner, quality, state of
repair or lack of repair of the Premises; or (g) any other matter with respect
to the Premises. Tenant further acknowledges and agrees that, except to the
extent specifically set forth in this Lease, the leasing of the Premises as
provided for herein is made on an "AS-IS" condition and basis with all faults.
Except for Landlord's obligations under Sections 4.2, 6.3.2, 6.3.3 and this
Section 11.3, Landlord shall have no liability or responsibility for any latent
or patent defects in the Premises. Except for damages arising from Landlord's
failure to perform its obligations under this Sections 4.2, 6.3.2, 6.3.3 and
this Section 11.3, Tenant and anyone claiming by, through or under Tenant hereby
fully and irrevocably releases Landlord from any and all claims that it may now
have or hereafter acquire against Landlord for any cost, loss,
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liability, damage, expense, demand, action or cause of action arising from or
related to any construction defects, errors, omissions or other conditions,
including, but not limited to, environmental matters, now or hereafter affecting
the Premises. This release includes claims of which Tenant is presently unaware
or which Tenant does not presently suspect to exist in its favor which, if known
by Tenant, would materially affect Tenant's release of Landlord. Tenant
specifically waives the provision of California Civil Code ss. 1542, which
provides as follows: "A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the time of executing
the release, which if known by him must have materially affected his settlement
with the debtor." Nothing contained herein shall release Landlord from any
claims or liability arising out of Landlord's acts or omissions, including,
without limitation, fraud or misrepresentation or release by Landlord of
Hazardous Materials on the Premises.
12. ALTERATIONS.
12.1 TENANT CHANGES; CONDITIONS.
(a) Subject to the terms of Section 11.3 and the Work Letter Agreement
attached hereto as Exhibit "C", Tenant shall not make any alterations,
additions, improvements or decorations to the Premises (collectively, "TENANT
CHANGES," and individually, a "TENANT CHANGE") unless Tenant first obtains
Landlord's prior written approval thereof, which approval Landlord shall not
unreasonably withhold or delay. If Landlord fails to respond to Tenant's request
for approval within ten (10) days after receipt of the same, Landlord shall be
deemed to have approved the Tenant Change which is the subject of the approval
so long as Tenant informed Landlord in its request for approval (or thereafter
but within such ten (10) day period) that Landlord's failure to respond within
such ten (10) day period would result in Landlord's deemed approval.
Notwithstanding the foregoing, Landlord's prior approval shall not be required
for any Tenant Change which satisfies all of the following conditions
(hereinafter a "PRE-APPROVED CHANGE"): (i) the costs of such Tenant Change does
not exceed Ten Thousand Dollars ($10,000.00) individually; (ii) the costs of
such Tenant Change when aggregated with the costs of all other Tenant Changes
made by Tenant do not exceed Fifty Thousand Dollars ($50,000.00) in any three
(3) year period; (iii) Tenant delivers to Landlord final plans, specifications
and working drawings for such Tenant Change at least ten (10) days prior to
commencement of the work thereof; (iv) Tenant and such Tenant Change otherwise
satisfy all other conditions set forth in this Section 12.1; and (v) the Tenant
Change does not affect the structural, electrical, mechanical, life-safety or
exterior elements of the Premises.
(b) After Landlord has approved the Tenant Changes and the plans,
specifications and working drawings therefor (or is deemed to have approved the
Pre-Approved Changes as set forth in Section 12.1(a) above), Tenant shall: (i)
enter into an agreement for the performance of such Tenant Changes with licensed
and bondable contractors and subcontractors selected by Tenant and approved by
Landlord, which approval shall not be unreasonably withheld; and (ii) before
proceeding with any Tenant Change, provide Landlord with at least ten (10) days'
prior written notice thereof. In addition, before proceeding with any Tenant
Change, Tenant's contractors shall obtain, on behalf of Tenant and at Tenant's
sole cost and expense: (A) all necessary governmental permits and approvals for
the commencement and completion of such Tenant Change; and (B) at Landlord's
reasonable request, a completion and lien indemnity bond, or other surety,
satisfactory to Landlord for such Tenant Change if the cost of such Tenant
Change exceeds the amount then held by Landlord as security for Tenant's
obligations under this Lease pursuant to Sections 5.1 and 5.2 hereof. Landlord's
approval of any contractor(s) and subcontractor(s) of Tenant shall not release
Tenant or any such contractor(s) and/or subcontractor(s) from any liability for
any conduct or acts of such contractor(s) and/or subcontractor(s). Further,
Landlord's approval of Tenant Changes and the plans therefor will create no
liability or responsibility on Landlord's part concerning the completeness of
same or their design sufficiency or compliance with laws.
(c) All Tenant Changes shall be performed: (i) in accordance with the
approved plans, specifications and working drawings; (ii) lien-free and in a
good and workmanlike manner; (iii) in compliance with all laws, rules and
regulations of all governmental agencies and authorities including, without
limitation, applicable building permit requirements and the provisions of Title
III of the ADA; (iv) by licensed and/or bondable contractors and subcontractors
approved by Landlord and (v) at such times, in such manner and subject to such
rules and regulations as Landlord may from time to time reasonably designate.
(d) Throughout the performance of the Tenant Changes, Tenant shall
obtain, or cause its contractors to obtain, workers compensation insurance and
commercial general liability insurance in compliance with the provisions of
Section 20 of this Lease.
12.2 REMOVAL OF TENANT CHANGES AND TENANT IMPROVEMENTS. All Tenant
Changes and the initial Tenant Improvements in the Premises (whether installed
or paid for by Landlord or Tenant), shall become the property of Landlord and
shall remain upon and be surrendered with the Premises at the end of the Term of
this Lease; provided, however, Landlord may, by written notice delivered to
Tenant in connection with its approval of the Initial Tenant Improvements
pursuant to the Work Letter or any Tenant Changes pursuant to Section 12.1
identify those items of the initial Tenant Improvements and Tenant Changes which
Landlord shall require Tenant to remove at the end of the Term of this Lease.
However, Landlord's failure to specify at that time whether Tenant will be
required to remove the Tenant Improvements or any Tenant Changes will only be
deemed an election not to require such removal if Tenant informed Landlord in
its request for approval (or thereafter but prior to Landlord's approval) that
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Landlord's failure to identify such items would result in Tenant having no
obligation to remove the same at the expiration or earlier termination of the
Term. If Landlord requires Tenant to remove any such items as described above,
Tenant shall, at its sole cost, remove the identified items on or before the
expiration or sooner termination of this Lease and repair any damage to the
Premises caused by such removal (or, at Landlord's option, shall pay to Landlord
all of Landlord's costs of such removal and repair).
12.3 REMOVAL OF PERSONAL PROPERTY. All articles of personal property
owned by Tenant or installed by Tenant at its expense in the Premises (including
business and trade fixtures, furniture and movable partitions) shall be, and
remain, the property of Tenant, and shall be removed by Tenant from the
Premises, at Tenant's sole cost and expense, on or before the expiration or
sooner termination of this Lease. Tenant shall repair any damage caused by such
removal.
12.4 TENANT'S FAILURE TO REMOVE. If Tenant fails to remove by the
expiration or sooner termination of this Lease all of its personal property, or
any items of Tenant Improvements or Tenant Changes identified by Landlord for
removal pursuant to Section 12.2 above, Landlord may, (without liability to
Tenant for loss thereof), at Tenant's sole cost and in addition to Landlord's
other rights and remedies under this Lease, at law or in equity: (a) remove and
store such items in accordance with applicable law; and/or (b) upon ten (10)
days' prior notice to Tenant sell all or any such items at private or public
sale for such price as Landlord may obtain as permitted under applicable law.
Landlord shall apply the proceeds of any such sale to any amounts due to
Landlord under this Lease from Tenant (including Landlord's attorneys' fees and
other costs incurred in the removal, storage and/or sale of such items), with
any remainder to be paid to Tenant.
12.5 LANDLORD'S WORK. Notwithstanding anything above to the contrary,
Landlord, at Landlord's sole cost and expense (and without offset or reduction
of the Allowance or the Additional Allowance), shall, as soon as practicable,
install a domestic backflow device and a meter therefor in a location at the
Building that is mutually acceptable to Landlord and the City of San Diego
("LANDLORD'S WORK"). Tenant acknowledges that Landlord's Work will be performed
following Landlord's delivery of the Premises to Tenant, and that Landlord will
not be liable for any disruption or damage caused by Landlord's Work, nor shall
the performance of Landlord's Work constitute a constructive eviction or entitle
Tenant to any abatement of Rent nor shall Landlord be liable for any damage to
Tenant's property or any interruption of Tenant's business as a result thereof.
Tenant acknowledges and agrees that it shall have no right to complete
Landlord's Work.
13. LIENS. Tenant shall not permit any mechanic's, materialmen's or other liens
to be filed against all or any part of the Premises, nor against Tenant's
leasehold interest in the Premises, by reason of or in connection with any
repairs, alterations, improvements or other work contracted for or undertaken by
Tenant or any other act or omission of Tenant or Tenant's agents, employees,
contractors, licensees or invitees. Tenant shall, at Landlord's request, provide
Landlord with enforceable, conditional and final lien releases (and other
reasonable evidence reasonably requested by Landlord to demonstrate protection
from liens) from all persons furnishing labor and/or materials with respect to
the Premises. Landlord shall have the right at all reasonable times to post on
the Premises and record any notices of non-responsibility which it deems
necessary for protection from such liens. If any such liens are filed, Tenant
shall, at its sole cost, immediately cause such lien to be released of record or
bonded so that it no longer affects title to the Premises. If Tenant fails to
cause such lien to be so released or bonded within twenty (20) days after filing
thereof, Landlord may, without waiving its rights and remedies based on such
breach, and without releasing Tenant from any of its obligations, cause such
lien to be released by any means it shall deem proper, including payment in
satisfaction of the claim giving rise to such lien. Tenant shall pay to Landlord
within five (5) days after receipt of invoice from Landlord, any sum paid by
Landlord to remove such liens, together with interest at the Interest Rate from
the date of such payment by Landlord. Notice is hereby given that Landlord shall
not be liable for any labor, services or materials furnished or to be furnished
to Tenant, or to anyone holding the Premises through or under Tenant, and that
no mechanics' or other liens for any such labor, services or materials shall
attach to or affect the interest of Landlord in the Premises.
14. ASSIGNMENT AND SUBLETTING.
14.1 RESTRICTION ON TRANSFER. Tenant will not assign this Lease in
whole or in part, nor sublet all or any part of the Premises (collectively and
individually, a "TRANSFER"), without the prior written consent of Landlord,
which consent Landlord will not unreasonably withhold, except as provided in
this Section 14. In no event may Tenant encumber or hypothecate this Lease. The
consent by Landlord to any assignment, encumbrance or subletting shall not
constitute a waiver of the necessity for such consent to any subsequent
assignment or subletting. This prohibition against assigning or subletting shall
be construed to include a prohibition against any assignment or subletting by
operation of law. Irrespective of any assignment or sublease, Tenant shall
remain fully liable under this Lease and shall not be released from performing
any of the terms, covenants and conditions of this Lease. Without limiting in
any way Landlord's right to withhold its consent on any reasonable grounds, it
is agreed that Landlord will not be acting unreasonably in refusing to consent
to an assignment or sublease if, in Landlord's opinion, (i) the net worth or
financial capabilities of such assignee is less than that of Tenant at the date
hereof (this provision does not apply to any proposed subtenant), (ii) the
proposed assignee or subtenant does not have the financial capability to fulfill
the obligations imposed by the assignment or sublease, (iii) the proposed
assignment or sublease involves a change of use of the Premises from that
specified herein, or (iv) the proposed assignee or subtenant is not, in
Landlord's reasonable opinion, of reputable or good character. Subject to
Section 14.5, if Tenant is a corporation, or is an unincorporated association or
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partnership, the transfer, assignment or hypothecation of any stock or interest
in such corporation, association or partnership in the aggregate in excess of
forty-nine percent (49%) shall be deemed an assignment within the meaning and
provisions of this Section 14.1.
14.2 TRANSFER NOTICE. If Tenant desires to effect Transfer, then at least
thirty (30) days prior to the date when Tenant desires the Transfer to be
effective (the "TRANSFER DATE"), Tenant agrees to give Landlord a notice (the
"TRANSFER NOTICE"), stating the name, address and business of the proposed
assignee, sublessee or other transferee (sometimes referred to hereinafter as
"TRANSFEREE"), reasonable information (including references) concerning the
character, ownership, and financial condition of the proposed Transferee, the
Transfer Date, any ownership or commercial relationship between Tenant and the
proposed Transferee, and the consideration and all other material terms and
conditions of the proposed Transfer, all in such detail as Landlord may
reasonably require.
14.3 LANDLORD'S OPTIONS. Within fifteen (15) days of Landlord's receipt
of any Transfer Notice, and any additional information requested by Landlord
concerning the proposed Transferee's financial responsibility, Landlord will
notify Tenant of its election to do one of the following: (i) consent to the
proposed Transfer subject to such reasonable conditions as Landlord may impose
in providing such consent; (ii) refuse such consent, which refusal shall be on
reasonable grounds; or (iii) if the Transfer Notice relates to the entire
Premises, terminate this Lease and recapture the Premises for reletting by
Landlord. The provisions of this Section 14.2 shall not apply to a Permitted
Transfer. In the event Landlord elects to terminate this Lease and recapture the
Premises pursuant to subparagraph (iii) above, Tenant may, within five (5)
business days after receipt of Landlord's election to so terminate and
recapture, rescind its Transfer Notice and this Lease shall remain in full force
and effect.
14.4 ADDITIONAL CONDITIONS. A condition to Landlord's consent to any
Transfer of this Lease will be the delivery to Landlord of a true copy of the
fully executed instrument of assignment, sublease, transfer or hypothecation, in
form and substance reasonably satisfactory to Landlord. Tenant agrees to pay to
Landlord, as additional rent, fifty percent (50%) of all sums and other
consideration payable to and for the benefit of Tenant by the assignee or
sublessee in excess of the rent payable under this Lease for the same period and
portion of the Premises. In calculating excess rent or other consideration which
may be payable to Landlord under this Section, Tenant will be entitled to deduct
commercially reasonable third party brokerage commissions and attorneys' fees
and other amounts reasonably and actually expended by Tenant in connection with
such assignment or subletting if acceptable written evidence of such
expenditures is provided to Landlord. No Transfer will release Tenant of
Tenant's obligations under this Lease or alter the primary liability of Tenant
to pay the Rent and to perform all other obligations to be performed by Tenant
hereunder. Each sublease shall provide that if Landlord gives said sublessee
written notice that Tenant is in default under this Lease, said sublessee will
thereafter make all payments due under the sublease directly to or as directed
by Landlord, which payments will be credited against any payments due under this
Lease. Tenant hereby irrevocably and unconditionally assigns to Landlord all
rents and other sums payable under any sublease of the Premises; provided,
however, that Landlord hereby grants Tenant a license to collect all such rents
and other sums so long as Tenant is not in default under this Lease. Tenant
shall, within ten (10) days after the execution and delivery of any assignment
or sublease, deliver a duplicate original copy thereof to Landlord. Consent by
Landlord to one Transfer will not be deemed consent to any subsequent Transfer.
In the event of default by any Transferee of Tenant or any successor of Tenant
in the performance of any of the terms hereof, Landlord may proceed directly
against Tenant without the necessity of exhausting remedies against such
Transferee or successor. If Tenant effects a Transfer or requests the consent of
Landlord to any Transfer (whether or not such Transfer is consummated), then,
upon demand, and as a condition precedent to Landlord's consideration of the
proposed assignment or sublease, Tenant agrees to pay Landlord a non-refundable
administrative fee of Five Hundred Dollars ($500.00), plus Landlord's reasonable
attorneys' fees and costs (whether attributable to Landlord's in-house attorneys
or paralegals or otherwise) and other costs incurred by Landlord in reviewing
such proposed assignment or sublease (not to exceed Seven Hundred Fifty Dollars
($750.00), in 2000 Dollars). Acceptance of the administrative fee and/or
reimbursement of Landlord's attorneys' fees and costs shall in no event obligate
Landlord to consent to any proposed Transfer. Notwithstanding any contrary
provision of this Lease, if Tenant or any proposed Transferee claims that
Landlord has unreasonably withheld or delayed its consent to a proposed Transfer
or otherwise has breached its obligations under this Section 14, Tenant's and
such Transferee's only remedy shall be to seek a declaratory judgment and/or
injunctive relief, and Tenant, on behalf of itself and, to the extent permitted
by law, such proposed Transferee waives all other remedies against Landlord,
including without limitation, the right to seek monetary damages or to terminate
this Lease.
14.5 PERMITTED TRANSFERS. Notwithstanding the provisions of this Section
14 to the contrary, Tenant may assign this Lease or sublet the Premises or any
portion thereof (herein, a "PERMITTED TRANSFER"), without Landlord's consent, to
any entity that controls, is controlled by or is under common control with
Tenant, or to any entity resulting from a merger or consolidation with Tenant,
or to any person or entity that acquires all of the assets of Tenant's business
as a going concern (a "PERMITTED TRANSFEREE"), provided that: (a) at least
twenty (20) days prior to such assignment or sublease, Tenant delivers to
Landlord the financial statements and other financial and background information
of the assignee or sublessee as described in Section 14.2 above; (b) in the case
of an assignment, the assignee assumes, in full, the obligations of Tenant under
this Lease pursuant to a commercially reasonable assumption agreement, a fully
executed copy of which is delivered to Landlord within twenty (20) days
following the effective date of such assignment or subletting; (c) the financial
net worth of the assignee or sublessee equals or exceeds that of Tenant and any
guarantor hereof as of the date of execution of this Lease; (d) Tenant remains
fully liable under this Lease; (e) the use of the Premises
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remains unchanged; and (f) such transaction is not entered into as a subterfuge
to avoid the restrictions and provisions of this Section 14.
15. ENTRY BY LANDLORD. Landlord and its employees and agents shall at all
reasonable times have the right to enter the Premises to inspect the same, to
exhibit the Premises to prospective lenders or purchasers (or during the last
twelve (12) months of the Term, to prospective tenants), to post notices of
non-responsibility, and/or to alter, improve or repair the Premises as
contemplated by this Lease, all without being deemed guilty of or liable for any
breach of Landlord's covenant of quiet enjoyment or any eviction of Tenant, and
without abatement of rent. In exercising such entry rights, Landlord shall
endeavor to minimize, as reasonably practicable, the interference with Tenant's
business, and shall provide Tenant with reasonable advance written notice of
such entry (except in emergency situations and for providing regularly scheduled
services, if any). Landlord shall have the means which Landlord may deem proper
to open Tenant's doors in an emergency in order to obtain entry to the Premises.
Any entry to the Premises obtained by Landlord by any of said means or otherwise
shall not under any circumstances be construed or deemed to be a forcible or
unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant
from the Premises or any portion thereof, or grounds for any abatement or
reduction of Rent and Landlord shall not have any liability to Tenant for any
damages or losses on account of any such entry by Landlord except, subject to
the provisions of Sections 21.1 and 23, to the extent of Landlord's gross
negligence or willful misconduct.
16. UTILITIES AND SERVICES. Tenant shall be solely responsible for obtaining and
shall promptly pay all charges for heat, air conditioning, water, gas,
electricity or any other utility used, consumed or provided in, furnished to or
attributable to the Premises directly to the supplying utility companies
following the Early Occupancy Date, together with all deposits and hook-up and
connection charges for such utilities. Tenant shall reimburse Landlord within
thirty (30) days of billing for fixture charges and/or water tariffs, if
applicable, which are charged to Landlord by utility companies. Landlord will
notify Tenant of this charge as soon as it becomes known. This charge will
increase or decrease with current charges being levied against Landlord or the
Premises by the local utility company, and will be due as additional rent. In no
event shall Rent abate or shall Landlord be liable for any interruption or
failure in the supply of any such utility services to Tenant.
17. INDEMNIFICATION AND EXCULPATION.
17.1 TENANT'S ASSUMPTION OF RISK AND WAIVER. Except to the extent such
matter is not covered by the insurance required to be maintained by Tenant under
this Lease and such matter is attributable to the gross negligence or willful
misconduct of Landlord or Landlord's agent(s) or a release by Landlord of
Hazardous Materials on the Premises, Landlord shall not be liable to Tenant,
Tenant's employees, agents or invitees for: (i) any damage to property of
Tenant, or of others, located in, on or about the Premises, (ii) the loss of or
damage to any property of Tenant or of others by theft or otherwise, (iii) any
injury or damage to persons or property resulting from fire, explosion, falling
plaster, steam, gas, electricity, water, rain or leaks from any part of the
Premises or from the pipes, appliance of plumbing works or from the roof, street
or subsurface or from any other places or by dampness or by any other cause of
whatsoever nature, or (iv) any such damage caused by other persons in the
Premises, occupants of adjacent property, or the public, or caused by operations
in construction of any private, public or quasi-public work. Landlord shall in
no event be liable for any consequential damages or loss of business or profits
and Tenant hereby waives any and all claims for any such damages. All property
of Tenant kept or stored on the Premises shall be so kept or stored at the sole
risk of Tenant and Tenant shall hold Landlord harmless from any claims arising
out of damage to the same, including subrogation claims by Tenant's insurance
carriers, unless such damage shall be caused by the gross negligence or willful
misconduct of Landlord or Landlord's agent(s). Landlord or its agents shall not
be liable for interference with the light or other intangible rights.
17.2 INDEMNIFICATION. Tenant shall be liable for, and shall indemnify,
defend, protect and hold Landlord and Landlord's partners, officers, directors,
employees, agents, successors and assigns (collectively, "LANDLORD INDEMNIFIED
PARTIES") harmless from and against, any and all claims, damages, judgments,
suits, causes of action, losses, liabilities and expenses, including attorneys'
fees and court costs (collectively, "INDEMNIFIED CLAIMS"), arising or resulting
from (a) any occurrence at the Premises following the Early Occupancy Date,
unless caused by the negligence or willful misconduct of Landlord or its agents,
employees or contractors, (b) any act or omission of Tenant or any of Tenant's
agents, employees, contractors, subtenants, assignees, licensees or Tenant's
invitees (collectively, "TENANT PARTIES"); (c) the use of the Premises and
conduct of Tenant's business by Tenant or any Tenant Parties, or any other
activity, work or thing done, permitted or suffered by Tenant or any Tenant
Parties, in or about the Premises; and/or (d) any default by Tenant of any
obligations on Tenant's part to be performed under the terms of this Lease. In
case any action or proceeding is brought against Landlord or any Landlord
Indemnified Parties by reason of any such Indemnified Claims, Tenant, upon
notice from Landlord, shall defend the same at Tenant's expense by counsel
approved in writing by Landlord, which approval shall not be unreasonably
withheld. Subject to Section 21 hereof, Landlord will be liable for, and shall
indemnify, protect, defend and hold harmless Tenant and Tenant's partners,
officers, directors, employees, agents, successors and assigns (collectively,
"TENANT INDEMNIFIED PARTIES") from and against any and all Indemnified Claims
that arise or result from (a) any negligent or willful act or omission of
Landlord, Landlord's agents, employees or contractors, (b) any default by
Landlord of any obligations on Landlord's part to be performed under the terms
of this Lease, and/or (c) any occurrence at the Premises (i) prior to the Early
Occupancy Date or (ii) following the expiration or sooner termination of this
Lease and Tenant's vacation of the Premises, unless attributable to any act or
omission of Tenant or the
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Tenant Parties. In case any action or proceeding is brought against Tenant or
any Tenant Indemnified Parties by reason of any such Indemnified Claims,
Landlord, upon notice from Tenant, shall defend the same at Landlord's expense
by counsel approved in writing by Tenant, which approval shall not be
unreasonably withheld. Indemnified Claims do not include claims pertaining to
Hazardous Materials, as such claims are covered by the provisions of Section 6.
17.3 SURVIVAL; NO RELEASE OF INSURERS. The indemnification obligations
under Section 17.2, shall survive the expiration or earlier termination of this
Lease. The covenants, agreements and indemnification in Sections 17.1 and 17.2
above, are not intended to and shall not relieve any insurance carrier of its
obligations under policies required to be carried pursuant to the provisions of
this Lease.
18. DAMAGE OR DESTRUCTION.
18.1 OBLIGATION TO RESTORE. Except as set forth below, in case of
damage to or destruction of the Premises, whether or not by a risk required to
be covered by insurance as set forth in Section 20 of this Lease, this Lease
shall not terminate and Tenant shall promptly restore, rebuild, replace or
repair (hereinafter referred to as "RESTORE" or "RESTORATION") the Premises to
substantially the same condition as existed immediately prior to such damage or
destruction. Such Restoration shall be commenced promptly but in no event later
than ninety (90) days after the casualty and shall thereafter be prosecuted with
due diligence.
Notwithstanding the foregoing or any provision to the contrary in this Lease, if
(a) Landlord has elected to maintain the Special Form (fka All Risk) insurance
for the Premises pursuant to Section 20.4 and fails to make the appropriate
insurance proceeds available within ninety (90) days following a casualty to
which such insurance applies, or (b) the casualty is (i) of a type that is not
covered by insurance required to be maintained by Tenant (or Landlord) hereunder
(an "UNINSURED CASUALTY") and (ii) the cost of Restoration exceeds ten percent
(10%) of the replacement cost of the Premises (the "UNINSURED THRESHOLD
AMOUNT"), then Tenant shall have no obligation to Restore and Tenant shall have
the right to terminate this Lease by giving Landlord written notice thereof
within ninety (90) days following the casualty; provided, however, Landlord may
rescind such termination by giving Tenant written notice, within thirty (30)
days following receipt of Tenant's termination notice, of Landlord's election to
make available to Tenant in connection with its Restoration of the Premises, (A)
in the case of clause (a) above, an amount equal to the cost of Restoration and
(B) in the case of clause (b) above, the difference between the cost of such
Restoration and the Uninsured Threshold Amount. Notwithstanding any provision to
the contrary in this Lease, if Landlord has elected to carry the Special Form
(fka All-Risk) insurance under Section 20.4 and the deductible exceeds the
deductible Tenant is permitted to maintain hereunder, Landlord shall be required
to pay such excess.
Notwithstanding the foregoing, however, in the case of damage to or destruction
of the Premises during the last twelve (12) months of the Term that will render
the Premises inaccessible or unusable for purposes of conducting Tenant's
business for a period of ninety (90) days or more, Tenant may elect to terminate
this Lease by giving Landlord written notice of such election within thirty (30)
days following the casualty, in which event Tenant shall have no obligation to
Restore the Premises; provided, however, Tenant shall deliver any insurance
proceeds to Landlord in accordance with Section 3 below. If Tenant elects to
terminate this Lease in accordance with this paragraph, this Lease shall
terminate thirty (30) days following the date Landlord receives Tenant's written
notice of such election (the "TERMINATION DATE") upon the payment by Tenant of
all Rent and all other sums then due and payable under this Lease to and
including the Termination Date. Said termination shall not release Tenant from
the obligations and liabilities of Tenant under this Lease, actual or
contingent, which have accrued on or prior to the Termination Date.
18.2 RECONSTRUCTION AND REPAIR REQUIREMENTS. Tenant shall obtain
Landlord's prior approval of all plans for Restoration work performed by Tenant,
which approval shall not be unreasonably withheld or delayed.
18.3 NO RENT ABATEMENT DURING RECONSTRUCTION. There shall be no Rent
abatement during Restoration of the Premises or during that period after any
casualty and prior to commencement of Restoration. Notwithstanding the
foregoing, in the event Landlord elects (i) to maintain rental loss insurance
pursuant to Section 20.4 or (ii) to rescind Tenant's termination of this Lease
pursuant to the second paragraph of Section 18.1, then the following shall
apply: In the event that as a result of any casualty damage to the Premises,
Tenant is prevented from using, and does not use, the Premises or does not use
some portion thereof, then the Rent shall be abated or reduced, as the case may
be, during the period that Tenant continues to be so prevented from using and
does not use the Premises or does not use some portion thereof, in the
proportion that the rentable square feet of the portion of the Premises that
Tenant is prevented from using, and does not use, bears to the total rentable
square feet of the Premises; provided, however, Tenant shall only be entitled to
such abatement so long as Tenant is complying with its Restoration obligations
under Section 18.1 and in no event may such abatement continue beyond the later
to occur of (i) twelve (12) months following the casualty or (ii) the expiration
date of coverage under Landlord's rental loss insurance policy. Notwithstanding
the foregoing to the contrary, if the damage is due to the willful or
intentional misconduct of Tenant or any Tenant Parties, there shall be no
abatement of Rent unless such abatement (i) is covered by the rental loss
insurance maintained by Landlord or (ii) would have been covered by the rental
insurance loss insurance required to be maintained under Section 20.4 in the
event Landlord has failed to maintain such insurance.
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18.4 ADJUSTMENT OF LOSS AND DISBURSEMENT OF INSURANCE PROCEEDS UPON
RESTORATION. Except for Restoration that is reasonably expected to cost less
than Fifty Thousand Dollars ($50,000), Landlord shall have the right to adjust
the loss with the insurance company(ies) and all proceeds of the insurance
policies maintained pursuant to Section 20.1(a) ("PROCEEDS") shall be deposited
with a depository acceptable to Landlord and Tenant (the "DEPOSITORY"). If the
Proceeds are insufficient to cover the anticipated cost of Restoration, Tenant
shall deposit with the Depository prior to the commencement of Restoration
funds in the amount of such deficiency, unless Landlord is responsible therefor
pursuant to Section 18.1 above. The Depository shall disburse the Proceeds and
Tenant's funds, if applicable, during the course of Restoration in accordance
with customary construction disbursements, including a ten percent (10%)
retention. If, after the Restoration has been completed in accordance with the
terms of this Lease, there are remaining funds held by the Depository, then
such funds (after first deducting from such funds the fees and expenses of the
Depository) shall be delivered to Tenant. If there are not sufficient funds
remaining to pay for the Depository's fees and expenses, Tenant shall be
responsible for the payment of same.
18.5 DISBURSEMENT OF INSURANCE PROCEEDS UPON TERMINATION. Upon any
termination of this Lease under the provisions of this Article 18, all proceeds
from insurance policies maintained under Section 20 (other than proceeds
attributable to Tenant's personal property, inventory, equipment and trade
fixtures) shall be disbursed and paid to Landlord.
18.6 WAIVER OF TERMINATION. The agreements contained in this Article
18 provide a material part of the consideration for this Lease and in
bargaining for and obtaining its rights under this Article 18, Tenant waives
any right to terminate this Lease under Section 1932 and/or 1933 of the Civil
Code of California, or any similar statute or law now or hereafter in force.
19. EMINENT DOMAIN.
19.1 TOTAL OR PARTIAL TAKING. In case all of the Premises, or such
part thereof as shall materially and substantially interfere with Tenant's
ability to conduct its business upon the Premises, shall be taken for any
public or quasi-public purpose by any lawful power or authority by exercise of
the right of appropriation, condemnation or eminent domain, or sold to prevent
such taking, Tenant shall have the right to terminate this Lease effective as
of the date possession is required to be surrendered to said authority. Tenant
shall not assert any claim against Landlord or the taking authority for any
compensation because of such taking, and Landlord shall be entitled to receive
the entire amount of any award without deduction for any estate or interest of
Tenant; provided, however, in the event of such a taking, Tenant shall be
entitled to such portion of the award as shall be attributable to goodwill and
for damage to, or the cost of removal of, Tenant's personal property. In the
event this Lease is not terminated following a taking, Landlord shall be
entitled to the entire amount of the award without deduction for any estate or
interest of Tenant, Landlord shall restore the Premises to substantially their
same condition prior to such partial taking to the extent of any award proceeds
received by Landlord, and a fair and equitable abatement shall be made to
Tenant for the Monthly Rent corresponding to the time during which, and to the
part of the Premises of which, Tenant shall be so deprived on account of such
taking and restoration. If the award proceeds from the taking are insufficient
to restore the Premises as required by the preceding sentence and Landlord does
not provide its own funds to so restore the Premises, and if as a result
thereof Tenant's ability to use the Premises as contemplated by this Lease is
materially and substantially impaired, then Tenant may elect to terminate this
Lease by giving Landlord written notice thereof; provided, however, Landlord
may rescind such termination by giving Tenant written notice within ten (10)
business days following Landlord's receipt of such termination notice from
Tenant that Landlord will provide the necessary funds to so restore the
Premises.
19.2 TEMPORARY TAKING. In the event of taking of the Premises or any
part thereof for temporary use, (i) this Lease shall be and remain unaffected
thereby and Rent shall not abate, and (ii) Tenant shall be entitled to receive
for itself such portion or portions of any award made for such use with respect
to the period of the taking which is within the Lease Term. For purposes of
this Section 19.2, a temporary taking shall be defined as a taking for a period
of one (1) year or less.
19.3 WAIVER OF TERMINATION. Tenant and Landlord waive any right to
terminate this Lease under Section 1265.130 of the California Code of Civil
Procedure, or any similar statute or law now or hereafter in force.
20. TENANT'S INSURANCE.
20.1 TYPES OF INSURANCE. On or before the earlier of the Early
Occupancy Date or the date Tenant commences or causes to be commenced any work
of any type in or on any portion of the Premises, and continuing thereafter
until the expiration of the Term, Tenant shall obtain and keep in full force
and effect respecting the Premises, the following insurance:
(a) Special Form (fka All Risk) insurance, including fire and
extended coverage, sprinkler leakage (including earthquake sprinkler leakage),
vandalism, malicious mischief, earthquake and flood coverage upon property of
every description and kind located on the Premises, including, without
limitation, furniture, equipment and any other personal property, any Tenant
Changes, the Tenant Improvements, and the Building in an amount not less then
the full replacement cost thereof. In the event that there shall be a dispute as
to the amount which comprises full replacement cost, the decision of Landlord or
the mortgagees of Landlord shall be presumptive.
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(b) Commercial general liability insurance coverage, on an
occurrence basis, including personal injury, bodily injury (including wrongful
death), broad form property damage, operations hazard, owner's protective
coverage, contractual liability (including Tenant's indemnification obligations
under this Lease, including Section 17 hereof), liquor liability (if Tenant
serves or stores alcohol on the Premises), products and completed operations
liability, and owned/non-owned auto liability, with a general aggregate of not
less than Three Million Dollars ($3,000,000) per occurrence with "umbrella" or
excess liability coverage of not less than Five Million Dollars ($5,000,000).
The limits of such commercial general liability insurance shall be increased
every five (5) years during the Term of this Lease to an amount reasonably
required by Landlord, but not to exceed customary industry standards.
(c) Worker's compensation and employer's liability insurance,
in statutory amounts and limits, covering all persons employed in connection
with any work done in, on or about the Premises for which claims for death or
bodily injury could be asserted against Landlord, Tenant or the Premises.
(d) Loss of income, extra expense and business interruption
insurance covering a minimum of twelve (12) months of Tenant's Rent and such
additional amounts as will reimburse Tenant for direct or indirect loss of
earnings attributable to all perils commonly insured against by prudent tenants
or attributable to prevention of access to the Premises or Tenant's parking
areas as a result of such perils.
(e) Any other form or forms of insurance as Tenant or Landlord
or the mortgagees of Landlord may reasonably require from time to time, in form,
amounts and for insurance risks against which a prudent tenant would protect
itself, but only to the extent such risks and amounts are available in the
insurance market at commercially reasonable costs.
20.2 REQUIREMENTS. Each policy required to be obtained by Tenant
hereunder shall: (a) be issued by insurers authorized to do business in the
state in which the Premises is located and rated not less than financial class
X, and not less than policyholder rating A- in the most recent version of
Best's Key Rating Guide (provided that, in any event, the same insurance
company shall provide the coverages described in Sections 20.1(a) and 20.1(d)
above); (b) be in form reasonably satisfactory from time to time to Landlord;
(c) name Tenant as named insured thereunder and shall name Landlord and, at
Landlord's request, such other persons or entities of which Tenant has been
informed in writing, as additional insureds (and with respect to the insurance
described in Sections 20.1(a) and (d) above, as loss-payees) thereunder, all as
their respective interests may appear; (d) not have a deductible amount
exceeding Ten Thousand Dollars ($10,000) except that with respect to earthquake
insurance, the deductible amount shall not exceed ten percent (10%) of the
total insured value, which deductible amount shall be deemed self-insured with
a full waiver of subrogation; (e) specifically provide that the insurance
afforded by such policy for the benefit of the additional insureds shall be
primary, and any insurance carried by the additional insureds shall be excess
and non-contributing; (f) contain an endorsement that the insurer waives its
right to subrogation as described in Section 21 below; (g) require the insurer
to notify the additional insureds in writing not less than ten (10) days prior
to any change, reduction in coverage, cancellation or other termination
thereof; (h) contain a cross liability or severability of interest endorsement
to the extent the same are available in the insurance market; (i) be in amounts
sufficient at all times to satisfy any coinsurance requirements thereof; and
(j) provide that any loss otherwise payable thereunder shall be payable
notwithstanding any act or omission of Landlord or Tenant which might, absent
such provision, result in a forfeiture of all or a part of such insurance
payment Tenant agrees to deliver to Landlord, as soon as practicable after the
placing of the required insurance, but in no event later than the date Tenant
enters all or any part of the Premises, certificates from the insurance company
evidencing the existence of such insurance and Tenant's compliance with the
foregoing provisions of this Section 20). Tenant shall cause replacement
certificates to be delivered to Landlord not less than ten (10) days prior to
the expiration of any such policy or policies. If any such initial or
replacement certificates are not furnished within the time(s) specified herein,
Tenant shall be deemed to be in material default under this Lease without the
benefit of any additional notice or cure period provided in Section 22.1 below,
and Landlord shall have the right, but not the obligation, to procure such
policies and certificates at Tenant's expense.
20.3 EFFECT ON INSURANCE. Tenant shall not do or permit to be done
anything which will violate or invalidate any insurance policy maintained by
Tenant hereunder. If Tenant's occupancy or conduct of its business in or on the
Premises results in any increase in premiums for any insurance carried by
Landlord, Tenant shall pay such increase as additional rent within ten (10)
days after being billed therefor by Landlord. If any insurance coverage carried
by Landlord shall be cancelled or reduced (or cancellation or reduction thereof
shall be threatened) by reason of the use or occupancy of the Premises by
Tenant or by anyone permitted by Tenant to be upon the Premises, and if Tenant
fails to remedy such condition within five (5) days after notice thereof,
Tenant shall be deemed to be in default under this Lease, without the benefit
of any additional notice or cure period specified in Section 22.1 below, and
Landlord shall have all remedies provided in this Lease, at law or in equity,
including, without limitation, the right (but not the obligation) to enter upon
the Premises and attempt to remedy such condition at Tenant's cost.
20.4 LANDLORD'S OPTION TO INSURE. Landlord shall have the option from
time to time to maintain the Special Form (fda All Risk) insurance referred to
in Section 20.1(a) above covering the property described therein (other than
Tenant's personal property, furniture and equipment, which Tenant shall
continue to insure) and/or rental loss insurance covering Tenant's rental
obligations hereunder for a period of at least twelve (12) months by giving
Tenant written notice thereof. If Landlord elects to maintain such insurance,
Tenant shall have no obligation to maintain such insurance on the property
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covered thereby until Landlord elects not to maintain such insurance by giving
Tenant at least sixty (60) days' prior written notice thereof. Tenant shall
reimburse Landlord, as additional rent, the cost of such insurance within
thirty (30) days following receipt of an invoice therefor.
21. WAIVER OF SUBROGATION.
21.1 WAIVER. Tenant hereby waives its rights against Landlord with
respect to any claims or damages or losses which are caused by or result from
(a) occurrences insured against under any insurance policy carried by Tenant
pursuant to the provisions of this Lease, or (b) occurrences which would have
been covered under any insurance required to be obtained and maintained by
Tenant under Section 20 of this Lease had such insurance been obtained and
maintained as required therein. The foregoing waiver shall be in addition to,
and not a limitation of, any other waivers or releases contained in this Lease.
21.2 WAIVER OF INSURERS. Tenant shall cause each insurance policy
required to be obtained by it pursuant to Section 20 to provide that the
insurer waives all rights of recovery by way of subrogation against Landlord in
connection with any claims, losses and damages covered by such policy. If
Tenant fails to maintain the insurance required hereunder, such risks shall be
deemed to be self-insured with a deemed full waiver of subrogation as set forth
in the immediately preceding sentence.
22. TENANT'S DEFAULT AND LANDLORD'S REMEDIES.
22.1 TENANT'S DEFAULT. The occurrence of any one or more of the
following events shall constitute a default under this Lease by Tenant:
(a) the vacation of the Premises by Tenant. "VACATION" shall
mean vacating the Premises without providing a reasonable level of security to
minimize the potential for vandalism, or where the coverage of the property
insurance under Section 20.1(a) is jeopardized as a result thereof;
(b) the failure by Tenant to make any payment of Rent or any
other payment required to be made by Tenant hereunder, within five (5) business
days of written notice from Landlord that such payment was not received;
(c) the failure by Tenant to observe or perform any of the
express or implied covenants or provisions of this Lease to be observed or
performed by Tenant, other than as specified in Sections 22.1(a) or (b) above,
where such failure shall continue for a period of thirty (30) days after
written notice thereof from Landlord to Tenant; provided, however, that if the
nature of Tenant's default is such that it may be cured but more than thirty
(30) days are reasonably required for its cure, then Tenant shall not be deemed
to be in default if Tenant shall commence such cure within said thirty (30) day
period and thereafter diligently prosecute such cure to completion;
(d) (i) the making by Tenant or any guarantor hereof of any
general assignment for the benefit of creditors, (ii) the filing by or against
Tenant or any guarantor hereof of a petition to have Tenant adjudged a bankrupt
or a petition for reorganization or arrangement under any law relating to
bankruptcy (unless, in the case of a petition filed against Tenant or any
guarantor hereof, 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
or of substantially all of any guarantor's assets, where possession is not
restored to Tenant within sixty (60) days, or (iv) the attachment, execution or
other judicial seizure of substantially all of Tenant's assets located at the
Premises or of substantially all of any guarantor's assets or of Tenant's
interest in this Lease where such seizure is not discharged within sixty (60)
days;
(e) any material representation or warranty made by Tenant in
this Lease or any other document delivered in connection with the execution and
delivery of this Lease or pursuant to this Lease proves to be incorrect in any
material respect;. or
(f) Tenant or any guarantor hereof shall be liquidated or
dissolved or shall begin proceedings towards its liquidation or dissolution.
Any notice given under this Section 22.1 shall be in lieu of, and not in
addition to, any notice required under California Code of Civil Procedure,
Section 1161.
22.2 LANDLORD'S REMEDIES; TERMINATION. In the event of any such
default by Tenant, in addition to any other remedies available to Landlord
under this Lease, at law or in equity, Landlord shall have the immediate option
to terminate this Lease and all rights of Tenant hereunder. In the event that
Landlord shall elect to so terminate this Lease, then Landlord may recover from
Tenant:
(a) the worth at the time of award of any unpaid Rent which
had been earned at the time of such termination; plus
(b) the worth at the time of the 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 Tenant proves could have
been reasonably avoided; plus
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(c) 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 Tenant proves could be reasonably avoided; plus
(d) any other amount necessary to compensate Landlord for all
the detriment proximately caused by 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: unamortized Tenant Improvement
costs; attorneys' fees; unamortized brokers' commissions; the costs of
refurbishment, alterations, renovation and repair of the Premises; and removal
(including the repair of any damage caused by such removal) and storage (or
disposal) of Tenant's personal property, equipment, fixtures, Tenant Changes,
Tenant Improvements and any other items which Tenant is required under this
Lease to remove but does not remove.
As used in Sections 22.2(a) and 22.2(b) above, the "worth at the time of award"
is computed by allowing interest at the Interest Rate set forth in Section 1.10
of the Summary. As used in Section 22.2(c) above, the "worth at the time of
award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
22.3 LANDLORD'S REMEDIES; RE-ENTRY RIGHTS. In the event of any such
default by Tenant, in addition to any other remedies available to Landlord
under this Lease, at law or in equity, Landlord shall also have the right as
permitted by applicable law, with or without terminating this Lease, to
re-enter the Premises and remove all persons and property from the Premises;
such property may be removed, stored and/or disposed of pursuant to Section
12.4 of this Lease or any other procedures permitted by applicable law. No
re-entry or taking possession of the Premises by Landlord pursuant to this
Section 22.3, and no acceptance of surrender of the Premises or other action on
Landlord's part, shall be construed as an election to terminate this Lease
unless a written notice of such intention be given to Tenant or unless the
termination thereof be decreed by a court of competent jurisdiction.
22.4 LANDLORD'S REMEDIES; CONTINUATION OF LEASE. In the event of any
such default by Tenant, in addition to any other remedies available to Landlord
under this Lease, at law or in equity, Landlord shall have the right to
continue this Lease in full force and effect, whether or not Tenant shall have
abandoned the Premises. The foregoing remedy shall also be available to
Landlord pursuant to California Civil Code Section 1951.4 and any successor
statute thereof in the event Tenant has abandoned the Premises. In the event
Landlord elects to continue this Lease in full force and effect pursuant to
this Section 22.4, then Landlord shall be entitled to enforce all of its rights
and remedies under this Lease, including the right to recover rent as it
becomes due. Landlord's election not to terminate this Lease pursuant to this
Section 22.4 or pursuant to any other provision of this Lease, at law or in
equity, shall not preclude Landlord from subsequently electing to terminate
this Lease or pursuing any of its other remedies.
22.5 LANDLORD'S RIGHT TO PERFORM. Except as specifically provided
otherwise in this Lease, all covenants and agreements by Tenant under this
Lease shall be performed by Tenant at Tenant's sole cost and expense and
without any abatement or offset of rent. If Tenant shall fail to pay any sum of
money (other than Rent) or perform any other act on its part to be paid or
performed hereunder and such failure shall continue for three (3) days with
respect to monetary obligations (or ten (10) days with respect to non-monetary
obligations) after Tenant's receipt of written notice thereof from Landlord
(except that no notice will be required in the event of an emergency), Landlord
may, without waiving or releasing Tenant from any of Tenant's obligations, make
such payment or perform such other act on behalf of Tenant. All sums so paid by
Landlord and all necessary incidental costs incurred by Landlord in performing
such other acts shall be payable by Tenant to Landlord within five (5) days
after demand therefor as additional rent.
22.6 INTEREST. If any monthly installment of Rent, or any other amount
payable by Tenant hereunder is not received by Landlord by the date when due,
it shall bear interest at the Interest Rate set forth in Section 1.10 of the
Summary from the date due until paid; provided, however, for the first three
(3) times in any consecutive twelve (12) month period, interest shall not
accrue and be payable unless Tenant fails to make such payment within five (5)
business days following the date Tenant receives written notice from Landlord
that such Rent is past due. All interest, and any late charges imposed pursuant
to Section 22.7 below, shall be considered additional rent due from Tenant to
Landlord under the terms of this Lease.
22.7 LATE CHARGES. Tenant acknowledges that, in addition to interest
costs, the late payments by Tenant to Landlord of any Rent or other sums due
under this Lease will cause Landlord to incur costs not contemplated by this
Lease, the exact amount of such costs being extremely difficult and impractical
to fix. Such other costs include, without limitation, processing,
administrative and accounting charges and late charges that may be imposed on
Landlord by the terms of any mortgage, deed of trust or related loan documents
encumbering the Premises. Accordingly, if any installment of Rent or any other
amount payable by Tenant hereunder is not received by Landlord by the due date
thereof, Tenant shall pay to Landlord an additional sum of five percent (5%) of
the overdue amount as a late charge, but in no event more than the maximum late
charge allowed by law; provided, however, for the first three (3) times in any
consecutive twelve (12) month period, such late charge shall not be payable
unless Tenant fails to make such payment within five (5) business days
following the date Tenant receives written notice from Landlord that such Rent
is past due. The parties agree that such late charge represents a fair and
reasonable estimate of the costs that Landlord will incur by reason of any late
payment as hereinabove
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referred to by Tenant, and the payment of late charges and interest are
distinct and separate in that the payment of interest is to compensate Landlord
for the use of Landlord's money by Tenant, while the payment of late charges is
to compensate Landlord for Landlord's processing, administrative and other
costs incurred by Landlord as a result of Tenant's delinquent payments.
Acceptance of a late charge or interest shall not constitute a waiver of
Tenant's default with respect to the overdue amount or prevent Landlord from
exercising any of the other rights and remedies available to Landlord under
this Lease or at law or in equity now or hereafter in effect.
22.8 SECURITY INTEREST. Tenant hereby grants to Landlord a lien and
security interest on all property of Tenant now or hereafter placed in or upon
the Premises including, but not limited to, all fixtures, machinery, equipment,
furnishings and other articles of personal property, and all proceeds of the
sale or other disposition of such property (collectively, the "COLLATERAL") to
secure the payment of all Rent to be paid by Tenant pursuant to this Lease.
Such lien and security interest shall be in addition to any landlord's lien
provided by law. This Lease shall constitute a security agreement under the
Commercial Code of the State so that Landlord shall have and may enforce a
security interest in the Collateral. Tenant agrees to execute as debtor and
deliver such financing statement or statements and any further documents as
Landlord may now or hereafter reasonably request to perfect or otherwise
protect such security interest pursuant to such code. Landlord may also at any
time file a copy of this Lease as a financing statement. Landlord, as secured
party, shall be entitled to all rights and remedies afforded as secured party
under such code, which rights and remedies shall be in addition to Landlord's
liens and rights provided by law or by the other terms and provisions of this
Lease. Notwithstanding the provisions of this Section 22.8 to the contrary, if
Tenant desires to obtain a loan secured by the Collateral and requests that
Landlord execute a lien waiver in connection therewith, Landlord shall
subordinate its lien rights to the rights of Tenant's lender pursuant to a
commercially reasonable form of lien waiver, provided that Tenant shall
reimburse Landlord for any reasonable costs it incurs in connection with its
review and approval of such lien waiver within ten (10) business days following
Tenant's receipt of invoice(s) therefor from Landlord. Nothing in this Section
22.8 shall permit Tenant to encumber its leasehold interest in the Premises.
22.9 RIGHTS AND REMEDIES CUMULATIVE. All rights, options and remedies
of Landlord contained in this Section 22 and elsewhere in this Lease shall be
construed and held to be cumulative, and no one of them shall be exclusive of
the other, and Landlord shall have the right to pursue any one or all of such
remedies or any other remedy or relief which may be provided by law or in
equity, whether or not stated in this Lease. Nothing in this Section 22 shall
be deemed to limit or otherwise affect Tenant's indemnification of Landlord
pursuant to any provision of this Lease.
22.10 WAIVER OF REDEMPTION. Tenant hereby waives and surrenders for
itself and all those claiming under it, including creditors of all kinds, (i)
any right and privilege which it or any of them may have under any present or
future law to redeem any of the Premises or to have a continuance of this Lease
after termination of this Lease or of Tenant's right of occupancy or possession
pursuant to any court order or any provision hereof, and (ii) the benefits of
any present or future law which exempts property from liability for debt or for
distress for rent.
22.11 COSTS UPON DEFAULT AND LITIGATION. Tenant shall pay to Landlord
and its mortgagees as additional rent all the expenses incurred by Landlord or
its mortgagees in connection with any default by Tenant hereunder or the
exercise of any remedy by reason of any default by Tenant hereunder, including
reasonable attorneys' fees and expenses. If Landlord or its mortgagees shall be
made a party to any litigation commenced against Tenant or any litigation
pertaining to this Lease or the Premises, at the option of Landlord and/or its
mortgagees, Tenant, at its expense, shall provide Landlord and/or its
mortgagees with counsel approved by Landlord and/or its mortgagees and shall
pay all costs incurred or paid by Landlord and/or its mortgagees in connection
with such litigation.
23. LANDLORD'S DEFAULT. Landlord shall not be in default in the performance of
any obligation required to be performed by Landlord under this Lease unless
Landlord has failed to perform such obligation within thirty (30) days after
the receipt of written notice from Tenant specifying in detail Landlord's
failure to perform; provided however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for its
performance, then Landlord shall not be deemed in default if it commences such
performance within such thirty (30) day period and thereafter diligently
pursues the same to completion. Upon any such uncured default by Landlord,
Tenant may exercise any of its rights provided in law or at equity; provided,
however: (a) Tenant shall have no right to offset or abate Rent in the event of
any default by Landlord under this Lease (except as provided in this Section
23); (b) Tenant's rights and remedies hereunder shall be limited to the extent
(i) Tenant has expressly waived in this Lease any of such rights or remedies,
and/or (ii) this Lease otherwise expressly limits Tenant's rights or remedies,
including the limitation on Landlord's liability contained in Section 30
hereof; (c) Tenant shall not have the right to terminate this Lease as a result
of any such default; and (d) in no event shall Landlord be liable for
consequential damages or loss of business profits.
If Landlord fails to perform in the payment to Tenant of any sums owed by
Landlord to Tenant under the terms of Sections 4.2, 6.3.3, 11.3 and Exhibit "C"
to this Lease within the time periods set forth in this Section 23 following
receipt of written notice from Tenant to Landlord and its lender pursuant to
Section 26.2 hereof, or if damages are awarded to Tenant in any judgment against
Landlord which remains unpaid for thirty (30) days following the date the
judgment is final and not subject to appeal, then Tenant shall be entitled to
offset such sums (including interest on the unpaid balance at the Interest Rate
commencing thirty (30) days after the date Tenant notified Landlord of
Landlord's obligation or, with
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respect to a judgment, the date the judgment is final and non-appealable)
against Annual Rent, provided that Tenant has first provided to Landlord (and
its lender) an additional ten (10) business days prior written notice that
Tenant shall be asserting such offset. If Landlord does not object to such
offset within such ten (10) business day period then Tenant may proceed with
such offset. However, if Landlord provides Tenant with written notice of
Landlord's objection to such offset within such time period, then Tenant shall
not have any right to offset any sums so contested by Landlord until the dispute
is resolved by arbitration pursuant to Section 32. If the dispute is resolved by
arbitration pursuant to Section 32 and it is held that Tenant is entitled to all
or any portion of the sums so claimed by Tenant, and if Landlord fails to
reimburse Tenant such sums, together with interest at the Interest Rate
(commencing thirty (30) days after the date Tenant notified Landlord of
Landlord's obligation), within thirty (30) days following such arbitration
decision, then Tenant may deduct such sums against Annual Rent.
24. SUBORDINATION. At the request of Landlord or any mortgagee of a mortgage or
a beneficiary of a deed of trust now or hereafter encumbering all or any
portion of the Premises, or any lessor of any ground or master lease now or
hereafter affecting all or any portion of the Premises, this Lease shall be
subject and subordinate at all times to such ground or master leases (and such
extensions and modifications thereof), and to the lien of such mortgages and
deeds of trust (as well as to any advances made thereunder and to all renewals,
replacements, modifications and extensions thereof); provided, however, no
subordination of this Lease to a future ground or master lease or mortgage or
deed of trust shall result in Tenant being disturbed in its possession of the
Premises or in the enjoyment of its rights under this Lease so long as Tenant
is not in default with respect to its obligations hereunder, and any
subordination agreement which Landlord, any mortgagee, beneficiary or lessor
requests Tenant to execute to effect or confirm such subordination shall so
provide. Notwithstanding the foregoing, Landlord shall have the right to
subordinate or cause to be subordinated any or all ground or master leases or
the lien of any or all mortgages or deeds of trust to this Lease. In the event
that any ground or master lease terminates for any reason or any mortgage or
deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for
any reason, at the election of Landlord's successor in interest, Tenant shall
attorn to and become the tenant of such successor subject to the terms and
conditions of this Lease. Tenant hereby waives its rights under any current or
future law which gives or purports to give Tenant any right to terminate or
otherwise adversely affect this Lease and the obligations of Tenant hereunder
in the event of any such foreclosure proceeding or sale. Subject to the
foregoing, Tenant covenants and agrees to execute and deliver to Landlord
within ten (10) days after receipt of written demand by Landlord and in the
form reasonably required by Landlord, any additional documents evidencing the
priority or subordination of this Lease with respect to any such ground or
master lease or the lien of any such mortgage or deed of trust or Tenant's
agreement to attorn. Should Tenant fail to sign and return any such documents
within said ten (10) day period, Tenant shall be in default hereunder without
the benefit of any additional notice or cure periods specified in Section 22.1
above.
Within thirty (30) days after the execution of this Lease by Landlord and
Tenant, Landlord shall obtain a subordination, non-disturbance and attornment
agreement from the holder of any pre-existing security device which is secured
by the Premises ("NON-DISTURBANCE AGREEMENT"), which Non-Disturbance Agreement
shall be in form and substance of Exhibit "F" attached hereto. In the event that
Landlord is unable to provide the Non-Disturbance Agreement within said thirty
(30) day period, Tenant's sole remedy shall be to terminate this Lease by
delivering a notice of termination to Landlord within ten (10) days after the
end of such thirty (30) day period; provided, however, that Landlord shall be
entitled to rescind such termination by delivering to Tenant the Non-Disturbance
Agreement within such ten (10) day period.
25. ESTOPPEL CERTIFICATE.
25.1 TENANT'S OBLIGATIONS. Within ten (10) business days following
Landlord's written request, Tenant shall execute and deliver to Landlord an
estoppel certificate, in a form substantially similar to the form of Exhibit
"G" attached hereto, certifying: (a) the Commencement Date of this Lease; (b)
that this Lease is unmodified and in full force and effect (or, if modified,
that this Lease is in full force and effect as modified, and stating the date
and nature of such modifications); (c) the date to which the Rent and other
sums payable under this Lease have been paid; (d) that there are not, to the
best of Tenant's knowledge, any defaults under this Lease by either Landlord or
Tenant, except as specified in such certificate; and (e) such other matters as
are set forth in Exhibit "G" or are reasonably requested by Landlord. Any such
estoppel certificate delivered pursuant to this Section 25.1 may be relied upon
by any mortgagee, beneficiary, purchaser or prospective purchaser of any
portion of the Premises, as well as their assignees.
25.2 TENANT'S FAILURE TO DELIVER. Tenant's failure to deliver such
estoppel certificate within such time shall constitute a default hereunder
without the applicability of notice and cure periods specified in Section 22.1
above and shall be conclusive upon Tenant that: (a) this Lease is in full force
and effect without modification, except as may be represented by Landlord; (b)
there are no uncured defaults in Landlord's or Tenant's performance (other than
Tenant's failure to deliver the estoppel certificate); and (c) not more than
one (1) month's rental has been paid in advance. Tenant shall indemnify,
protect, defend (with counsel reasonably approved by Landlord in writing) and
hold Landlord harmless from and against any and all claims, judgments, suits,
causes of action, damages, losses, liabilities and expenses (including
attorneys' fees and court costs) attributable to any failure by Tenant to
timely deliver any such estoppel certificate to Landlord pursuant to Section
25.1 above.
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26. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS.
26.1 MODIFICATIONS. If, in connection with Landlord's obtaining or
entering into any financing or ground lease for any portion of the Premises,
the lender or ground lessor shall request modifications to this Lease, Tenant
shall, within ten (10) days after request therefor, execute an amendment to
this Lease including such modifications, provided such modifications are
reasonable, do not increase the obligations of Tenant hereunder, or adversely
affect the leasehold estate created hereby or Tenant's rights hereunder.
26.2 CURE RIGHTS. In the event of any default on the part of Landlord,
Tenant will give notice by registered or certified mail to any beneficiary of a
deed of trust or mortgagee covering the Premises or ground lessor of Landlord
whose address shall have been furnished to Tenant, and shall offer such
beneficiary, mortgagee or ground lessor a reasonable opportunity to cure the
default (including with respect to any such beneficiary or mortgagee, time to
obtain possession of the Premises, subject to this Lease and Tenant's rights
hereunder, by power of sale or judicial foreclosure, if such should prove
necessary to effect a cure).
27. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that, upon
Tenant performing all of the covenants and provisions on Tenant's part to be
observed and performed under this Lease (including payment of rent hereunder),
Tenant shall and may peaceably and quietly have, hold and enjoy the Premises,
in accordance with and subject to the terms and conditions of this Lease, as
against all persons claiming by, through or under Landlord.
28. TRANSFER OF LANDLORD'S INTEREST. The term "Landlord" as used in this Lease,
so far as covenants or obligations on the part of the Landlord are concerned,
shall be limited to mean and include only the owner or owners, at the time in
question, of the fee title to, or a lessee's interest in a ground lease of, the
Premises. Subject to Section 5 hereof, in the event of any transfer or
conveyance of any such title or interest (other than a transfer for security
purposes only), the transferor shall be automatically relieved of all covenants
and obligations on the part of Landlord contained in this Lease which accrue
after the date of the transfer or conveyance. Landlord and Landlord's
transferees and assignees shall have the absolute right to transfer all or any
portion of their respective title and interest in the Premises and/or this
Lease without the consent of Tenant, and such transfer or subsequent transfer
shall not be deemed a violation on Landlord's part of any of the terms and
conditions of this Lease.
29. LIMITATION ON LANDLORD'S LIABILITY. Notwithstanding anything contained in
this Lease to the contrary, the obligations of Landlord under this Lease
(including any actual or alleged breach or default by Landlord) do not
constitute personal obligations of the individual partners, directors, officers
or shareholders of Landlord or Landlord's partners, and Tenant shall not seek
recourse against the individual partners, directors, officers or shareholders
of Landlord or Landlord's partners, or any of their personal assets for
satisfaction of any liability with respect to this Lease. In addition, in
consideration of the benefits accruing hereunder to Tenant and notwithstanding
anything contained in this Lease to the contrary, Tenant hereby covenants and
agrees for itself and all of its successors and assigns that the liability of
Landlord for its obligations under this Lease (including any liability as a
result of any actual or alleged failure, breach or default hereunder by
Landlord), shall be limited solely to, and Tenant's and its successors' and
assigns' sole and exclusive remedy shall be against, Landlord's interest in the
Premises, and no other assets of Landlord; provided, however, if, as of the
date Tenant obtains any judgment or award against Landlord, Landlord has
voluntarily encumbered the Premises by more than eighty percent (80%) of the
then-existing fair market value of the Premises, Tenant shall have recourse
against other assets of Landlord to satisfy such judgment or award up to the
amount that the outstanding balance of the encumbrance exceeds eighty percent
(80%) of the then-existing fair market value of the Premises (but in no event
shall such recourse against other assets of Landlord exceed twenty percent
(20%) of the then-existing fair market value of the Premises).
30. MISCELLANEOUS.
30.1 GOVERNING LAW. This Lease shall be governed by, and construed
pursuant to, the laws of the state in which the Premises are located.
30.2 SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 28
above, and except as otherwise provided in this Lease, all of the covenants,
conditions and provisions of this Lease shall be binding upon, and shall inure
to the benefit of, the parties hereto and their respective heirs, personal
representatives and permitted successors and assigns; provided, however, no
rights shall inure to the benefit of any Transferee of Tenant unless the
Transfer to such Transferee is made in compliance with the provisions of
Section 14.
30.3 NO MERGER. The voluntary or other surrender of this Lease by
Tenant or a mutual termination thereof shall not work as a merger and shall, at
the option of Landlord, either (a) terminate all or any existing subleases, or
(b) operate as an assignment to Landlord of Tenant's interest under any or all
such subleases.
30.4 PROFESSIONAL FEES. If either Landlord or Tenant should bring suit
or arbitration against the other with respect to this Lease, including for
unlawful detainer or any other relief against the other hereunder, then all
costs and expenses incurred by the prevailing party therein (including, without
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limitation, its actual appraisers', accountants', attorneys' and other
professional fees, expenses and court costs), shall be paid by the other party.
30.5 WAIVER. The waiver by either party of any breach by the other
party of any term, covenant or condition herein contained shall not be deemed
to be a waiver of any subsequent breach of the same or any other term, covenant
and condition herein contained, nor shall any custom or practice which may
become established between the parties in the administration of the terms
hereof be deemed a waiver of, or in any way affect, the right of any party to
insist upon the performance by the other in strict accordance with said terms.
No waiver of any default of either party hereunder shall be implied from any
acceptance by Landlord or delivery by Tenant (as the case may be) of any Rent
or other payments due hereunder or any omission by the non-defaulting party to
take any action on account of such default if such default persists or is
repeated, and no express waiver shall affect defaults other than as specified
in said waiver. The subsequent acceptance of Rent hereunder by Landlord shall
not be deemed to be a waiver of any preceding breach by Tenant of any term,
covenant or condition of this Lease other than the failure of Tenant to pay the
particular Rent so accepted, regardless of Landlord's knowledge of such
preceding breach at the time of acceptance of such Rent.
30.6 TERMS AND HEADINGS; INTERPRETATION. The words "Landlord" and
"Tenant" as used herein shall include the plural as well as the singular. Words
used in any gender include other genders. The Section headings of this Lease
are not a part of this Lease and shall have no effect upon the construction or
interpretation of any part hereof. Any deletion of language from this Lease
prior to its execution by Landlord and Tenant shall not be construed to raise
any presumption, canon of construction or implication, including, without
limitation, any implication that the parties intended thereby to state the
converse of the deleted language.
30.7 TIME. Time is of the essence with respect to performance of every
provision of this Lease in which time or performance is a factor. All
references in this Lease to "days" shall mean calendar days unless specifically
modified herein to be "business" days.
30.8 PRIOR AGREEMENTS; AMENDMENTS. This Lease, including the Summary
and all Exhibits and Riders attached hereto contains all of the covenants,
provisions, agreements, conditions and understandings between Landlord and
Tenant concerning the Premises and any other matter covered or mentioned in
this Lease, and no prior agreement or understanding, oral or written, express
or implied, pertaining to the Premises or any such other matter shall be
effective for any purpose. No provision of this Lease may be amended or added
to except by an agreement in writing signed by the parties hereto or their
respective successors in interest. The parties acknowledge that all prior
agreements, representations and negotiations are deemed superseded by the
execution of this Lease to the extent they are not expressly incorporated
herein.
30.9 SEPARABILITY. The invalidity or unenforceability of any provision
of this Lease (except for Tenant's obligation to pay Rent) shall in no way
affect, impair or invalidate any other provision hereof, and such other
provisions shall remain valid and in full force and effect to the fullest
extent permitted by law.
30.10 RECORDING. Neither Landlord nor Tenant shall record this Lease.
Landlord shall, promptly following Tenant's request therefor, execute,
acknowledge and deliver to Tenant a short form memorandum of this Lease in form
and substance reasonably acceptable to Landlord. Upon the expiration or earlier
termination of this Lease, Tenant shall promptly following request therefor,
execute, acknowledge and deliver to Landlord, in recordable form, a properly
acknowledged quitclaim deed or other instrument extinguishing all of the
Tenant's rights and interest in and to the Premises. If such short form
memorandum is recorded in accordance with the foregoing, Tenant shall pay for
all costs of or related to such recording, including, but not limited to,
recording charges and documentary transfer taxes.
30.11 EXHIBITS AND RIDERS. All Exhibits and Riders attached to this
Lease are hereby incorporated in this Lease for all purposes as though set
forth at length herein.
30.12 AUCTIONS. Tenant shall have no right to conduct any auction in,
on or about the Premises.
30.13 ACCORD AND SATISFACTION. No payment by Tenant or receipt by
Landlord of a lesser amount than the Rent payment herein stipulated shall be
deemed to be other than on account of the Rent, nor shall any endorsement or
statement on any check or any letter accompanying any check or payment as Rent
be deemed an accord and satisfaction, and Landlord may accept such check or
payment without prejudice to Landlord's right to recover the balance of such
Rent or pursue any other remedy provided in this Lease. Tenant agrees that each
of the foregoing covenants and agreements shall be applicable to any covenant
or agreement either expressly contained in this Lease or imposed by any statute
or at common law.
30.14 FINANCIAL STATEMENTS. Upon ten (10) days prior written request
from Landlord (which Landlord may make at any time during the Term but no more
often than once in any calendar year), Tenant shall deliver to Landlord a
current financial statement of Tenant and any guarantor of this Lease. Such
statements shall be prepared in accordance with generally acceptable accounting
principles and certified as true in all material respects by Tenant (if Tenant
is an individual) or by an authorized officer of Tenant (if Tenant is a
corporation or limited liability company) or a general partner of Tenant (if
Tenant is a partnership).
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30.15 NO PARTNERSHIP. Landlord does not, in any way or for any
purpose, become a partner of Tenant in the conduct of its business, or
otherwise, or joint venturer or a member of a joint enterprise with Tenant by
reason of this Lease.
30.16 FORCE MAJEURE. In the event that either party hereto shall be
delayed or hindered in or prevented from the performance of any act required
hereunder by reason of strikes, lock-outs, labor troubles, inability to procure
materials, failure of power, governmental moratorium or other governmental
action or inaction (including failure, refusal or delay in issuing permits,
approvals and/or authorizations), injunction or court order, riots,
insurrection, war, fire, earthquake, flood or other natural disaster or other
reason of a like nature not the fault of the party delaying in performing work
or doing acts required under the terms of this Lease (but excluding delays due
to financial inability) (herein collectively, "FORCE MAJEURE DELAYS"), then
performance of such act shall be excused for the period of the delay and the
period for the performance of any such act shall be extended for a period
equivalent to the period of such delay. The provisions of this Section 30.16
shall not apply to nor operate to excuse Tenant from the payment of Rent
strictly in accordance with the terms of this Lease.
30.17 COUNTERPARTS. This Lease may be executed in one or more
counterparts, each of which shall constitute an original and all of which shall
be one and the same agreement.
30.18 NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees
that the terms of this Lease are confidential and constitute proprietary
information of Landlord. Disclosure of the terms could adversely affect the
ability of Landlord to negotiate other leases and impair Landlord's
relationship with other tenants. Accordingly, Tenant agrees that it, and its
partners, officers, directors, employees, agents and attorneys, shall not
intentionally and voluntarily disclose the terms and conditions of this Lease
to any newspaper or other publication or any other tenant or apparent
prospective tenant of the Building or other portion of the Premises, or real
estate agent, either directly or indirectly, without the prior written consent
of Landlord, provided, however, that Tenant may disclose the terms to
prospective subtenants or assignees under this Lease and as may be required to
comply with any laws.
30.19 NON-DISCRIMINATION. Tenant acknowledges and agrees that there
shall be no discrimination against, or segregation of, any person, group of
persons, or entity on the basis of race, color, creed, religion, age, sex,
marital status, national origin, or ancestry in the leasing, subleasing,
transferring, assignment, occupancy, tenure, use, or enjoyment of the Premises,
or any portion thereof.
30.20 WAIVER OF JURY TRIAL. Each party hereby waives any right to a
trial by jury in any action seeking specific performance of any provision of
this Lease, for damages for any breach under this Lease, or otherwise for
enforcement of any right or remedy hereunder.
31. LEASE EXECUTION.
31.1 TENANT'S AUTHORITY. If Tenant executes this Lease as a limited
liability company, partnership or corporation, then Tenant and the persons
and/or entities executing this Lease on behalf of Tenant represent and warrant
that: (a) Tenant is a duly organized and validly existing limited liability
company, partnership or corporation, as the case may be, and is qualified to do
business in the state in which the Premises are located; (b) such persons
and/or entities executing this Lease are duly authorized to execute and deliver
this Lease on Tenant's behalf in accordance with the Tenant's operating
agreement (if Tenant is a limited liability company), Tenant's partnership
agreement (if Tenant is a partnership), or a duly adopted resolution of
Tenant's board of directors and Tenant's by-laws (if Tenant is a corporation);
and (c) this Lease is binding upon Tenant in accordance with its terms. Tenant
shall, promptly following Landlord's request therefor, deliver evidence,
reasonably acceptable to Landlord, of such qualification, organization,
existence and authorization.
31.2 JOINT AND SEVERAL LIABILITY. If more than one person or entity
executes this Lease as Tenant: (a) each of them is and shall be jointly and
severally liable for the covenants, conditions, provisions and agreements of
this Lease to be kept, observed and performed by Tenant; and (b) the act or
signature of, or notice from or to, any one or more of them with respect to this
Lease shall be binding upon each and all of the persons and entities executing
this Lease as Tenant with the same force and effect as if each and all of them
had so acted or signed, or given or received such notice.
31.3 NO OPTION. The submission of this Lease for examination or
execution by Tenant does not constitute a reservation of or option for the
Premises and this Lease shall not become effective as a Lease until it has been
executed by Landlord and delivered to Tenant.
32. ARBITRATION.
32.1 SUBMITTALS TO ARBITRATION. The submittal to arbitration in
accordance with the terms of this Section 32 shall be the sole and exclusive
method, means and procedure to resolve any and all claims, disputes or
disagreements arising under the second paragraph of Section 23 of this Lease
but shall not apply to any claims, disputes or disagreements arising under any
other provisions of this Lease. The parties hereby irrevocably waive any and
all rights to the contrary and shall, in connection with all claims, disputes
and disagreements under Section 23 hereof, at all times conduct themselves in
strict, full, complete and timely accordance with the terms of this Section 32
and all attempts to circumvent the terms of this Section 32 shall be absolutely
null and void and of no force or effect whatsoever.
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32.2 JAMS/ENDISPUTE. Any dispute to be arbitrated pursuant to the
provisions of this Section 32 shall be determined by binding arbitration before
a retired judge of the Superior Court of the State of California (the
"ARBITRATOR") under the auspices of JAMS/Endispute ("JAMS") in San Diego,
California. Such arbitration shall be initiated by the parties, or either of
them, within ten (10) days after either party sends written notice (the
"ARBITRATION NOTICE") of a demand to arbitrate by registered or certified mail
to the other party and to JAMS. The Arbitration Notice shall contain a
description of the subject matter of the arbitration, the dispute with respect
thereto, the amount involved, if any, and the remedy or determination sought.
The parties may agree on a retired judge from the JAMS panel. If they are
unable to promptly agree, JAMS will provide a list of three (3) available
judges and each party may strike one. The remaining judge (or if there are two
(2), the one selected by JAMS) will serve as the Arbitrator. In the event that
JAMS shall no longer exist or if JAMS fails or refuses to accept submission of
such dispute, then the dispute shall be resolved by binding arbitration before
the American Arbitration Association ("AAA") in San Diego, California under the
AAA's commercial arbitration rules then in effect.
32.3 ARBITRATION PROCEDURE.
(a) PRE-DECISION ACTIONS. The Arbitrator shall schedule a
pre-hearing conference to resolve procedural matters, arrange for the exchange
of information, obtain stipulations, and narrow the issues. The parties will
submit proposed discovery schedules to the Arbitrator at the pre-hearing
conference. The scope and duration of discovery will be within the sole
discretion of the Arbitrator. The Arbitrator shall have the discretion to order
a pre-hearing exchange of information by the parties, including, without
limitation, production of requested documents, exchange of summaries of
testimony of proposed witnesses, and examination by deposition of parties and
third-party witnesses. This discretion shall be exercised in favor of discovery
reasonable under the circumstances.
(b) THE DECISION. Any party may be represented by counsel or
other authorized representative. In rendering a decision(s), the Arbitrator
shall determine the rights and obligations of the parties according to the
substantive and procedural laws of California and the terms and provisions of
this Lease. The Arbitrator's decision shall be based on the evidence introduced
at the hearing, including all logical and reasonable inferences therefrom. The
Arbitrator may make any determination, and/or grant any remedy or relief that
is just and equitable. The decision must be based on, and accompanied by, a
written statement of decision explaining the factual and legal basis for the
decision as to each of the principal controverted issues. The decision shall be
conclusive and binding, and it may thereafter be confirmed as a judgment by the
Superior Court of the State of California, subject only to challenge on the
grounds set forth in California Code of Civil Procedure Section 1286.2. The
validity and enforceability of the Arbitrator's decision is to be determined
exclusively by the California courts pursuant to the provisions of this Lease.
The Arbitrator may award costs, including without limitation attorneys' fees,
and expert and witness costs, to the prevailing party, if any, as determined by
the Arbitrator in its discretion. The Arbitrator's fees and costs shall be paid
by the non-prevailing party as determined by the Arbitrator in its discretion.
A party shall be determined by the Arbitrator to be the prevailing party if its
proposal for the resolution of a dispute is the closer to that adopted by the
Arbitrator.
[signatures on next page]
-24-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease as of the day and year
first above written.
"TENANT" FOTOBALL USA, Inc.,
a Delaware corporation
*By: __________________________________________
Name: ___________________________________
Title: __________________________________
*By: __________________________________________
Name: ___________________________________
Title: __________________________________
"LANDLORD" LBA VF-II, LLC,
a California limited liability company
By: LBA, INC., a California corporation
By: ______________________________________
Name: ________________________________
Title: _______________________________
- ---------
*NOTE:
IF TENANT IS A CALIFORNIA CORPORATION, then one of the following alternative
requirements must be satisfied:
(A) This Lease must be signed by two (2) officers of such corporation: one
being the chairman of the board, the president or a vice president,
and the other being the secretary, an assistant secretary, the chief
financial officer or an assistant treasurer. If one (1) individual is
signing in two (2) of the foregoing capacities, that individual must
sign twice; once as one officer and again as the other officer.
(B) If there is only one (1) individual signing in two (2) capacities, or
if the two (2) signatories do not satisfy the requirements of (A)
above, then Tenant shall deliver to Landlord a certified copy of a
corporate resolution in the form reasonably acceptable to Landlord
authorizing the signatory(ies) to execute this Lease.
IF TENANT IS A CORPORATION INCORPORATED IN A STATE OTHER THAN CALIFORNIA, then
Tenant shall deliver to Landlord a certified copy of a corporate resolution in
the form reasonably acceptable to Landlord authorizing the signatory(ies) to
execute this Lease.
-25-
<PAGE>
EXHIBIT "C"
WORK LETTER AGREEMENT
1. Tenant shall, at Tenant's sole cost and expense (but subject to reimbursement
by Landlord pursuant to Paragraph 6 below), improve the Premises in accordance
with plans and specifications approved in writing by Landlord (the "TENANT
IMPROVEMENTS") and in accordance with the requirements of all laws. . Within
ninety (90) days following the date of the Lease, Tenant shall provide to
Landlord working drawings for the Tenant Improvements (including signage)
prepared by a licensed architect or engineer. Within fifteen (15) days of
Landlord's receipt of such working drawings, Landlord shall notify Tenant of any
required changes to the working drawings. Landlord's failure to so notify Tenant
of any such required changes to the working drawings within said fifteen (15)
day period shall be deemed to constitute Landlord's approval thereof. Tenant
shall revise the working drawings in accordance with Landlord's comments and
deliver the same to Landlord within ten (10) days of Tenant's receipt of
Landlord's comments. Tenant shall, at its sole cost and expense, be responsible
for obtaining all permits and approvals from governmental authorities necessary
for the construction of such improvements and the operation of Tenant's
business. Landlord will reasonably cooperate with Tenant (at no cost to
Landlord) in Tenant's efforts to obtain all such permits and approvals. Landlord
makes no representation concerning the availability of such permits or
approvals.
2. No improvement of any kind to the Premises shall be erected or maintained
unless and until the plans, specifications and proposed location of such
improvement have been approved in writing by Landlord, which approval shall not
be unreasonably withheld or delayed. Landlord's review and approval of the
plans and specifications for the improvements shall create no liability or
responsibility on the part of Landlord for the completeness of such plans or
their design sufficiency or compliance with Laws.
3. Except for Landlord's reimbursement pursuant to Paragraph 6 below, Landlord
shall not be responsible for any costs associated with Tenant's construction of
any improvements and Tenant acknowledges that Tenant is accepting the Premises
in their "as-is" and "where-is" state, subject to Landlord's obligations under
Sections 4.2, 6.3.3, 11.3, and 12.5 of the Lease.
4. No work of any kind shall be commenced on and no building or other material
shall be delivered until at least five (5) business days after written notice
has been given by Tenant to Landlord of the commencement of such work or the
delivery of such materials.
5. The improvements shall be constructed, and all work performed on the
Premises, shall be in accordance with all laws. All work performed on the
Premises shall be done in a good, workmanlike and lien free manner and only
with new materials of good quality and high standards. All work required in the
construction of the improvements shall be performed only by competent
contractors duly licensed as such under the laws of the State of California and
reasonably approved by Landlord. Tenant shall then enter into a construction
contract approved by Landlord (which approval shall not be unreasonably
withheld or delayed) with the selected contractor to construct the Tenant
Improvements, which contract will (i) name Landlord as a third party
beneficiary (ii) permit an assignment to Landlord, at Landlord's election, upon
a default by Tenant under the Lease and (iii) provide that the contractor will
guarantee that the Tenant Improvements will be free from any defects in
workmanship and materials for at lease one (1) year following substantial
completion. Tenant shall be responsible for all aspects of coordinating the
construction management, including obtaining and paying for utilities consumed
during construction.
6. Landlord agrees to contribute the sum ("ALLOWANCE") of up to Nine Hundred
Five Thousand Six Hundred Seventy Dollars ($905,670.00) toward the cost of the
Tenant Improvements. The parties agree and acknowledge that the cost to
construct the Additional Improvements and Landlord's Work shall not offset or
reduce the Allowance. Landlord shall only be obligated to make disbursements
from the Allowance to the extent costs are incurred by Tenant for Tenant
Improvement Allowance Items. If the cost of the Tenant Improvement Allowance
Items does not exceed the Allowance, Landlord shall apply the difference toward
the, Rent due under the Lease commencing upon the earliest date Rent is due
until such excess Allowance is exhausted. The Allowance shall be disbursed by
Landlord only for the following items and costs (collectively, the "TENANT
IMPROVEMENT ALLOWANCE ITEMS"):
(a) Payment of the fees of Tenant's architect and engineers in connection
with the preparation of the plans and specifications and final working
drawings;
(b) The payment of plan check, permit and license fees relating to
construction of the Tenant Improvements;
and
(c) The cost of construction of the Tenant Improvements.
7. Provided Tenant is not in default under the Lease (and no circumstance exists
that would, with notice or lapse of time, or both, constitute a default under
the Lease), Landlord shall make monthly disbursements of the Allowance for
Tenant Improvements. Landlord may, at its election, make disbursement checks
payable jointly to Tenant and the contractor or other payee, as applicable. As
to each disbursement, the appropriate portion of the Allowance shall be
disbursed to Tenant (less 10% retention) only when Landlord has received the
following ("EVIDENCE OF COMPLETION"):
EXHIBIT "C"
-1-
<PAGE>
(a) Tenant has delivered to Landlord a draw request ("DRAW REQUEST") in
substantially the form of AIA Document G702 and G703 (or other form
reasonably acceptable to Landlord) specifying that the requisite
portion of Tenant Improvements has been completed, together with
invoices, receipts and bills evidencing the costs and expenses set
forth in such Draw Request. The Draw Request shall constitute a
representation by Tenant that the Tenant Improvements identified
therein have been completed in a good and workmanlike manner and in
accordance with the approved plans;
(b) The architect for the Tenant Improvements has certified to Landlord
that the Tenant Improvements have been completed to the level indicated
in the Draw Request in accordance with the approved plans;
(c) Tenant has delivered to Landlord conditional lien releases from the
contractor and all relevant subcontractors and materialmen with respect
to work covered by the current Draw Request and unconditional lien
releases from the contractor and all relevant subcontractors and
materialmen with respect to work covered by prior Draw Requests;
(d) Landlord or Landlord's architect or construction representative has
inspected the Tenant Improvements and determined that the portion of
the Tenant Improvements covered by the Draw Request has been completed
in a good and workmanlike manner, and Landlord is satisfied, in its
reasonable judgment, that the cost to complete the Tenant Improvements
does not exceed the remaining Allowance and other sums available to
Tenant for the payment of such costs.
8. The final disbursement of the balance of the Allowance (i.e., the retention)
shall be disbursed only when Landlord has received Evidence of Completion as to
all of the Tenant Improvements as provided hereinabove and the following
conditions have been satisfied:
(a) Sixty-five (65) days shall have elapsed following the filing of a
valid notice of completion by Tenant for the Tenant Improvements;
(b) A final or temporary certificate of occupancy for the Premises (if a
temporary certificate, the conditions set forth therein shall be
satisfactory to Landlord in its reasonable judgment) has been issued by
the appropriate governmental body;
(c) Tenant shall have delivered to Landlord one set of reproducible "As
Built" plans for the Tenant Improvements as prepared by Tenant's
architect;
(d) A complete list of the names, addresses, telephone numbers and contract
amount for all contractors, subcontractors, vendors and/or suppliers
providing materials and/or labor for the Tenant Improvements;
(e) No claim of lien shall be of record respecting the Tenant Improvements;
(f) Tenant shall have delivered to Landlord conditional or unconditional
lien releases, as applicable, in accordance with California Civil Code
Section 3262 as to all of the Tenant Improvements; Copies of all
building permits, indicating inspection and approval of the Premises by
the issuer of said permits; and
(g) Tenant is not in default under the Lease and no circumstance exists
that would, with notice or lapse of time, or both, constitute a default
under the Lease.
Landlord, at any time after completion of the Tenant Improvements and upon at
least five (5) business days prior written notice to Tenant, may cause an audit
to be made of Tenant's books and records relating to Tenant's expenditures in
connection with the construction of the Tenant Improvements. Tenant shall
maintain complete and accurate books and records in accordance with generally
accepted accounting principles of these expenditures during the term. Tenant
shall make available to Landlord's auditor within three (3) business days
following Landlord's notice requiring the audit, all books and records
maintained by Tenant pertaining to the construction and completion of the Tenant
Improvements. In addition to all other remedies which Landlord may have pursuant
to the Lease, Landlord may recover from Tenant the reasonable cost of its audit
if the audit discloses that Tenant falsely reported to Landlord expenditures
which were not in fact made or falsely reported a material amount of any
expenditure or the aggregate expenditures.
9. In addition to the Allowance, Landlord agrees to contribute an amount not to
exceed Eighty-Five Thousand Three Hundred Fifty Dollars ($85,350.00) (the
"ADDITIONAL ALLOWANCE") toward the actual and documented costs of the
additional Tenant Improvements described on Schedule 1 attached hereto (the
"ADDITIONAL IMPROVEMENTS"). All work required in the construction of the
Additional Improvements shall be performed only by competent contractors duly
licensed as such under the laws of the State of California and reasonably
approved by Landlord. Tenant will bid competitively the construction of the
Additional Improvements with contractors approved by Landlord and will select
the lowest bid. Tenant shall then enter into a construction contract approved
by Landlord (which approval shall not be unreasonably withheld or delayed) with
the selected contractor to construct the Additional Improvements, which
contract will (i) name Landlord as a third party beneficiary (ii) permit an
assignment to Landlord, at Landlord's election, upon a default by Tenant under
the Lease and (iii) provide that the contractor will
EXHIBIT "C"
-2-
<PAGE>
guarantee that the Additional Improvements will be free from any defects in
workmanship and materials for at lease one (1) year following substantial
completion. Landlord will disburse the Additional Allowance to Tenant in
accordance with Sections 6, 7 and 8 of this Exhibit "C"; provided, however,
that if the cost of the Additional Improvements is less than the Additional
Allowance, Tenant shall not be entitled to the difference between the
Additional Allowance and the cost of the Additional Improvements nor shall such
difference, if any, be applied toward the Rent due under the Lease.
EXHIBIT "C"
-3-
<PAGE>
FOTOBALL USA, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
12 MONTHS ENDED 12 MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
BASIC SHARES CALCULATION:
Reconciliation of weighted average number of shares outstanding to amount used
in basic earnings per share computation:
Weighted average number of shares outstanding 2,694,242 3,011,044
Net income $ 597,874 $ 2,646,066
---------- ------------
BASIC EARNINGS PER SHARE $ .22 $ .88
========== ============
DILUTED SHARES CALCULATION:
Reconciliation of weighted average number of shares outstanding to amount used
in diluted earnings per share computation:
Weighted average number of shares outstanding 2,694,242 3,011,044
Add-shares issuable from assumed exercise
of options: 79,928 190,450
--------- -----------
2,774,170 3,201,494
ADJUSTMENTS TO NET INCOME:
Net income $ 597,874 $ 2,646,066
DILUTED EARNINGS PER SHARE $ .22 $ .83
========== ============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE FOTOBALL USA, INC. FORM 10-KSB FOR THE
PERIOD ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,797,918
<SECURITIES> 0
<RECEIVABLES> 3,963,015
<ALLOWANCES> 250,000
<INVENTORY> 4,105,675
<CURRENT-ASSETS> 12,531,267
<PP&E> 3,089,438
<DEPRECIATION> 1,825,812
<TOTAL-ASSETS> 13,824,878
<CURRENT-LIABILITIES> 1,964,417
<BONDS> 0
0
0
<COMMON> 35,665
<OTHER-SE> 11,553,056
<TOTAL-LIABILITY-AND-EQUITY> 13,824,878
<SALES> 28,690,211
<TOTAL-REVENUES> 28,690,211
<CGS> 16,922,249
<TOTAL-COSTS> 8,939,658
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120,711
<INCOME-PRETAX> 2,759,066
<INCOME-TAX> 113,000
<INCOME-CONTINUING> 2,646,066
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,646,066
<EPS-BASIC> .88
<EPS-DILUTED> .83
</TABLE>
