<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-24294
MEDIA ARTS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0354419
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
521 Charcot Ave, San Jose, California 95131
(Address of principal executive offices and zip code)
Registrant's telephone number: (408) 324-2020
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Registrant's Common Stock, $0.01 par
value, was 11,031,527 at September 30, 1997.
This report consists of 13 pages of which this page is number 1.
1
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MEDIA ARTS GROUP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
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Part I: Financial Information
<S> <C>
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheet as
of September 30, 1997 and March 31, 1997 3
Condensed Consolidated Statement of Operations for the
Three and Six Month Periods Ended September 30, 1997
and 1996 4
Condensed Consolidated Statement of Cash Flows for the
Three and Six Month Periods Ended September 30, 1997
and 1996 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item II: Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II: Other Information
Item 1: Legal Proceedings 12
Item 2: Changes in Securities 12
Item 3: Defaults upon Senior Securities 12
Item 4: Submission of Matters to a Vote of Security Holders 12
Item 5: Other Information 12
Item 6: Exhibits and Reports on Form 8-K 12
(a). Exhibits 12
(b). Reports on Form 8-k 12
Signatures 13
</TABLE>
2
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<TABLE>
MEDIA ARTS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except per share data)
<CAPTION>
September 30, March 31,
1997 1997
_____________ _____________
<S> <C> <C>
ASSETS
Current assets
Cash $ 5,180 $ 374
Accounts receivable, net 8,258 7,394
Receivable from related parties - 114
Inventories 6,040 5,415
Net assets of discontinued operations - 890
Prepaid expenses and other current assets 1,891 1,464
Deferred income taxes 1,630 1,581
Income taxes refundable 34 2,002
_______ _______
Total current assets 23,033 19,234
Property, plant and equipment 3,883 3,562
Other assets 260 265
_______ _______
$27,176 $23,061
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable $ 1,797 $ 2,065
Commissions payable 401 403
Accrued royalties 1,396 1,213
Accrued compensation costs 1,731 714
Accrued expenses 3,325 2,250
Income taxes payable 2,459 -
Borrowings under line of credit - 2,655
Current portion of long term debt 1,789 2,062
_______ _______
Total current liabilities 12,898 11,362
Long-term debt, less current portion 2,969 4,609
Convertible notes 1,200 1,200
_______ _______
Total liabilities 17,067 17,171
_______ _______
Stockholders' equity
Common 69 69
Additional paid-in capital 17,191 17,176
Retained earnings (accumulated deficit) (7,151) (11,355)
_______ _______
Total stockholders' equity 10,109 5,890
_______ _______
$27,176 $23,061
======= =======
<FN>
See Accompanying Notes to Financial Statements
</TABLE> 3
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<TABLE>
MEDIA ARTS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
<CAPTION>
Three months Six months
Ended September 30 Ended September 30
__________________ _________________
1997 1996 1997 1996
_______ _______ _______ _______
<S> <C> <C> <C> <C>
Net sales $17,224 $11,323 $30,413 $20,041
Cost of sales 5,684 4,057 9,892 7,754
_______ _______ _______ _______
Gross profit 11,540 7,266 20,521 12,287
_______ _______ _______ _______
Operating expenses
Marketing and selling 4,424 3,031 7,766 6,129
General and administrative 3,120 2,474 5,914 4,748
_______ _______ _______ _______
Total operating expenses 7,544 5,505 13,680 10,877
_______ _______ _______ _______
Operating profit 3,996 1,761 6,841 1,410
Interest expense (475) (564) (1,163) (1,080)
Exchange gains (losses) 45 - (16) (62)
Gain on sale and leaseback 997 - 997 -
_______ _______ _______ _______
Income from continuing operations
before income taxes 4,563 1,197 6,659 268
Provision for income taxes 1,690 470 2,455 105
_______ _______ _______ _______
Income from continuing operations 2,873 727 4,204 163
Loss from discontinued operations - (594) - (1,385)
Loss on disposal of discontinued
operations - (12,245) - (12,245)
_______ _______ _______ _______
Net income (loss) $ 2,873 $(12,112) $ 4,204 $(13,467)
======= ======= ======= =======
Income from continuing operations
per share $ 0.25 0.07 0.37 0.02
Loss from discontinued operations - (0.06) - (0.14)
Loss on disposal of discontinued
operations - (1.24) - (1.24)
_______ _______ _______ _______
Net income (loss) per share $ 0.25 $ (1.23) $ 0.37 $ (1.36)
======= ======= ======= =======
Weighted average common and common 11,298 9,867 11,296 9,867
equivalent shares outstanding ======= ======= ======= =======
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
4
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<TABLE>
MEDIA ARTS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands, Unaudited)
<CAPTION>
Six months ended September 30,
1997 1996
________ ________
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,204 $(13,467)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Losses from discontinued operations - 13,630
Depreciation 520 485
Amortization of intangibles 486 162
Deferred income taxes (49) 89
Provision for returns and allowances 403 (10)
Provision for losses on accounts receivable (429) 334
Changes in assets and liabilities:
Accounts receivables (838) 766
Receivables from related parties 114 (11)
Inventories (625) (537)
Prepaid expenses and other current assets (427) (107)
Other assets (2) (9)
Accounts payable (268) 508
Commissions payable (2) (149)
Accrued compensation costs 1,017 (107)
Income taxes refundable 1,968 -
Accrued expenses 1,075 (254)
Taxes payable 2,459 -
Accrued royalties 183 -
________ ________
Net cash provided by continuing
operating activities 9,789 1,323
Net cash provided by (used in) discontinued ops 890 (761)
________ ________
Net cash provided by operations 10,679 562
________ ________
Net cash used in investing activities
for acquisitions of property and equipment (841) (271)
________ ________
Cashflows from financing activities:
Repayment of borrowings under line of
credit (2,655) (362)
Repayment of notes payable (2,392) (311)
Proceeds from issuance of common stock 15 -
________ ________
Net cash used in financing activities (5,032) (673)
________ ________
Net increase (decrease) in cash 4,806 (382)
Cash at beginning of period 374 382
________ ________
Cash and cash equivalents at end of period $ 5,180 $ -
======== ========
<FN>
See Accompanying Notes to Financial Statements
</TABLE> 5
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The consolidated financial statements of Media Arts Group, Inc. (the
Company) include the accounts of its wholly owned subsidiary, Thomas
Kinkade Stores, Inc. The Company markets and distributes fine quality
gift and collectible art work and other home decor products primarily
in the United States.
The condensed interim financial statements of Media Arts Group, Inc.
have been prepared by the Company without audit. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to rules and regulations of
the Securities and Exchange Commission. The information included in
this report should be read in conjunction with the Company's audited
financial statements and notes thereto included in the Company's
Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited interim
financial statements reflect all material adjustments (consisting
solely of normal recurring adjustments) necessary for a fair
presentation of the financial position, operating results and cash
flows for the periods presented. The results of the interim period
ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the entire fiscal year which ends
March 31, 1998.
Note 2 - Net income (loss) per share
Net income (loss) per share is computed using the weighted average
number of shares of Common Stock and dilutive Common Stock equivalent
shares outstanding. Common Stock equivalents include shares from the
exercise of stock options and warrants (using the treasury stock
method).
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) 128,"Earnings per
Share." SFAS 128 specifies the computation, presentation and
disclosure requirements for earnings per share for entities with
publicly held common stock or potential common stock. This statement
is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Earlier application of
this statement is not permitted. SFAS 128 requires restatement of all
prior-period earnings per share data previously presented. Reported
earnings per share would not change materially if the provisions of
this statement were applied.
6
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Note 3 - Inventories
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
_______ _______
<S> <C> <C>
Raw materials $ 564 $ 843
Work-in-process 9 12
Finished goods 5,467 4,560
_______ _______
Total $ 6,040 $ 5,415
======= =======
</TABLE>
Note 4 - Debt
On June 30, 1997, the Company repaid $1.3 million of a $7.4 million
Senior Subordinated Note, and on July 7, 1997 repaid a further
$700,000 of that note. The payments were made using the proceeds of a
federal income tax refund. The remaining principal balance of $5.4
million is due between December 28, 1998 and December 31, 2001.
Note 5 - Sale and leaseback
In July 1997, the Company exercised an option to purchase its San Jose
leasehold facility. The Company subsequently sold the facility to an
investor and entered into a four year lease agreement with that
investor. The gain on the sale and leaseback of the facility, after
transaction costs of $110,000 and deferral of $650,000 to offset
future rent increases as compared to the previous lease, aggregated
$997,000.
7
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ITEM 2:
MEDIA ARTS GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information set forth below should be read in conjunction with the
unaudited condensed consolidated financial statements and notes
thereto included in Part I - Item 1 of this Quarterly Report and the
Company's Annual Report on Form 10-K for the year ended March 31, 1997
which contains the audited financial statements and notes thereto for
the years ended March 31, 1997, 1996 and 1995 and Management's
Discussion and Analysis of Financial Condition and Results of
Operations for those respective periods.
Forward looking statements in this Quarterly Report on Form 10-Q as
well as the Company's Annual Report on Form 10-K for the year ended
March 31, 1997, are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Stockholders are
cautioned that all forward-looking statements pertaining to the
Company involve risks and uncertainties, including, without
limitation, risks detailed from time to time in the Company's periodic
reports and other information filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
Net Sales
Net sales for the quarter ended September 30, 1997 were $17.2 million, a
52% increase compared to the $11.3 million from continuing operations
reported for the quarter ended September 30, 1996. Net sales for the six
months ended September 30, 1997 were $30.4 million, up 52% compared to
$20.0 million from continuing operations in the prior year. The significant
increase in net sales was due primarily to an increase in the number of
wholesale customers as well as an increase in same store retail sales.
The number of wholesale accounts increased due to the successful
efforts of the Company's in-house sales force, as well as the
continued implementation of the independently owned Signature Galleries which
are dedicated to Thomas Kinkade products. Wholesale sales increased by 50%
and retail sales increased by 56% for the September 1997 quarter as compared
to the prior year. Wholesale sales increased by 58% and retail sales
increased by 46% for the six months ended September 30, 1997 compared to the
same period in the prior year. Retail sales increased due to the continued
recognition by the public of the work of Thomas Kinkade as well as a change
in the product mix of retail sales towards higher priced editions.
Gross Profit
Gross profit increased by $4.2 million, or 58%, to $11.5 million for
the quarter ended September 30, 1997, in comparison to the $7.3 million
from continuing operations reported for the quarter ended September 30, 1996.
Gross profit was $20.5 million for the six months ended September 30, 1997
compared to $12.3 million in the prior year. The increase was due to
increased sales as well as an increase in gross margins. The Company's
consolidated gross margin was 67% for the three and six months ended
September 30, 1997, compared to 64% and 61% for the same periods in the
prior year. The gross margin increase related principally to an improvement
8
<PAGE>
in wholesale gross margins due to higher sales volumes, a change in product
mix to higher margin products and improved manufacturing efficiencies.
Selling and Marketing Expenses
Selling and marketing expenses were $4.4 million and $7.8 million for the
three and six months ended September 30, 1997, respectively, compared to
$3.0 million and $6.1 million for the same periods in the prior year. As
a percentage of net sales, selling and marketing expenses decreased to 26%
for both the three and six month periods ended September 30, 1997, from 27%
and 31% in the prior year, due to net sales increasing while selling
expenses increased at a slightly lower comparative rate. Selling and
marketing costs increased due primarily to higher compensation costs
related to the increased level of sales. The Company expects selling
and marketing costs to increase in absolute terms as the Company pursues
further expansion of its markets and distribution channels.
General and Administrative Expenses
General and administrative expenses were $3.1 million and $2.5 million
for the September 1997 and 1996 quarters, respectively, and were $5.9 million
and $4.7 million for the six month periods ended September 30, 1997 and 1996,
respectively. Expressed as a percentage of net sales, general and
administrative expenses were 18% in the September 1997 quarter compared to
22% in the September 1996 quarter, and were 19% for the six months ended
September 30, 1997 compared to 24% in the prior year. The increase in
general and administrative expenses was primarily due to payments under
incentive compensation plans as a result of higher levels of profitability,
as well as to higher headcount and related costs as the Company's
infrastructure has expanded in response to increased sales. General
and administrative expenses are expected to increase in the future as the
Company provides support for further expansion of its business.
Interest Expense
Interest expense was $475,000 for the quarter ended September 30,
1997, compared to $564,000 for the same period in the prior year, and was
$1.2 million and $1.1 million for the six months ended September 1997 and
1996. The decrease was due to a reduction in the Company's borrowings under
lines of credit offset by an increase in non-cash amortization of debt
issuance costs resulting from refinancing of the Company's long term debt in
February 1997.
Sale and leaseback
In July 1997, the Company exercised an option to purchase its San Jose
leasehold facility. The Company subsequently sold the facility to an
investor and entered into a four year lease agreement with that
investor. The gain on the sale and leaseback of the facility, after
transaction costs of $110,000 and deferral of $650,000 to offset
future rent increases as compared to the previous lease, aggregated
$997,000.
9
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Provision for Income Tax
Income tax expense was $1.7 million and $2.5 million for the quarter and six
months ended September 1997, compared to $470,000 and $105,000 for the same
periods in the prior year. The Company's effective income tax rate for the
quarter and six months ended September, 1997 was 37% compared to 39% and in
the prior year.
Seasonality
The Company's business has experienced, and is expected to continue to
experience, significant seasonality. The Company's net revenues are
generally highest in the September and December quarters and have
historically been lower in the March and June quarters. Management
believes that the seasonal effect is due primarily to customer buying
patterns and is typical of the art, gift and collectible industry.
The Company expects the seasonal trends to continue in the foreseeable
future. In addition, since a significant portion of the Company's revenues
are generated from orders received within the quarter, sales in any quarter
are substantially dependent on orders booked in that quarter. Future
revenue growth is dependent on the continued demand for the artwork of
Thomas Kinkade and the expansion of distribution through additional
dealers, such as Signature Galleries.
The Company's quarterly operating results may fluctuate as a result of
numerous factors including market acceptance of the art of Thomas Kinkade
and the Company's products based on his works (including new product
categories and series), the timing, mix and number of new product releases,
timing of opening of new Company-owned Thomas Kinkade Galleries, the
successful implementation of the Thomas Kinkade Signature Galleries program
and expansion of distribution generally, the formation and implementation of
new strategic business alliances, the hiring and training of new
manufacturing, sales and administrative personnel, continued implementation of
manufacturing efficiencies, timing of product deliveries and the incurrence of
other operating costs. Accordingly, the results of operations in any quarter
will not necessarily be indicative of the results that may be achieved for a
full fiscal year or any future quarter. Fluctuations in operating results may
also result in volatility in the price of the Company's Common Stock.
Liquidity and Capital Resources
The Company's working capital position was $10.1 million at
September 30, 1997, compared to $7.9 million at March 31, 1997.
The change in working capital was primarily attributable to year to
date net income of $4.2 million, a federal income tax refund of $2.0
million, partly offset by a $2.0 million repayment of long-term debt
and a $2.7 million repayment of the line of credit.
The Company incurred $841,000 in capital expenditures for property
and equipment during the six months ended September 30, 1997. The
Company anticipates that total capital expenditures in fiscal 1998 will
be approximately $3.0 million, and will relate primarily to continued
manufacturing and infrastructure investments, as well as to the opening
of new retail locations.
10
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The Company has a $10.0 million line of credit with a bank (the Senior
Debt). Borrowing capacity under the Senior Debt facility is based
upon eligible accounts receivable and inventory and aggregated $8.2
million as of September 30, 1997. During the June 1997 quarter the
Company fully repaid the Senior Debt. In February 1997 the Company
renegotiated and issued $7.4 million in secured notes payable to
investors (the Subordinated Debt). As of July 31, 1997, the Company
had repaid $2.0 million of the Subordinated Debt using the proceeds of
a federal income tax refund.
The Company's working capital requirements in the foreseeable future
will change depending on the Company's operating results and any
other adjustments in its operating plan as needed in response to
competition, acquisition opportunities or unexpected events. In
addition, the Company is continuing to negotiate the
repayment terms of $1.6 million of notes which are currently payable
to a former shareholder of John Hine Limited (a discontinued subsidiary
of the Company). Management believes the settlement will not have a material
impact on the Company's financial position or results of operations. The
Company believes that existing borrowing capacity under lines of credit,
together with revenues from operations, will be sufficient to meet these
commitments plus satisfy minimum working capital requirements through fiscal
1998, however the Company may seek additional capital in the future to pursue
additional business opportunities, to retire indebtedness or to provide for
other operational purposes.
11
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PART II - Other Information
ITEM 1. LEGAL PROCEEDINGS - Not Applicable
ITEM 2. CHANGES IN SECURITIES - Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Media Arts Group, Inc. was convened on
September 24, 1997.
(b) The following directors were elected to hold office until the next
Annual Meeting:
Votes
Nominee Votes Withheld
Kenneth E. Raasch 9,003,590 2,480
Thomas Kinkade 9,003,390 2,680
Norman A. Nason 9,003,590 2,480
Mike Kiley 9,003,590 2,480
Norm Mahoney 9,003,590 2,680
c) The following matters were voted upon at the meeting:
The amendment of the Company's Employee Stock Option Plan
To increase the number of shares reserved for issuance
Thereunder from 824,863 to 1,124,863
Votes for - 7,658,948, against - 91,479, abstain - 1,255,643
Broker nonvote - 0
The selection and ratification of Price Waterhouse, LLP as independent
public accountants for the year ending March 31, 1998.
Votes for - 7,903,257, against - 1,450, abstain - 1,101,363,
broker nonvote - 0.
ITEM 5. OTHER INFORMATION - Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.1 - Employment Agreement with James Landrum
Exhibit 10.2 - Employment Agreement with Craig Fleming
Exhibit 10.3 - Lease of 521 Charcot Ave, San Jose CA 95131
Exhibit 11.01 - Computation of Income From Continuing
Operations and Net Income Per Share
Exhibit 27 - Financial Data Schedules (EDGAR version
only)
(b) Reports on Form 8-K - none
12
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MEDIA ARTS GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDIA ARTS GROUP, INC.
(Registrant)
By /s/ Craig Fleming
---------------------------------
Craig Fleming
Chief Executive Officer
By /s/ Raymond A. Peterson
---------------------------------
Raymond A. Peterson
Senior Vice President &
& Chief Financial Officer
Date: November 13, 1997
13
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EXHIBIT INDEX
Exhibit Number
10.01 Employment Agreement with James Landrum
10.02 Employment Agreement with Craig Fleming
10.03 Lease of 521 Charcot Ave, San Jose CA 95131
11.01 Computation of net income (loss) per share
27 Financial Data Schedule
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of May 1, 1997 by and
between MEDIA ARTS GROUP, INC., a Delaware corporation (the "Employer"),
and JAMES F. LANDRUM, JR., of 14296 Buckner Drive, San Jose, California
95127 (the "Employee").
RECITALS
A. Employer is the parent company of various wholly owned
subsidiaries and divisions which are engaged in the business of the
creation, printing, reproduction, marketing, production, and selling of
various forms of artwork, including, without limitation, paintings,
prints, lithographs, posters, as well as licensing and wholesale
distribution of plates, figurines, and other two- and three-dimensional
artwork. Employer is also engaged in significant growth which may lead
to the acquisition and development of related and other businesses.
B. The Board of Directors of the Employer (the "Board"), and any of its
Compensation Committee, has approved and authorized the entry of this
Agreement with the Employee.
The parties to this Agreement desire to enter into this Agreement
setting forth the terms and conditions for the employment relationship
of the Employee with the Employer.
NOW, THEREFORE, IN CONSIDERATION OF THE COVENANTS, CONDITIONS AND
PROMISES OF THE PARTIES SET FORTH BELOW, Employer and Employee agree as
follows:
1. Employment. The Employee is employed as Vice-President, General
Counsel and Corporate Secretary, as of the date of this Agreement and
through and until the termination of this Agreement, as hereinafter
defined, with the duties and responsibilities and on the terms and
conditions hereinafter set forth.
2. Responsibilities and Duties of Employee. It is agreed that
Employee is employed on a full-time basis, which is defined to mean
Employee's entire productive time, ability and attention. It is further
agreed that for so long as the Employee is employed with the Employer,
Employee shall not engage in any other business duties or pursuits,
without the express written consent of the Board or the President of the
Employer (the "President"). In his capacity as Vice-President, General
Counsel and Corporate Secretary, Employee shall be primarily responsible
for, and shall personally perform or personally supervise, each of the
following:
(a) all legal functions, including contract generation/review,
litigation management, and intellectual property management, as well as
development of internal legal operations and operating controls, of
Employer and any of its subsidiaries;
<PAGE>
(b) all legal functions, including development of internal controls
as are, and will be, needed in order to fully comply with all legal
reporting requirements of the various state and federal government
entities, including without limitation, the Securities and Exchange
Commission, with jurisdiction over the activities of the Employer and
any of its subsidiaries;
(c) all functions relating to corporate governance, including all
responsibilities typically performed by a Corporate Secretary;
Notwithstanding anything in this Agreement to the contrary, it is
expressly understood and agreed that the Employee shall not have the
right to make any contracts or commitments for or on behalf of the
Employer or any of its subsidiaries without the express consent of the
President or Board.
In addition to the aforementioned responsibilities and duties, Employee
shall perform such other duties and responsibilities as the Board or the
President of the Employer shall designate as are not inconsistent with
the Employee's position with the Employer, including the performance of
duties with respect to any subsidiaries of the Employer.
Employee shall at all times perform the duties set forth herein
faithfully, industriously, and to the best of Employee's ability,
experience and talent. Employee shall report directly to the President
of the Employer in regard to all matters unless otherwise mutually
agreed to by the parties.
3. Location of Employee's Work. The Employee shall be based in
the principal executive offices of the Employer in San Jose, California,
or in any city to which the principal executive offices of the Employer
may relocate. The Employee shall travel to such other locations as may
be reasonably required in the performance of his duties hereunder.
4. Duration of Employment. The Employer agrees to employ Employee
in the capacity set forth above for the period of time commencing as of
the date hereof and ending on May 1, 2000. In that regard, this
Agreement shall be binding on the parties as of the date hereof and
shall terminate at Midnight on May 1, 2000; provided, however, in the
event a Change of Control as defined herein, occurs prior to the
expiration of this Agreement, this Agreement shall not expire prior to
the last day of the sixtieth (60th) month following the date of such
Change in Control.
5. Compensation to Employee.
(a) Salary. The Employer agrees to pay the Employee a base
salary at an annual rate equal to $125,000.00, with such salary to be
increased, at such times, if any, as the Board may deem appropriate, to
an amount determined by the Board, which increases shall be consistent
with the normal historical business practices of the Employer and the
salary adjustments for other senior executives of the Employer.
Notwithstanding the foregoing, the salary of the Employee shall not be
decreased at any time from the amount of salary then in effect.
Participation in deferred compensation, discretionary bonus, retirement
and other employee benefit plans shall not reduce the salary payable to
the Employee under this Paragraph (a) of this Section 5. The salary
under this Paragraph (a) of this Section 5 shall be payable on a semi-
monthly basis and shall be subject to standard federal and California
tax withholding rules.
<PAGE>
(b) Health Care. The Employer agrees to provide medical insurance
coverage under the Employer's group medical insurance plan for the
Employee and his dependents, at no cost to the Employee for such
coverage of the Employee and his dependents.
(c) Bonuses. The Employee shall also be entitled to participate in
any Bonus program of the Employer that the Employer has adopted or may
adopt for the benefit of its senior executives.
(d) Retirement and Employee Benefit Plans. The Employee shall be
entitled to participate in any plan of the Employer relating to stock
options, stock purchases, pension, thrift, profit sharing, education, or
other retirement or employee benefits that the Employer has adopted or
may adopt for the benefit of its senior executives.
(e) Fringe Benefits; Framed Lithograph; Cellular Phone. In
addition to the benefit plans referred to above, the Employee shall be
entitled to participate in any other fringe benefits which are now or
may be or become applicable to the Employer's senior executives, and any
other benefits which are commensurate with the duties and
responsibilities to be performed by the Employee under this Agreement.
The Employee shall receive one framed lithograph, which is produced and
distributed by the Employer and which the Employee shall select, per
year of employment, commencing after the first twelve months of
employment. The Employer agrees to provide the Employee with a cellular
telephone. The Employer shall reimburse the Employee for reasonable
expenses incurred for the use of such cellular telephone.
Notwithstanding the foregoing, the benefits provided under this
paragraph shall not be decreased following a Change in Control, as
hereinafter defined, without the written consent of the Employee,
provided, however, that the benefits provided under this paragraph shall
cease upon termination of the Employee's employment with the Employer.
(f) Voluntary Absences: Vacations. The Employee shall be
entitled, without loss of pay, to be absent voluntarily for reasonable
periods of time from the performance of the duties and responsibilities
under this Agreement. All such voluntary absences shall count as paid
vacation time, unless the Board otherwise determines. The Employee
shall be entitled to an annual paid vacation of four (4) weeks per year
or such longer period as the Board may approve; such paid vacation shall
accrue at the rate of 13.33 hours per month. The timing of paid
vacations shall be scheduled in a reasonable manner by the Employee,
subject to the general approval of the President or Board.
6. Expenses Incurred by Employee. In addition to the
compensation structure set forth in Section 5, the Employer shall pay
all direct out-of-pocket expenses incurred by the Employee in connection
with the performance of his duties set forth herein including, but not
limited to, travel, lodging and long distance telephone expenses. The
Employee shall include in any request for reimbursement for such
expenses a detailed account with receipts of all expenses incurred by
the Employee, and a detailed account of the business relating to those
expenses, in connection with the performance of his duties as described
in this Agreement.
<PAGE>
7. Termination.
(a) Disability. If, as a result of the Employee's incapacity due
to physical or mental illness, he shall have been absent from the full-
time performance of his duties with the Employer for six (6) consecutive
months, and within thirty (30) days after written notice of termination
is given, he shall not have returned to the full-time performance of his
duties, his employment may be terminated by the Employer for
"Disability."
(b) Cause. Subject to the notice provisions set forth below, the
Employer may terminate the Employee's employment for "Cause" at any
time. "Cause" shall mean termination upon (1) the willful failure by
the Employee to substantially perform his duties with the Employer
(other than any such failure resulting from his incapacity due to
physical or mental illness), after a written demand for substantial
performance is delivered to him by the Board, which demand specifically
identifies the manner in which the Board believes that he has not
substantially performed his duties or (2) the willful engaging by the
Employee in conduct which is demonstrably and materially injurious to
the Employer, monetary or otherwise. For purposes of this paragraph (b)
of this Section 7, no act, or failure to act, on the Employee's part
shall be deemed "willful" unless done, or omitted to be done, by him not
in good faith and without the reasonable belief that this action or
omission was in the best interest of the Employer.
Notwithstanding the foregoing, the Employee shall not be deemed to have
been terminated for Cause unless and until there shall have been
delivered to him a copy of a resolution duly adopted by the affirmative
vote of not less than two-thirds (2/3) of the entire membership of the
Board at a meeting of such Board (after reasonable notice to him and an
opportunity for him, together with his counsel, to be heard before such
Board), finding that he has engaged in the conduct set forth above in
this paragraph (b) and specifying the particulars thereof in detail.
(c) Notice of Termination. Any termination of the Employee's
employment by the Employer or by the Employee shall be communicated by
written Notice of Termination to the other party hereto in accordance
with Section 11. "Notice of Termination" shall mean a notice that shall
indicate the specific termination provision in this Agreement relied
upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for the termination of the
Employee's employment under the provision so indicated.
(d) Date of Termination. "Date of Termination" shall mean (i) if the
Employee's employment is terminated by his death, the date of his death;
(2) if the Employee's employment is terminated for Disability, thirty
(30) days after Notice of Termination is given (provided that he shall
not have returned to the full-time performance of his duties during such
thirty (30) day period); (3) if the Employee's employment is terminated
for Cause, the date specified in the Notice of Termination (which shall
not be less than thirty (30) days from the date such Notice of
Termination is given), and (4) if the Employee's employment is
terminated for any other reason, the date specified in the Notice of
Termination.
(e) Change in Control. A "Change in Control" shall be deemed to have
occurred if the conditions set forth in any one of the following
paragraphs shall have been satisfied:
<PAGE>
(i) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
(other than the Employer; any trustee or other fiduciary holding
securities under an employee benefit plan of the Employer; any company
owned, directly or indirectly, by the stockholders of the Employer in
substantially the same proportions as their ownership of the stock of
the Employer; or Thomas Kinkade or Kenneth E. Raasch, their wives or
widows, their lineal descendants and their heirs, devisees and donees,
and trusts created by them, inter vivos or by will, for the benefit of
such persons or for the benefit of charitable or educational
institutions), is or becomes the "beneficial owner" (as defined in Rule
13d-j under the Exchange Act), directly or indirectly, of securities of
the Employer (not including in the securities beneficially owned by such
person any securities acquired directly from the Employer, its
affiliates or Thomas Kinkade or Kenneth E. Raasch or acquired by
convening any convertible preferred stock of the Employer, par value
$.01 per share) representing 51% or more of the combined voting power of
the Employer's then outstanding securities; or
(ii) during any period of two consecutive years (not including any
period prior to the date hereof), individuals who at the beginning of
such period constitute the Board and any new director (other than a
director designated by a person who has entered into an agreement with
the Employer to effect a transaction described in subsection (i), (iii)
or (iv) of this Section 7(e)) whose election by the Board or nomination
for election by the Employer's stockholders was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason
to constitute a majority thereof, or
(iii) the shareholders of the Employer approve a merger or
consolidation of the Employer with any other corporation, other than (A)
a merger or consolidation which would result in the voting securities of
the Employer outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity), in combination with the
ownership of any trustee or other fiduciary holding securities under an
employee benefit plan of the Employer, at least 75% of the combined
voting power of the voting securities of the Employer or such surviving
entity outstanding immediately after such merger or consolidation, or
(B) a merger or consolidation effected to implement a recapitalization
of the Employer (or similar transaction) in which no person acquires
more than 50% of the combined voting power of the Employer's then
outstanding securities; or
(iv) the shareholders of the Employer approve a plan of complete
liquidation of the Employer or an agreement for the sale or disposition
by the Employer of all or substantially all the Employer's assets.
(f) Good Reason. At any time following a Change in Control, the
Employee may terminate his employment hereunder for "Good Reason." "Good
Reason" shall mean the occurrence (without the Employee's express
written consent) of any one of the following acts by the Employer, or
failures by the Employer to act, unless, in the case of any act or
failure to act described in paragraph (i), (v), (vi) or (vii) below,
such act or failure to act is corrected prior to the Date of Termination
specified in the Notice of Termination given in respect thereof;
<PAGE>
(i) the assignment to the Employee of any duties inconsistent with
the Employee's status as a senior executive of the Employer of a
substantially adverse alteration in the nature or status of the
Employee's responsibilities from those in effect immediately prior to
the Change in Control;
(ii) a reduction by the Employer in the Employee's annual base
salary which is prohibited by this agreement as in effect on the date
hereof or as the same may be increased from time to time;
(iii) the relocation of the Employer's principal office to a
location outside the Santa Clara County, California area (or, if
different, the metropolitan area in which such offices are located
immediately prior to the Change in Control) or the Employer's requiring
the Employee to be based anywhere other than the Employer's principal
executive offices (or, if different, the metropolitan area in which such
offices are located immediately prior to the Change in Control), except
for required travel on the Employer's or any of its subsidiaries'
business to an extent substantially consistent with the Employee's
present business travel obligations;
(iv) the failure by the Employer, without the Employee's
consent, to pay to the Employee any portion of the Employee's current
compensation, or to pay to the Employee any portion of an installment of
deferred compensation under any deferred compensation program of the
Employer, within seven (7) days of the date such compensation is due;
(v) the failure by the Employer to continue in effect any
compensation plan in which the Employee participates immediately prior
to the Change in Control which is material to the Employee's total
compensation, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan,
or the failure by the Employer to continue the Employee's participation
therein (or in such substitute or alternative plan) on a basis not
materially less favorable, both in terms of the amount of benefits
provided and the level of the Employee's participation relative to other
participants, as existed immediately prior to the Change in Control;
(vi) the failure by the Employer to continue to provide the Employee
with benefits substantially similar to those enjoyed by the Employee
under any of the Employer's pension, life insurance, medical, health and
accident, or disability plans in which the Employee was participating
immediately prior to the Change in Control, the taking of any action by
the Employer which would directly or indirectly materially reduce any of
such benefits or deprive the Employee of any material fringe benefit
enjoyed by the Employee immediately prior to the Change in Control, or
the failure by the Employer to provide the Employee with the number of
paid vacation days to which the Employee is entitled on the basis of
years of service with the Employer in accordance with the Employer's
normal vacation policy in effect immediately prior to the Change in
Control; or
(vii) any purported termination of the Employee's employment which is
not effected pursuant to a Notice of Termination satisfying the
requirements of this Agreement; for purposes of this Agreement, no such
purported termination shall be effective.
<PAGE>
The Employee's right to terminate his employment for Good Reason shall
not be affected by his incapacity due to physical or mental illness.
Some or all of the above acts or failure to act constitutes a breach of
contract and the Employee's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to
act constituting Good Reason hereunder.
8. Compensation Upon Termination or During Disability. The
Employee shall be entitled to the following benefits during a period of
disability, or upon termination of his employment, as the case may be,
provided that such period or termination occurs prior to the expiration
of this Agreement:
(a) During any period that the Employee fails to perform his full-
time duties with the Employer as a result of incapacity due to physical
or mental illness, he shall continue to receive his base salary at the
rate in effect at the commencement of any such period together with all
compensation payable to him under the Employer's disability plan or
program or other similar plan during such period, until his employment
is terminated pursuant to Section 7(a) hereof. Thereafter, or in the
event the Employee's employment shall be terminated by reason of his
death, his benefits shall be determined under the Employer's retirement,
insurance and other compensation programs then in effect in accordance
with the terms of such programs.
(b) If at any time the Employee's employment shall be terminated (i)
by reason of his death (ii) by the Employer for Cause or Disability or
(iii) by him for any reason (other than, following the occurrence of a
Change in Control, for Good Reason), the Employer shall pay him or the
appropriate payee, as the case may be (as determined in accordance with
Section 9(b) hereof) his full base salary through the Date of
Termination at the rate in effect at the time Notice of Termination is
given, plus all other amounts to which he is entitled under any
compensation plan of the Employer at the time such payments are due, and
the Employer shall have no further obligations to him under this
Agreement.
(c) If, prior to a Change in Control, the Employee's employment shall
be terminated by the Employer other than for Cause or Disability, he
shall be entitled to the benefits provided below:
(i) the Employer shall pay to the Employee his full base salary
through the Date of Termination at the rate in effect at the time the
Notice of Termination is given, no later than the fifth (5th) day
following the Date of Termination, plus all other amounts to which he is
entitled under any compensation plan of the Employer, at the time such
payments are due;
(ii) the Employer shall pay the Employee, at the time such payments
would have been made had the Employee's employment not been terminated
hereunder, all salary, bonus payments and vested portions of retirement
and employee benefit plans that would have been payable to the Employee
pursuant to this Agreement had the Employee continued to be employed for
the remaining duration of this Agreement, assuming for the purpose of
such continuing payments that the Employee's salary for each year of
such remaining duration is equal to his salary at the Date of
Termination and that his annual bonus for each year of such remaining
duration is equal to the average of the annual bonuses paid to him by
the Employer with respect to the three (or, if less, the number of years
<PAGE>
the Employee has been employed by the Employer) fiscal years ended
immediately prior to the fiscal year in which the Date of Termination
occurs; and
(iii) the Employer shall continue in effect for the benefit of the
Employee all insurance or other provisions for indemnification and
defense of officers or directors of the Employer which are in effect on
the date the Notice of Termination is sent to the Employee with respect
to all of his acts and omissions while an officer or director as fully
and completely as if such termination had not occurred, and until the
final expiration or running of all periods of limitation against actions
which may be applicable to such acts or omissions.
(d) If, following a Change in Control, the Employee's employment
should be terminated by the Employer other than for Cause or Disability
or by the Employee for Good Reason, he shall be entitled to the benefits
below:
(i) the Employer shall pay to the Employee his full base salary
through the Date of Termination at the rate in effect at the time Notice
of Termination is given; plus all salary and bonus payments that would
have been payable to the Employee pursuant to this Agreement had the
Employee continued to be employed for the duration of this Agreement,
assuming for the purpose of such payments that his salary for each year
of such duration is equal to his salary at the Date of Termination and
that his annual bonus for each year of such duration is equal to the
average of the annual bonuses paid to him by the Employer (or its
predecessors) with respect to the three (or, if less, the number of
years the Employee has been employed with the Employer and its
predecessors) fiscal years ended immediately prior to the fiscal year in
which the Date of Termination occurs; plus all other amounts to which he
is entitled under any compensation plan of the Employer, including but
not limited to vested portions of retirement and employee benefit plans
in cash in a lump sum no later than the fifteenth (15th) day following
the Date of Termination; and
(ii) the Employer shall continue in effect for the benefit of the
Employee all insurance or other provisions for indemnification and
defense of officers or directors of the Employer which are in effect on
the date the Notice of Termination is sent to the Employee with respect
to all of his acts and omissions while an officer or director as fully
and completely as if such termination had not occurred, and until the
final expiration or running of all periods of limitation against actions
which may be applicable to such acts or omissions.
(e) The Employee shall not be required to mitigate the amount of any
payment provided for in this Section 8 by seeking other employment or
otherwise.
(f) In the event the employment of the Employee is terminated by
the Employer without Cause or the Employee's employment is terminated by
the Employee under conditions entitling him to payment hereunder and the
Employer fails to make timely payment of the amounts then owed to the
Employee under this Agreement, the Employee shall be entitled to
interest on such amounts at the rate of one percent (1%) above the prime
rate (defined as the base rate on corporate loans at large U.S. money
center commercial banks as published by the Wall Street Journal),
compounded monthly, for the period from the date such amounts were
otherwise due until payment is made to the Employee (which interest
<PAGE>
shall be in addition to all rights which the Employee is otherwise
entitled to under this Agreement).
9. No Assignments. This Agreement is personal to each of the
parties hereto. No party may assign or delegate any rights or
obligations hereunder without first obtaining the written consent of all
of the other parties hereto, except that this Agreement shall be binding
upon and inure to the benefit of any successor corporation to the
Employer.
(a) This Agreement shall inure to the benefit of and be enforceable
by the Employee and his personal or legal representatives, executors,
administrators. successors, heirs, distributees, devisees and legatees.
If the Employee should die while any amount would still be payable to
him hereunder had he continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to his devisee, legatee or other designee, if there is no
such designee, to his estate.
10. (a) Noncompetition. The Employee agrees that while this
Agreement is in effect, he will not, directly or indirectly, without the
prior written consent of the Employer, provide consultative service with
or without pay, own, manage, operate, join, control, participate in, or
be connected as a stockholder, partner, or otherwise with any business
individual, partner, firm, corporation, or other entity which is then in
competition with the Employer or any subsidiary of affiliate of the
Employer. It is further expressly agreed that the Employer will or would
suffer irreparable injury if the Employee were to compete with the
Employer or any subsidiary or affiliate of the Employer in violation of
this Agreement and that the Employer would by reason of such competition
be entitled to injunctive relief in a court of appropriate jurisdiction,
and the Employee further consents and stipulates to the entry of such
injunctive relief in such a court prohibiting the Employee from
competing with the Employer or any subsidiary or affiliate of the
Employer, in the areas set forth above, in violation of this Agreement.
(b) Right to Company Materials. The Employee agrees that all
styles, designs, lists, materials, books, files, reports,
correspondence, records, and other documents ("Company Material") used,
prepared, or made available to the Employee, shall be and shall remain
the property of the Employer, its subsidiary, or its affiliate, as the
case may be. Upon termination of employment or the expiration of this
Agreement, all Company Materials shall be returned immediately to the
Employer, its subsidiary, or its affiliate, as the case may be;
provided, however, that the Employee shall be entitled to make and
retain any copies thereof with respect to matters involving the
Employee.
(c) Antisolicitation. The Employee promises and agrees that while
this Agreement continues in effect, he will not influence or attempt to
influence customers or suppliers of the Employer or any of its present
or future subsidiaries or affiliates, either directly or indirectly, to
divert their business to any individual, partnership, firm, corporation
or other entity then in competition with the business of the Employer,
or any subsidiary or affiliate of the Employer.
(d) Soliciting Employees. The Employee promises and agrees
that while this Agreement continues in effect, he will not directly or
indirectly solicit any of the employees of the Employer, its
<PAGE>
subsidiaries or its affiliates to work for or invest in, as the case may
be, any business, individual, partnership, firm, corporation, or other
entity then in competition with the business of the Employer or any
subsidiary or affiliate of the Employer.
(e) Restriction on Use or Disclosure of Trade Secrets. It is
expressly understood that the Employee may be dealing with trade secrets
of the Employer, its subsidiaries and its affiliates, including but not
limited to information, system(s), inventions, and processes, all of a
confidential nature, that concern the operations of the Employer, its
subsidiaries or affiliates and that are the Employer's property and are
used in the course of the Employer's business or that of its
subsidiaries or affiliates. The Employee promises and agrees that he
will not disclose to anyone, directly or indirectly, either while this
Agreement is in effect or at any time thereafter, any of such trade
secrets, or use them other than in the course of his employment. The
Employee acknowledges that the Employer may use all remedies, including
injunctive relief, in order to enforce the provisions of this paragraph
(e).
1. Notice. For the purpose of this Agreement, notices provided
for in this Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States certified or
registered mail, return receipt requested, postage prepaid, addressed to
the respective addresses set forth below, or to such other address as
any party may have furnished to the other in writing in accordance
herewith, except that notice of a change of address shall be effective
only upon actual receipt:
Employer: MEDIA ARTS GROUP, INC.521 Charcot Ave.
San Jose, CA 95131
Attn. President
Employee: JAMES F. LANDRUM, JR.
14296 Buckner Drive
San Jose, CA 95131
12. Indemnification. If the Employee is made or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was an officer of the Employer, or is
or was an officer of the Employer serving at the request of the Employer
as a director or officer, employee or agent of another corporation
partnership, joint venture, trust, employee benefit plan or other
enterprise, then the Employer shall indemnify the Employee against
expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with
such action suit or proceeding if he acted in good faith, as such term
is defined in the Bylaws of the Employer, and in a manner he reasonably
believed to be in or not opposed to the best interests of the Employer,
and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; provided, however,
that with respect to actions, suit or proceedings by or in the right of
the Employer, the Employer shall not indemnify the Employee in respect
of any claim, issue or matter as to such which Employee shall have been
adjudged to be liable to the Employer unless and only to the extent that
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of
all the circumstances of the case, such Employee is fairly and
<PAGE>
reasonably entitled to indemnity for such expenses which the court shall
deem proper.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person
did not act in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the Employer, and, with
respect to any criminal action or proceeding, any reasonable cause to
believe that his conduct was unlawful.
13. Entire Agreement. This Agreement represents the entire
agreement of the parties hereto. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter
hereof have been made by any of the parties which are not expressly set
forth in this Agreement.
14. Amendments, Additions, Modification, Waiver or Discharge. No
amendments or additions to this Agreement shall be binding unless in
writing and signed by all parties hereto. No provision of this Agreement
may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing and signed by all parties hereto.
15. Governing Law. This Agreement shall be governed by,
construed and enforced in accordance with the laws of the State of
California and any applicable federal laws.
16. Cautions and Section Numbers. The captions and numbers to the
sections and paragraphs of this Agreement are inserted for convenience
only and shall not affect the construction or interpretation hereof.
17. Triplicate Originals: Counterparts. This Agreement and all
amendments shall be fully executed in triplicate and each triplicate
shall constitute an original of the same instrument. This Agreement may
be executed in several counterparts, each of which shall be deemed to be
an original, but all of which together shall constitute one and the same
instrument.
18. Arbitration. Any controversy or claim arising out of or relating
to this Agreement shall be settled exclusively by arbitration, conducted
before a panel of three (3) arbitrators in San Jose, California in
accordance with the rules of the American Arbitration Association then
in effect. Judgment may be entered on the arbitrator's award in any
court having jurisdiction.
19. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions
hereof.
20. Numbers. Unless the context clearly indicates otherwise, words
used herein in the singular include the plural and words in the plural
include the singular.
21. Gender. The use of the feminine, masculine or neuter pronoun
shall not be restrictive as to gender and shall be interpreted in all
cases as the context may require.
<PAGE>
22. Representations of Employee. The Employee represents that he
is not under contract of any kind with any entity or business which
would prohibit him from entering into this Agreement. The Employee
further represents that he is entirely free to enter into this Agreement
and that he neither has nor will enter into any agreement or other
obligation while this Agreement is in effect which might conflict with
this Agreement or interfere or conflict with any of the terms hereof.
23. Representations of Employer. The Employer represents that it is
a corporation in good standing by and under the laws of the State of
Delaware and that its president has the authority to properly execute
this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Agreement on the date first indicated above.
_/s/ Craig Fleming______________
CRAIG FLEMING
President, MEDIA ARTS GROUP, INC.
_/s/ James Landrum_______________
JAMES F. LANDRUM, JR.
Employee
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is effective as of May 8, 1997 by and between
MEDIA ARTS GROUP, INC., a Delaware corporation (the "Employer"), and
CRAIG FLEMING, of 1387 Alder Lake Court, San Jose, California 95131
(the "Employee").
RECITALS
A. Employer is the parent company of various wholly owned
subsidiaries and divisions which are engaged in the business of the
creation, printing, reproduction, marketing, production, and selling of
various forms of artwork, including, without limitation, paintings,
prints, lithographs, posters, as well as licensing and wholesale
distribution of plates, figurines, and other two- and three-dimensional
artwork. Employer is also engaged in significant growth which may lead
to the acquisition and development of related and other businesses.
B. The Board of Directors of the Employer (the "Board"), and
any of its Compensation Committee, has approved and authorized the entry
of this Agreement with the Employee.
C. The parties to this Agreement desire to enter into this Agreement
setting forth the terms and conditions for the employment relationship
of the Employee with the Employer.
NOW, THEREFORE, IN CONSIDERATION OF THE COVENANTS, CONDITIONS AND
PROMISES OF THE PARTIES SET FORTH BELOW, Employer and Employee agree as
follows:
1. Employment. The Employee is employed as President, as of the
date of this Agreement and through and until the termination of this
Agreement, as hereinafter defined, with the duties and responsibilities
and on the terms and conditions hereinafter set forth.
2. Responsibilities and Duties of Employee. It is agreed that
Employee is employed on a full-time basis, which is defined to mean
Employee's entire productive time, ability and attention. It is further
agreed that for so long as the Employee is employed with the Employer,
Employee shall not engage in any other business duties or pursuits,
without the express written consent of the Board of the Employer (the
"Board"). In his capacity as President, Employee shall perform such
duties and responsibilities as the Board of the Employer shall designate
as are not inconsistent with the Employee's position with the Employer,
including the performance of duties with respect to any subsidiaries of
the Employer.
Employee shall at all times perform the duties set forth herein
faithfully, industriously, and to the best of Employee's ability,
experience and talent. Employee shall report directly to the Board of
the Employer in regard to all matters unless otherwise mutually agreed
to by the parties.
<PAGE>
3. Location of Employee's Work. The Employee shall be based in
the principal executive offices of the Employer in San Jose, California,
or in any city to which the principal executive offices of the Employer
may relocate. The Employee shall travel to such other locations as may
be reasonably required in the performance of his duties hereunder.
4. Duration of Employment. The Employer agrees to employ Employee
in the capacity set forth above for the period of time commencing as of
the date hereof and ending on May 8, 2000. In that regard, this
Agreement shall be binding on the parties as of the date hereof and
shall terminate at Midnight on May 8, 2000; provided, however, in the
event a Change of Control as defined herein, occurs prior to the
expiration of this Agreement, this Agreement shall not expire prior to
the last day of the sixtieth (60th) month following the date of such
Change in Control.
5. Compensation to Employee.(a) Salary. The Employer agrees
to pay the Employee a base salary at an annual rate equal to
$225,000.00, with such salary to be increased, at such times, if any, as
the Board may deem appropriate, to an amount determined by the Board,
which increases shall be consistent with the normal historical business
practices of the Employer and the salary adjustments for other senior
executives of the Employer. Notwithstanding the foregoing, the salary of
the Employee shall not be decreased at any time from the amount of
salary then in effect. Participation in deferred compensation,
discretionary bonus, retirement and other employee benefit plans shall
not reduce the salary payable to the Employee under this Paragraph (a)
of this Section 5. The salary under this Paragraph (a) of this Section
5 shall be payable on a semi-monthly basis and shall be subject to
standard federal and California tax withholding rules.
(b) Health Care. The Employer agrees to provide medical insurance
coverage under the Employer's group medical insurance plan for the
Employee and his dependents, at no cost to the Employee for such
coverage of the Employee and his dependents.
(c) Bonuses. Employee shall be entitled to participate in any Bonus
program of the Employer that the Employer has adopted or may adopt for
the benefit of its senior executives.
(d) Retirement and Employee Benefit Plans. The Employee shall be
entitled to participate in any plan of the Employer relating to stock
options, stock purchases, pension, thrift, profit sharing, education, or
other retirement or employee benefits that the Employer has adopted or
may adopt for the benefit of its senior executives.
(e) Fringe Benefits; Framed Lithograph; Automobile; Cellular Phone.
In addition to the benefit plans referred to above, the Employee shall
be entitled to participate in any other fringe benefits which are now or
may be or become applicable to the Employer's senior executives, and any
other benefits which are commensurate with the duties and
responsibilities to be performed by the Employee under this Agreement.
The Employee shall receive one framed lithograph, which is produced and
distributed by the Employer and which the Employee shall select, per
year of employment, commencing after the first twelve months of
employment.
Employer shall provide Employee with an automobile allowance of $500.00
per month.
<PAGE>
The Employer agrees to provide the Employee with a cellular telephone.
The Employer shall reimburse the Employee for reasonable expenses
incurred for the use of such cellular telephone. Notwithstanding the
foregoing, the benefits provided under this paragraph shall not be
decreased following a Change in Control, as hereinafter defined, without
the written consent of the Employee, provided, however, that the
benefits provided under this paragraph shall cease upon termination of
the Employee's employment with the Employer.
(f) Voluntary Absences: Vacations. The Employee shall be
entitled, without loss of pay, to be absent voluntarily for reasonable
periods of time from the performance of the duties and responsibilities
under this Agreement. All such voluntary absences shall count as paid
vacation time, unless the Board otherwise determines. The Employee
shall be entitled to an annual paid vacation of four (4) weeks per year
or such longer period as the Board may approve; such paid vacation shall
accrue at the rate of 13.33 hours per month. The timing of paid
vacations shall be scheduled in a reasonable manner by the Employee,
subject to the general approval of the Board.
(g)Art Allowance. Employee shall receive from Employer an artwork bonus
of $10,000 at wholesale cost, from which to purchase any of the
Employer's products.
(h) VP of Sales Bonus. Employee shall receive a bonus earned for
management of the Sales division for the first quarter (Q1) of the 1998
fiscal year.
(i) Stock Options. Employee shall receive the following options to
purchase Employer's stock:
1.50,000 shares of Media Arts Group, Inc. common stock at fair market
value on the date such options are formally approved by a Board vote,
such options to be based on the terms of the Employee Stock Option Plan
and vesting over 3 years of employment (34% at one year from said
approval date, 33% at two years from said approval date, and 33% at
three years from said approval date);
2.25,000 shares of Media Arts Group, Inc. common stock at fair market
value on July 1, 1998, such options to be based on the terms of the
Employee Stock Option Plan and vesting over 3 years of employment (34%
at one year on May 8, 1998, 33% at two years on May 8, 1999, and 33% at
three years on May 8, 2000);
3. 25,000 shares of Media Arts Group, Inc. common stock at fair market
value on July 1, 1999, such options to be based on the terms of the
Employee Stock Option Plan and vesting over 3 years of employment (34%
at one year on May 8, 1999, 33% at two years on May 8, 2000, and 33% at
three years on May 8, 2001);
(j)Living Allowance. Employee shall receive a living allowance of
$2,000.00 per month through December 1997. Should Employee's immediate
family relocate to Santa Clara County, Employee shall receive a $50,000
relocation expense payment and a living allowance of $3,000 per month
for 12 months from the date of such relocation.
<PAGE>
6. Expenses Incurred by Employee. In addition to the
compensation structure set forth in Section 5, the Employer shall pay
all direct out-of-pocket expenses incurred by the Employee in connection
with the performance of his duties set forth herein including, but not
limited to, travel, lodging and long distance telephone expenses. The
Employee shall include in any request for reimbursement for such
expenses a detailed account with receipts of all expenses incurred by
the Employee, and a detailed account of the business relating to those
expenses, in connection with the performance of his duties as described
in this Agreement.
7. Termination.
(a) Disability. If, as a result of the Employee's incapacity due
to physical or mental illness, he shall have been absent from the full-
time performance of his duties with the Employer for six (6) consecutive
months, and within thirty (30) days after written notice of termination
is given, he shall not have returned to the full-time performance of his
duties, his employment may be terminated by the Employer for
"Disability."
(b) Cause. Subject to the notice provisions set forth below, the
Employer may terminate the Employee's employment for "Cause" at any
time. "Cause" shall mean termination upon (1) the willful failure by
the Employee to substantially perform his duties with the Employer
(other than any such failure resulting from his incapacity due to
physical or mental illness), after a written demand for substantial
performance is delivered to him by the Board, which demand specifically
identifies the manner in which the Board believes that he has not
substantially performed his duties or (2) the willful engaging by the
Employee in conduct which is demonstrably and materially injurious to
the Employer, monetary or otherwise. For purposes of this paragraph (b)
of this Section 7, no act, or failure to act, on the Employee's part
shall be deemed "willful" unless done, or omitted to be done, by him not
in good faith and without the reasonable belief that this action or
omission was in the best interest of the Employer.
Notwithstanding the foregoing, the Employee shall not be deemed to have
been terminated for Cause unless and until there shall have been
delivered to him a copy of a resolution duly adopted by the affirmative
vote of not less than two-thirds (2/3) of the entire membership of the
Board at a meeting of such Board (after reasonable notice to him and an
opportunity for him, together with his counsel, to be heard before such
Board), finding that he has engaged in the conduct set forth above in
this paragraph (b) and specifying the particulars thereof in detail.
(c) Notice of Termination. Any termination of the Employee's
employment by the Employer or by the Employee shall be communicated by
written Notice of Termination to the other party hereto in accordance
with Section 11. "Notice of Termination" shall mean a notice that shall
indicate the specific termination provision in this Agreement relied
upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for the termination of the
Employee's employment under the provision so indicated.
(d) Date of Termination. "Date of Termination" shall mean (i) if the
Employee's employment is terminated by his death, the date of his death;
(2) if the Employee's employment is terminated for Disability, thirty
(30) days after Notice of Termination is given (provided that he shall
not have returned to the full-time performance of his duties during such
<PAGE>
thirty (30) day period); (3) if the Employee's employment is terminated
for Cause, the date specified in the Notice of Termination (which shall
not be less than thirty (30) days from the date such Notice of
Termination is given), and (4) if the Employee's employment is
terminated for any other reason, the date specified in the Notice of
Termination.
(e) Change in Control. A "Change in Control" shall be deemed to have
occurred if the conditions set forth in any one of the following
paragraphs shall have been satisfied:
(i) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
(other than the Employer; any trustee or other fiduciary holding
securities under an employee benefit plan of the Employer; any company
owned, directly or indirectly, by the stockholders of the Employer in
substantially the same proportions as their ownership of the stock of
the Employer; or Thomas Kinkade or Kenneth E. Raasch, their wives or
widows, their lineal descendants and their heirs, devisees and donees,
and trusts created by them, inter vivos or by will, for the benefit of
such persons or for the benefit of charitable or educational
institutions), is or becomes the "beneficial owner" (as defined in Rule
13d-j under the Exchange Act), directly or indirectly, of securities of
the Employer (not including in the securities beneficially owned by such
person any securities acquired directly from the Employer, its
affiliates or Thomas Kinkade or Kenneth E. Raasch or acquired by
convening any convertible preferred stock of the Employer, par value
$.01 per share) representing 51% or more of the combined voting power of
the Employer's then outstanding securities; or
(ii) during any period of two consecutive years (not including any
period prior to the date hereof), individuals who at the beginning of
such period constitute the Board and any new director (other than a
director designated by a person who has entered into an agreement with
the Employer to effect a transaction described in subsection (i), (iii)
or (iv) of this Section 7(e)) whose election by the Board or nomination
for election by the Employer's stockholders was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason
to constitute a majority thereof, or
(iii) the shareholders of the Employer approve a merger or
consolidation of the Employer with any other corporation, other than (A)
a merger or consolidation which would result in the voting securities of
the Employer outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity), in combination with the
ownership of any trustee or other fiduciary holding securities under an
employee benefit plan of the Employer, at least 75% of the combined
voting power of the voting securities of the Employer or such surviving
entity outstanding immediately after such merger or consolidation, or
(B) a merger or consolidation effected to implement a recapitalization
of the Employer (or similar transaction) in which no person acquires
more than 50% of the combined voting power of the Employer's then
outstanding securities; or
<PAGE>
(iv) the shareholders of the Employer approve a plan of complete
liquidation of the Employer or an agreement for the sale or disposition
by the Employer of all or substantially all the Employer's assets.
(f) Good Reason. At any time following a Change in Control, the
Employee may terminate his employment hereunder for "Good Reason." "Good
Reason" shall mean the occurrence (without the Employee's express
written consent) of any one of the following acts by the Employer, or
failures by the Employer to act, unless, in the case of any act or
failure to act described in paragraph (i), (v), (vi) or (vii) below,
such act or failure to act is corrected prior to the Date of Termination
specified in the Notice of Termination given in respect thereof;
(i) the assignment to the Employee of any duties inconsistent with
the Employee's status as a senior executive of the Employer of a
substantially adverse alteration in the nature or status of the
Employee's responsibilities from those in effect immediately prior to
the Change in Control;
(ii) a reduction by the Employer in the Employee's annual base
salary which is prohibited by this agreement as in effect on the date
hereof or as the same may be increased from time to time;
(iii) the relocation of the Employer's principal office to a
location outside the Santa Clara County, California area (or, if
different, the metropolitan area in which such offices are located
immediately prior to the Change in Control) or the Employer's requiring
the Employee to be based anywhere other than the Employer's principal
executive offices (or, if different, the metropolitan area in which such
offices are located immediately prior to the Change in Control), except
for required travel on the Employer's or any of its subsidiaries'
business to an extent substantially consistent with the Employee's
present business travel obligations;
(iv) the failure by the Employer, without the Employee's
consent, to pay to the Employee any portion of the Employee's current
compensation, or to pay to the Employee any portion of an installment of
deferred compensation under any deferred compensation program of the
Employer, within seven (7) days of the date such compensation is due;
(v) the failure by the Employer to continue in effect any
compensation plan in which the Employee participates immediately prior
to the Change in Control which is material to the Employee's total
compensation, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan,
or the failure by the Employer to continue the Employee's participation
therein (or in such substitute or alternative plan) on a basis not
materially less favorable, both in terms of the amount of benefits
provided and the level of the Employee's participation relative to other
participants, as existed immediately prior to the Change in Control;
(vi) the failure by the Employer to continue to provide the Employee
with benefits substantially similar to those enjoyed by the Employee
under any of the Employer's pension, life insurance, medical, health and
accident, or disability plans in which the Employee was participating
immediately prior to the Change in Control, the taking of any action by
the Employer which would directly or indirectly materially reduce any of
such benefits or deprive the Employee of any material fringe benefit
enjoyed by the Employee immediately prior to the Change in Control, or
<PAGE>
the failure by the Employer to provide the Employee with the number of
paid vacation days to which the Employee is entitled on the basis of
years of service with the Employer in accordance with the Employer's
normal vacation policy in effect immediately prior to the Change in
Control; or
(vii) any purported termination of the Employee's employment which is
not effected pursuant to a Notice of Termination satisfying the
requirements of this Agreement; for purposes of this Agreement, no such
purported termination shall be effective.
The Employee's right to terminate his employment for Good Reason shall
not be affected by his incapacity due to physical or mental illness.
Some or all of the above acts or failure to act constitutes a breach of
contract and the Employee's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to
act constituting Good Reason hereunder.
8. Compensation Upon Termination or During Disability. The
Employee shall be entitled to the following benefits during a period of
disability, or upon termination of his employment, as the case may be,
provided that such period or termination occurs prior to the expiration
of this Agreement:
(a) During any period that the Employee fails to perform his full-
time duties with the Employer as a result of incapacity due to physical
or mental illness, he shall continue to receive his base salary at the
rate in effect at the commencement of any such period together with all
compensation payable to him under the Employer's disability plan or
program or other similar plan during such period, until his employment
event the Employee's employment shall be terminated by reason of his
death, his benefits shall be determined under the Employer's retirement,
insurance and other compensation programs then in effect in accordance
with the terms of such programs.
(b) If at any time the Employee's employment shall be terminated (i)
by reason of his death (ii) by the Employer for Cause or Disability or
(iii) by him for any reason (other than, following the occurrence of a
Change in Control, for Good Reason), the Employer shall pay him or the
appropriate payee, as the case may be (as determined in accordance with
Section 9(b) hereof) his full base salary through the Date of
Termination at the rate in effect at the time Notice of Termination is
given, plus all other amounts to which he is entitled under any
compensation plan of the Employer at the time such payments are due, and
the Employer shall have no further obligations to him under this
Agreement.
(c) If, prior to a Change in Control, the Employee's employment shall
be terminated by the Employer other than for Cause or Disability, he
shall be entitled to the benefits provided below:
(i) the Employer shall pay to the Employee his full base salary
through the Date of Termination at the rate in effect at the time the
Notice of Termination is given, no later than the fifth (5th) day
following the Date of Termination, plus all other amounts to which he is
entitled under any compensation plan of the Employer, at the time such
payments are due;
<PAGE>
(ii) the Employer shall pay the Employee, at the time such payments
would have been made had the Employee's employment not been terminated
hereunder, all salary, bonus payments and vested portions of retirement
and employee benefit plans that would have been payable to the Employee
pursuant to this Agreement had the Employee continued to be employed for
the remaining duration of this Agreement, assuming for the purpose of
such continuing payments that the Employee's salary for each year of
such remaining duration is equal to his salary at the Date of
Termination and that his annual bonus for each year of such remaining
duration is equal to the average of the annual bonuses paid to him by
the Employer with respect to the three (or, if less, the number of years
the Employee has been employed by the Employer) fiscal years ended
immediately prior to the fiscal year in which the Date of Termination
occurs; and
(iii) the Employer shall continue in effect for the benefit of the
Employee all insurance or other provisions for indemnification and
defense of officers or directors of the Employer which are in effect on
the date the Notice of Termination is sent to the Employee with respect
to all of his acts and omissions while an officer or director as fully
and completely as if such termination had not occurred, and until the
final expiration or running of all periods of limitation against actions
which may be applicable to such acts or omissions.
(d) If, following a Change in Control, the Employee's employment
should be terminated by the Employer other than for Cause or Disability
or by the Employee for Good Reason, he shall be entitled to the benefits
below:
(i) the Employer shall pay to the Employee his full base salary
through the Date of Termination at the rate in effect at the time Notice
of Termination is given; plus all salary and bonus payments that would
have been payable to the Employee pursuant to this Agreement had the
Employee continued to be employed for the duration of this Agreement,
assuming for the purpose of such payments that his salary for each year
of such duration is equal to his salary at the Date of Termination and
that his annual bonus for each year of such duration is equal to the
average of the annual bonuses paid to him by the Employer (or its
predecessors) with respect to the three (or, if less, the number of
years the Employee has been employed with the Employer and its
predecessors) fiscal years ended immediately prior to the fiscal year in
which the Date of Termination occurs; plus all other amounts to which he
is entitled under any compensation plan of the Employer, including but
not limited to vested portions of retirement and employee benefit plans
in cash in a lump sum no later than the fifteenth (15th) day following
the Date of Termination; and
(ii) the Employer shall continue in effect for the benefit of the
Employee all insurance or other provisions for indemnification and
defense of officers or directors of the Employer which are in effect on
the date the Notice of Termination is sent to the Employee with respect
to all of his acts and omissions while an officer or director as fully
and completely as if such termination had not occurred, and until the
final expiration or running of all periods of limitation against actions
which may be applicable to such acts or omissions.
(e) The Employee shall not be required to mitigate the amount of any
payment provided for in this Section 8 by seeking other employment or
otherwise.
<PAGE>
(f) In the event the employment of the Employee is terminated by
the Employer without Cause or the Employee's employment is terminated by
the Employee under conditions entitling him to payment hereunder and the
Employer fails to make timely payment of the amounts then owed to the
Employee under this Agreement, the Employee shall be entitled to
interest on such amounts at the rate of one percent (1%) above the prime
rate (defined as the base rate on corporate loans at large U.S. money
center commercial banks as published by the Wall Street Journal),
compounded monthly, for the period from the date such amounts were
otherwise due until payment is made to the Employee (which interest
shall be in addition to all rights which the Employee is otherwise
entitled to under this Agreement).
9. No Assignments. This Agreement is personal to each of the
parties hereto. No party may assign or delegate any rights or
obligations hereunder without first obtaining the written consent of all
of the other parties hereto, except that this Agreement shall be binding
upon and inure to the benefit of any successor corporation to the
Employer.
(a) This Agreement shall inure to the benefit of and be enforceable
by the Employee and his personal or legal representatives, executors,
administrators. successors, heirs, distributees, devisees and legatees.
If the Employee should die while any amount would still be payable to
him hereunder had he continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to his devisee, legatee or other designee, if there is no
such designee, to his estate.
10. (a) Noncompetition. The Employee agrees that while this
Agreement is in effect, he will not, directly or indirectly, without the
prior written consent of the Employer, provide consultative service with
or without pay, own, manage, operate, join, control, participate in, or
be connected as a stockholder, partner, or otherwise with any business
individual, partner, firm, corporation, or other entity which is then in
competition with the Employer or any subsidiary of affiliate of the
Employer. It is further expressly agreed that the Employer will or would
suffer irreparable injury if the Employee were to compete with the
Employer or any subsidiary or affiliate of the Employer in violation of
this Agreement and that the Employer would by reason of such competition
be entitled to injunctive relief in a court of appropriate jurisdiction,
and the Employee further consents and stipulates to the entry of such
injunctive relief in such a court prohibiting the Employee from
competing with the Employer or any subsidiary or affiliate of the
Employer, in the areas set forth above, in violation of this Agreement.
(b) Right to Company Materials. The Employee agrees that all
styles, designs, lists, materials, books, files, reports,
correspondence, records, and other documents ("Company Material") used,
prepared, or made available to the Employee, shall be and shall remain
the property of the Employer, its subsidiary, or its affiliate, as the
case may be. Upon termination of employment or the expiration of this
Agreement, all Company Materials shall be returned immediately to the
Employer, its subsidiary, or its affiliate, as the case may be;
provided, however, that the Employee shall be entitled to make and
retain any copies thereof with respect to matters involving the
Employee.
<PAGE>
(c) Antisolicitation. The Employee promises and agrees that while
this Agreement continues in effect, he will not influence or attempt to
influence customers or suppliers of the Employer or any of its present
or future subsidiaries or affiliates, either directly or indirectly, to
divert their business to any individual, partnership, firm, corporation
or other entity then in competition with the business of the Employer,
or any subsidiary or affiliate of the Employer.
(d) Soliciting Employees. The Employee promises and agrees that
while this Agreement continues in effect, he will not directly or
indirectly solicit any of the employees of the Employer, its
subsidiaries or its affiliates to work for or invest in, as the case may
be, any business, individual, partnership, firm, corporation, or other
entity then in competition with the business of the Employer or any
subsidiary or affiliate of the Employer.
(e) Restriction on Use or Disclosure of Trade Secrets. It is
expressly understood that the Employee may be dealing with trade secrets
of the Employer, its subsidiaries and its affiliates, including but not
limited to information, system(s), inventions, and processes, all of a
confidential nature, that concern the operations of the Employer, its
subsidiaries or affiliates and that are the Employer's property and are
used in the course of the Employer's business or that of its
subsidiaries or affiliates. The Employee promises and agrees that he
will not disclose to anyone, directly or indirectly, either while this
Agreement is in effect or at any time thereafter, any of such trade
secrets, or use them other than in the course of his employment. The
Employee acknowledges that the Employer may use all remedies, including
injunctive relief, in order to enforce the provisions of this paragraph
(e).
11. Notice. For the purpose of this Agreement, notices provided
for in this Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States certified or
registered mail, return receipt requested, postage prepaid, addressed to
the respective addresses set forth below, or to such other address as
any party may have furnished to the other in writing in accordance
herewith, except that notice of a change of address shall be effective
only upon actual receipt:
Employer: MEDIA ARTS GROUP, INC.521 Charcot Ave.
San Jose, CA 95131
Attn. Chairman of the Board
Employee:CRAIG FLEMING
1387 Alder Lake Court
San Jose, California 95131
12. Indemnification. If the Employee is made or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was an officer of the Employer, or is
or was an officer of the Employer serving at the request of the Employer
as a director or officer, employee or agent of another corporation
partnership, joint venture, trust, employee benefit plan or other
enterprise, then the Employer shall indemnify the Employee against
expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with
such action suit or proceeding if he acted in good faith, as such term
<PAGE>
is defined in the Bylaws of the Employer, and in a manner he reasonably
believed to be in or not opposed to the best interests of the Employer,
and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; provided, however,
that with respect to actions, suit or proceedings by or in the right of
the Employer, the Employer shall not indemnify the Employee in respect
of any claim, issue or matter as to such which Employee shall have been
adjudged to be liable to the Employer unless and only to the extent that
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of
all the circumstances of the case, such Employee is fairly and
reasonably entitled to indemnity for such expenses which the court shall
deem proper.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person
did not act in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the Employer, and, with
respect to any criminal action or proceeding, any reasonable cause to
believe that his conduct was unlawful.
13. Entire Agreement. This Agreement represents the entire
agreement of the parties hereto. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter
hereof have been made by any of the parties which are not expressly set
forth in this Agreement.
14. Amendments, Additions, Modification, Waiver or Discharge. No
amendments or additions to this Agreement shall be binding unless in
writing and signed by all parties hereto. No provision of this Agreement
may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing and signed by all parties hereto.
15. Governing Law. This Agreement shall be governed by,
construed and enforced in accordance with the laws of the State of
California and any applicable federal laws.
16. Cautions and Section Numbers. The captions and numbers to the
sections and paragraphs of this Agreement are inserted for convenience
only and shall not affect the construction or interpretation hereof.
17. Triplicate Originals: Counterparts. This Agreement and all
amendments shall be fully executed in triplicate and each triplicate
shall constitute an original of the same instrument. This Agreement may
be executed in several counterparts, each of which shall be deemed to be
an original, but all of which together shall constitute one and the same
instrument.
18. Arbitration. Any controversy or claim arising out of or relating
to this Agreement shall be settled exclusively by arbitration, conducted
before a panel of three (3) arbitrators in San Jose, California in
accordance with the rules of the American Arbitration Association then
in effect. Judgment may be entered on the arbitrator's award in any
court having jurisdiction.
<PAGE>
19. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions
hereof.
20. Numbers. Unless the context clearly indicates otherwise, words
used herein in the singular include the plural and words in the plural
include the singular.
21. Gender. The use of the feminine, masculine or neuter pronoun
shall not be restrictive as to gender and shall be interpreted in all
cases as the context may require.
22. Representations of Employee. The Employee represents that he
is not under contract of any kind with any entity or business which
would prohibit him from entering into this Agreement. The Employee
further represents that he is entirely free to enter into this Agreement
and that he neither has nor will enter into any agreement or other
obligation while this Agreement is in effect which might conflict with
this Agreement or interfere or conflict with any of the terms hereof.
23. Representations of Employer. The Employer represents that it is
a corporation in good standing by and under the laws of the State of
Delaware and that its CEO/Chairman of the Board has the authority to
properly execute this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Agreement on the date first indicated above.
_/s/ Kenneth Raasch_____________
KENNETH E. RAASCH
CEO and CHAIRMAN OF THE BOARD
MEDIA ARTS GROUP, INC.
_/s/ Craig Fleming_______________
CRAIG FLEMING
Employee
STANDARD SINGLE TENANT NNN LEASE
W I T N E S S E T H
This lease ("Lease") is entered into by and between Limar Realty Corp. #36,
a California corporation ("Landlord") and Media Arts Group, a Delaware
corporation ("Tenant"). For and in consideration of the payment of rents
and the performance of the covenants herein set forth by Tenant, Landlord
does lease to Tenant and Tenant accepts the Premises described below subject
to the agreements herein contained.
1. BASIC LEASE TERMS
a. DATE OF LEASE: May 22, 1997
b. TENANT:Media Arts Group, Inc.
Address (of the Premises):521 Charcot Avenue, San Jose, California
Address (for Notices): (Please provide if other than the Premises.)
c. LANDLORD:Limar Realty Corp. No. 36
Address (for Notices): 1730 S. El Camino Real
Suite 400
San Mateo, California 94402
d. TENANT'S USE OF PREMISES: Artwork production and related office uses.
e. PREMISES AREA:Approximately 90,000 Rentable Square Feet
f. INSURING PARTY:Tenant is the "Insuring Party" unless otherwise stated
herein.
g. TERM (inclusive):Commencement Date: Approximately July 10, 1997, but
more particularly upon the date of transfer of title to the Premises to
Landlord. ("Commencement Date")
Expiration Date: The last day of the 36th month
following the Commencement Date. ("Expiration Date")
Number of Months: Thirty-Six (36)
h. INITIAL BASE RENT:Thirty Eight Thousand Two Hundred Fifty Dollars
($38,250.00) per month.
i. BASE RENT ADJUSTMENT:
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1) Cost of Living. Intentionally deleted.
2) Step Increase. The step adjustment provisions of par4.b.2) apply for the
periods shown below:
Monthly Base Rent
Periods (inclusive) Amount
Months 7 - 24 $59,400.00
Months 25 - 36 $66,150.00
j. TOTAL TERM BASE RENT: (exclusive of any adjustments due to par5.):
$2,092,500.00.
k. PREPAID BASE RENT:$38,250.00
l. SECURITY DEPOSIT:$116,150.00 - $66,150 in cash and $50,000 in an
irrevocable Letter of Credit.
m. BROKER(S):Not applicable
n. GUARANTOR(S):Not applicable
o. EXHIBITS: Exhibits lettered "A" through "D" are attached hereto and made
a part hereof.
2. PREMISES
a. Premises. Landlord leases to Tenant the premises described in par1. and in
Exhibit A (the "Premises"). The term "Premises" includes all the land and
improvements (including buildings, landscaping, parking lot, etc.) as
described on Exhibit A. Subject to any additional work Landlord has agreed
herein to do, Tenant hereby accepts the Premises in their condition existing
as of the date of the execution hereof, subject to all applicable zoning,
municipal, county and state laws, ordinances and regulations governing and
regulating the use of the Premises, and accepts this Lease subject thereto
and to all matters disclosed thereby and by any exhibits attached hereto.
Tenant acknowledges that neither Landlord nor Landlord's Broker has made any
representation or warranty as to the suitability of the Premises for the
conduct of Tenant's business. Tenant agrees with the square footage
specified for the Premises in par1. and will not hereafter challenge such
determination and agreement. The rental payable by Tenant pursuant to this
Lease is not subject to revision in the event of any discrepancy in the
rentable square footage for the Premises.
b. Acceptance; Quiet Enjoyment. Landlord represents that it is the fee
simple owner of the Premises and has full right and authority to make this
Lease. Landlord hereby leases the Premises to Tenant and Tenant hereby
accepts the same from Landlord, in accordance with the provisions of this
Lease. Landlord covenants that Tenant shall have peaceful and quiet
enjoyment of the Premises during the Term (as defined below) of this Lease.
3. TERM. The term ("Term") of this Lease is for the period that commences
at 12:01 a.m. on the Commencement Date and expires at 11:59 p.m. on the
Expiration Date. If Landlord, for any reason, cannot deliver possession of
the Premises to Tenant on or before the Commencement Date, this Lease shall
not be void or voidable, nor shall Landlord be liable to Tenant for any loss
or damage
resulting from such delay. In that event, however, there shall be an
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abatement of Base Rent (as defined below) covering the period between the
Commencement Date and the date when Landlord delivers possession to Tenant,
all other terms and conditions of this Lease shall remain in full force and
effect, provided, however, that if Landlord cannot deliver possession of the
Premises to Tenant, this Lease shall be void. If a delay in possession is
caused by Tenant's failure to perform any obligation in accordance with this
Lease, the Term shall commence as of the Commencement Date, and there shall
be no reduction of Base Rent between the Commencement Date and the time
Tenant takes possession.
4. RENT
a. Base Rent. Tenant shall pay Landlord in lawful money of the United
States, without notice, demand, offset or deduction, rent in the amount(s)
set forth in par1. which shall be payable in advance on the first day of each
and every calendar month ("Base Rent") provided, however, the first month's
Base Rent is due and payable upon execution of this Lease. Unless otherwise
specified in writing by Landlord, all installments of Base Rent shall be
payable at Limar Realty Corp. #36, Department #44292, P.O. Box 44000, San
Francisco, CA 94144-4294. Base Rent for any partial month at the beginning
Or end of this Lease will be prorated in accordance with the number of days in
the subject month. If the Term of this Lease contains any rental
abatement period, other than in accordance with par3. hereof, Tenant hereby
agrees that if Tenant breaches the Lease and/or abandons the Premises before
the end of the Term, or if Tenant's right to possession is terminated by
Landlord because of Tenant's breach of the Lease, Landlord may, at its
option, (1) void the rental abatement period; or (2) recover from Tenant, in
addition to any damages due Landlord under the terms and conditions of the
Lease, Base Rent prorated for the entirety of the rental abatement period at
a rental rate equivalent to two (2) times the Base Rent at such time of
proration.
For purposes of Section 467 of the Internal Revenue Code, the parties to
this Lease hereby agree to allocate the stated Base Rent provided herein
to the periods which correspond to the actual Base Rent payments as provided
under the terms and conditions of this Agreement.
b. Rent Adjustment.
1) Cost of Living Adjustment. Intentionally Deleted.
2) Step Increase. The Base Rent shall be increased periodically to the
amounts and at the times set forth in par1.i.
b. Rent Without Offset and Late Charge. All Rent shall be paid without
prior demand or notice and without any deduction or offset whatsoever. All
Rent shall be paid in lawful currency of the United States of America.
Tenant acknowledges that late payment by Tenant to Landlord of any Rent will
cause Landlord to incur costs not contemplated by this Lease, the exact
amount of such cost being extremely difficult and impracticable to
ascertain. Such costs include, without limitation, processing and
accounting charges and late charges that may be imposed on Landlord by the
terms of any encumbrance or note secured by the Premises. Therefor, if any
Rent is not received by Landlord within ten (10) days of its due date,
Tenant shall pay to Landlord a late charge equal to six percent (6%) of such
overdue payment. Landlord and Tenant hereby agree that such late charge
represents a fair and reasonable estimate of the costs that Landlord will
incur by reason of any such late payment and that the late charge is in
addition to any and all remedies available to the Landlord and that the
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assessment and/or collection of the late charge shall not be deemed a waiver
of any other default. Additionally, all such delinquent Rent or other sums,
plus this late charge, shall bear interest from the due date thereof at the
lesser of ten percent (10%) per annum or the maximum legal interest rate
permitted by law. Any payments of any kind returned for insufficient funds
will be subject to an additional handling charge of $25.00, and thereafter,
Landlord may require Tenant to pay all future payments of Rent or other sums
due by cashier's check.
c. Prepaid Base Rent. Upon the execution of this Lease, Tenant shall pay to
Landlord the Prepaid Base Rent set forth in (1., and such Prepaid Base Rent
shall be applied toward the Base Rent due for the first month of the Term
for which Rent is due. Landlord shall be entitled to immediately endorse
and cash Tenant's Prepaid Base Rent; however, such endorsement and cashing
shall not constitute Landlord's acceptance of this Lease. In the event
Landlord does not accept this Lease, Landlord shall return said Prepaid Base
Rent.
d. Rent. The term "Rent" as used in this Lease shall refer to Base Rent,
Prepaid Base Rent, Real Property Taxes, Operating Expenses, repairs and
maintenance costs, insurance, utilities, late charges and other similar
charges payable by Tenant pursuant to this Lease either directly to Landlord
or otherwise.
5. OPERATING EXPENSES
a. Payment by Tenant. During the Term of this Lease Tenant shall pay to
Landlord, as additional Rent, on a monthly basis one hundred percent (100%)
of the Operating Expenses. At Tenant's option, Tenant may pay, subject to
Landlord's rights under par13.d.7), all Operating Expenses directly.
b. Operating Expenses. The term "Operating Expenses" shall mean all
expenses, costs and disbursements (not specifically excluded from the
definition of Operating Expenses below) of every kind and nature which
Landlord shall pay or become obligated to pay because of or in connection
with the ownership, maintenance, repair and operation of the Premises.
Operating Expenses shall include, but not be limited to, the following:
1) Wages and salaries of all employees engaged in the operation, maintenance
and security of the Premises, including taxes, insurance and benefits
relating thereto; and the rental cost and overhead of any office and storage
space used to provide such services.
2) All supplies and materials used in the operation, repair or maintenance
Of the Premises.
3) Cost of all utilities, including surcharges, for the Premises, including
The cost of water, power and lighting which are not separately billed to and
paid for by Tenant.
4) Cost of all maintenance and service agreements for the Premises and the
equipment thereon, including but not limited to, security services, exterior
window cleaning, janitorial service, engineers, gardeners and trash removal
services.
5) All Insurance Costs, as such term is defined in par16.
5) Cost of repairs and general maintenance (excluding repairs and general
maintenance paid by proceeds of insurance or by Tenant or other third
<PAGE>
parties, and alterations attributable solely to the other tenants of the
Property).
6) A management fee equivalent to one and one half percent (1.5%) of the
Base Rent to be paid to Landlord on a monthly basis.
7) The costs of any additional services not provided to the Premises at the
Commencement Date but thereafter provided by Landlord in its management of
the Premises.
8) The cost of any capital improvements made to the Premises after the
Commencement Date that reduce other operating expenses or are required under
any governmental law or regulation, such cost thereof to be amortized over
such reasonable period as Landlord shall determine consistent with
applicable governmental requirements.
10) Real Property Taxes as that term is defined in par11.c.
11) Assessments, dues and other amounts payable pursuant to the CC&R's
described in par7.b.
c. Operating Expenses shall not include:
1) Costs paid for directly by Tenant;
2) Principal and interest payments on loans secured by deeds of trust
recorded against the Premises or the property of which the Premises are
part;
3) Real estate sales or leasing brokerage commissions; or
4) Executive salaries of off-site personnel employed by Landlord except for
the charge (or pro rata share) of the property manager of the Premises.
c. Extraordinary Services. Tenant shall pay within ten (10) days of receipt
of an invoice from Landlord the cost of additional or extraordinary services
provided to Tenant and not paid or payable by Tenant pursuant to other
provisions of this Lease.
d. Impound. Landlord reserves the right, at Landlord's option, to estimate
the annual cost of Operating Expenses performed by Landlord ("Projected
Operating Expenses") and to require same to be paid in advance. Tenant
shall pay to Landlord, monthly in advance as additional Rent, one-twelfth
(1/12) of the Projected Operating Expenses.
f. Adjustment.
1) Accounting. Within ninety (90) days (or as soon thereafter as possible)
after the close of each calendar year or portion thereof of occupancy,
Landlord shall provide Tenant a statement of such year's actual Operating
Expenses showing the actual Operating Expenses compared to the Projected
Operating Expenses. If the actual Operating Expenses are more than the
Projected Operating Expenses then Tenant shall pay Landlord, within ten (10)
days of receipt of a bill therefor, the difference. If the actual Operating
Expenses are less than the Projected Operating Expenses, then Tenant shall
receive a credit against future Operating Expenses payments equal to the
difference; provided, that in the case of an overpayment for the final lease
year of the Term, Landlord shall credit the difference against any sums due
from Tenant to Landlord in accordance with the terms of this Lease; and if
<PAGE>
no sums are due and unpaid, shall promptly refund the amount to Tenant.
2) Proration. Tenant's liability to pay Operating Expenses shall be
prorated on the basis of a 365 (or 366, as the case may be) day year to
account for any fractional portion of a year included at the commencement or
expiration of the Term of this Lease.
3) Survival. Landlord and Tenant's obligations to pay for or credit any
increase or decrease in payments pursuant to this par5. shall survive this
Lease.
g. Failure to Pay. Failure of Tenant to pay any of the charges required to
be paid under this par5. shall constitute a material default and breach of
this Lease and Landlord's remedies shall be as specified in par21.
h. Operating. Expense Audit. Within twelve (12) months of receipt of any
billing statement (pursuant to par5.f. above) ("Statement"), and upon thirty
(30) days prior written notice Tenant shall have the right to examine, to
copy and to have an audit conducted of all books and records of Landlord at
Landlord's office pertaining to the Operating Expenses for the period
covered by the Statement. If Tenant disputes the inclusion or amount of any
item or items in any such Statement, the Parties will use good faith efforts
to settle such dispute within thirty (30) days after notice of the dispute.
In the event that such dispute is not settled within this time period, the
dispute shall be resolved by a firm of real estate audit professionals
("Audit Professionals") mutually acceptable to Landlord and Tenant. Audit
Professionals shall mean for the purposes of this par5.h. an independent firm
of Certified Public Accountants with experience in real estate expense
reviews. If Landlord and Tenant cannot agree on Audit Professionals within
fifteen (15) days, then Landlord and Tenant shall each, within fifteen (15)
days, select one (1) independent firm of Audit Professionals, and such two
(2) Audit Professionals shall together select a third firm of Audit
Professionals, which third firm shall be the Audit Professionals who shall
resolve the dispute. The Audit Professionals shall be entitled to review all
records relating to the disputed items. The determination of the Audit
Professionals shall be final and binding upon both Landlord and Tenant. The
expenses of the Audit Professionals shall be borne by Tenant unless said
audit discloses an overall overstatement of Operating Expenses of five
percent (5%) or more for the period being audited, in which case Landlord
shall pay the audit expenses. If the Audit Professionals determine that
Tenant has made an over-payment or under-payment, then the procedures in
par5.f.1) shall be followed.
6. SECURITY DEPOSIT. Upon execution of this Lease, Tenant shall deposit a
cash security deposit of $66,150.00 and an irrevocable Letter of Credit in
the amount of $50,000.00 (collectively, the "Security Deposit") with
Landlord. The issuer of the Letter of Credit shall be a commercial bank
acceptable to Landlord, and the form of the Letter of Credit shall be
acceptable to Landlord. If Tenant is in default, Landlord can use the
Security Deposit or any portion of it (including, without limitation, a
drawing against the Letter of Credit) to cure the default or to compensate
Landlord for any damages sustained by Landlord resulting from Tenant's
default. Upon demand, Tenant shall immediately pay to Landlord a sum equal
to the portion of the Security Deposit expended or applied by Landlord to
restore the Security Deposit to its full amount including any interest which
would have been earned on the portion of the Security Deposit expended or
applied by the Landlord, from the date of such expense or application. In
no event will Tenant have the right to apply any part of the Security
Deposit to any Rent due under this Lease. Landlord's obligations with
<PAGE>
respect to the Security Deposit are those of a debtor and not a trustee, and
Landlord can commingle the cash portion of the Security Deposit with
Landlord's general funds. Landlord shall not be required to pay Tenant
interest on the Security Deposit. Landlord shall be entitled to immediately
endorse and cash Tenant's cash portion of the Security Deposit; however,
such endorsement and cashing shall not constitute Landlord's acceptance of
this Lease. In the event Landlord does not accept this Lease, Landlord
shall return said Security Deposit. If Tenant is not in default at the
expiration or termination of this Lease and has fully complied with the
provisions of par9. and par13.d.6), Landlord shall return the Security Deposit
to Tenant.
7. USE OF PREMISES
a. Tenant's Use. Tenant shall use the Premises solely for the purposes
stated in par1. and for no other purposes without obtaining the prior written
consent of Landlord. Tenant acknowledges that neither Landlord nor any
agent of Landlord has made any representation or warranty with respect to
the Premises or with respect to the suitability of the Premises to the
conduct of Tenant's business, nor has Landlord agreed to undertake any
modification, alteration or improvement to the Premises, except as provided
in writing in this Lease. Tenant acknowledges that Landlord may from time
to time, at its sole discretion, make such modifications, alterations,
deletions or improvements to the Premises as Landlord may reasonably deem
necessary or desirable, without compensation or notice to Tenant. Tenant
shall promptly comply with all laws, statutes, ordinances, orders and
governmental regulations affecting the Premises. Tenant shall not do or
permit anything to be done in or about the Premises or bring or keep
anything in the Premises that will in any way increase the premiums paid by
Landlord on its insurance related to the Premises. Tenant will not perform
any act or carry on any practices that may injure the Premises. Tenant
shall not use the Premises for sleeping, washing clothes, cooking or the
preparation, manufacture or mixing of anything that emits any objectionable
odor, noises, vibrations or lights onto such other tenants. If sound
insulation is required to muffle noise produced by Tenant on the Premises,
Tenant at its own cost shall provide all necessary insulation. Tenant shall
not do anything on the Premises which will overload any existing parking or
service to the Premises. Pets and/or animals of any type shall not be kept
on the Premises.
b. CC&R's. Tenant agrees that this Lease is subject and subordinate to the
existing Covenants, Conditions and Restrictions, as they may be amended from
time to time ("CC&R's"), and further agrees that the CC&R's are an integral
part of this Lease. Throughout the Term or any extension thereof,
notwithstanding any other provision hereof, Tenant shall faithfully and
timely assume and perform all obligations of Landlord and/or Tenant under
the CC&R's and any modifications or amendments thereto, including the
payment of any periodic or special dues or assessments against the Premises.
Such dues and assessments shall be included within the definition of
Operating Expenses pursuant to par5.b.11), and Tenant shall pay such amounts
as further set forth in par5. Tenant shall hold Landlord, its subsidiaries,
shareholders, directors, officers, agents and employees harmless and
indemnify Landlord, its subsidiaries, shareholders, directors, officers,
agents and employees against any loss, expense and damage, including
attorneys' fees and costs, arising out of the failure of Tenant to perform
or comply with the CC&R's.
c. Rules and Regulations. Tenant shall comply with and use the Premises in
accordance with the Rules and Regulations attached hereto as Exhibit C and
<PAGE>
to any reasonable modifications to such Rules and Regulations as Landlord
may adopt from time to time.
8. EMISSIONS; STORAGE, USE AND DISPOSAL OF WASTE
a. Emissions. Tenant shall not:
1) Permit any vehicle on the Premises to emit exhaust which is in violation
of any governmental law, rule, regulation or requirement;
2) Discharge, emit or permit to be discharged or emitted, any liquid, solid
or gaseous matter, or any combination thereof, into the atmosphere or on,
into or under the Premises, any building or other improvements of which the
Premises are a part, or the ground or any body of water which matter, as
reasonably determined by Landlord or any governmental entity, does or may
pollute or contaminate the same, or is, or may become, radioactive or does,
or may, adversely affect the (a) health or safety of persons, wherever
located, whether on the Premises or anywhere else, (b) condition, use or
enjoyment of the Premises or any other real or personal property, whether on
the Premises or anywhere else, or (c) Premises or any of the improvements
thereto including buildings, foundations, pipes, utility lines, landscaping
or parking areas;
3) Produce, or permit to be produced, any intense glare, light or heat;
3) Create, or permit to be created, any sound pressure level which will
interfere with the quiet enjoyment of any real property outside the
Premises, or which will create a nuisance or violate any governmental law,
rule, regulation or requirement;
4) Create, or permit to be created, any vibration that is discernible
outside the Premises; or
5) Transmit, receive or permit to be transmitted or received, any
electromagnetic, microwave or other radiation which is or may be harmful or
hazardous to any person or property in, or about the Premises, or anywhere
else.
b. Storage and Use.
1) Storage. Subject to the uses permitted and prohibited to Tenant under
this Lease, Tenant shall store in appropriate leak proof containers all
solid, liquid or gaseous matter, or any combination thereof, which matter,
if discharged or emitted into the atmosphere, the ground or any body of
water, does or may (a) pollute or contaminate the same, or (b) adversely
affect the (i) health or safety of persons, whether on the Premises or
anywhere else, (ii) condition, use or enjoyment of the Premises or any real
or personal property, whether on the Premises or anywhere else, or (iii)
Premises.
2) Use. In addition, without Landlord's prior written consent, Tenant shall
not use, store or permit to remain on the Premises any solid, liquid or
gaseous matter which is, or may become radioactive. If Landlord does give
its consent, Tenant shall store the materials in such a manner that no
radioactivity will be detectable outside a designated storage area and
Tenant shall use the materials in such a manner that (a) no real or personal
property outside the designated storage area shall become contaminated
thereby and (b) there are and shall be no adverse effects on the (i) health
or safety of persons, whether on the Premises or anywhere else, (ii)
<PAGE>
condition, use or enjoyment of the Premises or any real or personal property
thereon or therein, or (iii) Premises or any of the improvements thereto or
thereon.
3) Hazardous Materials. Subject to the uses permitted and prohibited to
Tenant under this Lease, Tenant shall store, use, employ, transport and
otherwise deal with all Hazardous Materials (as defined below) employed on
or about the Premises in accordance with all federal, state, or local law,
ordinances, rules or regulations applicable to Hazardous Materials in
connection with or respect to the Premises.
c. Disposal of Waste.
1) Refuse Disposal. Tenant shall not keep any trash, garbage, waste or
other refuse on the Premises except in sanitary containers and shall
regularly and frequently remove same from the Premises. Tenant shall keep
all incinerators, containers or other equipment used for storage or disposal
of such materials in a clean and sanitary condition.
2) Sewage Disposal. Tenant shall properly dispose of all sanitary sewage
and shall not use the sewage disposal system (a) for the disposal of
anything except sanitary sewage or (b) amounts in excess of the lesser of:
(i) that reasonably contemplated by the uses permitted under this Lease or
(ii) that permitted by any governmental entity. Tenant shall keep the
sewage disposal system free of all obstructions and in good operating
condition.
3) Disposal of Other Waste. Tenant shall properly dispose of all other
waste or other matter delivered to, stored upon, located upon or within,
used on, or removed from, the Premises in such a manner that it does not,
and will not, adversely affect the (a) health or safety of persons, wherever
located, whether on the Premises or elsewhere, (b) condition, use or
enjoyment of the Premises or any other real or personal property, wherever
located, whether on the Premises or anywhere else, or (c) Premises or any of
the improvements thereto or thereon including buildings, foundations, pipes,
utility lines, landscaping or parking areas.
d. Information. Tenant shall provide Landlord with any and all information
regarding Hazardous Materials in the Premises, including copies of all
filings and reports to governmental entities at the time they are
originated, and any other information requested by Landlord. In the event
of any accident, spill or other incident involving Hazardous Materials,
Tenant shall immediately report the same to Landlord and supply Landlord
with all information and reports with respect to the same. All information
described herein shall be provided to Landlord regardless of any claim by
Tenant that it is confidential or privileged.
e. Compliance with Law. Notwithstanding any other provision in this Lease
to the contrary, Tenant shall comply with all laws, statutes, ordinance,
regulations, rules and other governmental requirements in complying with its
obligations under this Lease, and in particular, relating to the storage,
use and disposal of Hazardous Materials.
f. Indemnity. Tenant hereby agrees to indemnify, defend and hold Landlord,
its agents, employees, lenders, shareholders, directors and representatives
harmless from and against any and all actions, causes of action, losses,
damages, costs, claims, expenses, penalties, obligations or liabilities of
any kind whatsoever (including but not limited to reasonable attorneys'
fees) arising out of or relating to any Hazardous Materials employed, used,
<PAGE>
transported across, or otherwise dealt with by Tenant (or invitees, or
persons or entities under the control of Tenant) in connection with or with
respect to the Premises. Notwithstanding any other provision of this Lease,
the indemnity obligation of Tenant pursuant to this par8.f. shall survive the
termination of this Lease and shall relate to any occurrence as described in
this par8.f. occurring in connection with this Lease. For purposes of this
Lease the term "Hazardous Materials" shall mean any hazardous, toxic or
dangerous waste, substance or material, pollutant or contaminant, as defined
for purposes of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (42 U.S.C. Sections 9601 et seq.), as amended, or the
Resource Conservation and Recovery Act (42 U.S.C. Sections 6901 et seq.), as
amended, or any other federal, state, or local law, ordinance, rule or
regulation applicable to the Premises, or any substance which is toxic,
explosive, corrosive, flammable, infectious, radioactive, carcinogenic,
mutagenic, or otherwise hazardous, or any substance which contains gasoline,
diesel fuel or other petroleum hydrocarbons, polychlorinated biphenyls
(PCB's), or radon gas, urea formaldehyde, asbestos or lead.
9. SIGNS. Tenant shall not place any sign upon or adjacent to the Premises,
except that Tenant may, with Landlord's prior written consent, install (but
not on the roof) such signs as are reasonably required to indicate Tenant's
company name or logo provided such signs are in compliance with all
applicable governmental requirements and the CC&R's. The installation of
any sign on or adjacent to the Premises by or for Tenant shall be subject to
the provisions of par13. (Repairs and Maintenance). Tenant shall remove any
sign placed on or adjacent to the Premises by Tenant upon the expiration of
the Term or sooner termination of this Lease, and Tenant shall repair any
damage or injury to the Premises caused thereby, all at Tenant's expense.
If any signs are not removed, or necessary repairs not made, Landlord shall
have the right to remove the signs and repair any damage or injury to the
Premises at Tenant's sole cost and expense. Landlord reserves all rights to
the use of the roof and the right to install, and all revenues from the
installation of, such signs on the Premises, including the roof, as do not
unreasonably interfere with the conduct of Tenant's business within the
Premises.
10. PERSONAL PROPERTY TAXES. Tenant shall pay prior to delinquency all
taxes assessed against and levied upon Tenant owned leasehold improvements,
trade fixtures, furnishings, equipment and all personal property of Tenant
contained in the Premises or elsewhere. When possible, Tenant shall cause
its leasehold improvements, trade fixtures, furnishings, equipment and all
other personal property to be assessed and billed separately from the real
property of Landlord. If any of Tenant's said personal property shall be
assessed with Landlord's real property, Tenant shall pay Landlord the taxes
attributable to Tenant within ten (10) days after receipt of a written
statement setting forth the taxes applicable to Tenant's property.
11. REAL PROPERTY TAXES
a. Payment of Taxes. Tenant shall pay the Real Property Taxes, as defined in
par11.c., during the Term of this Lease. Subject to par11.b., all such
payments shall be made at least ten (10) days prior to the delinquency date of
the applicable installment. Tenant shall promptly furnish Landlord with
satisfactory evidence that such Real Property Taxes have been paid. If any
such Real Property Taxes to be paid by Tenant shall cover any period of time
prior to the commencement of the Term or after the expiration or earlier
termination of the Term hereof, Tenant's share of such Real Property Taxes
shall be equitably prorated to cover only the period of time this Lease is
in effect, and Landlord shall reimburse Tenant for any overpayment after
<PAGE>
such proration. If Tenant shall fail to pay any Real Property Taxes
required by this Lease to be paid by Tenant, Landlord shall have the right
to pay the same, and Tenant shall reimburse Landlord therefor upon demand
b. Advance Payment. In order to ensure payment when due and before
delinquency of any or all Real Property Taxes, Landlord reserves the right,
at Landlord's option, to estimate the current Real Property Taxes applicable
to the Premises, and to require each installment of the Real Property Taxes
to be paid in advance to Landlord by Tenant, either: (i) in a lump sum
amount, at least twenty (20) days prior to the applicable delinquency date,
or (ii) monthly in advance with the payment of the Base Rent. If Landlord
elects to require payment monthly in advance, the monthly payment shall be
that equal monthly amount which, over the number of months remaining before
the month in which the applicable tax installment would become delinquent,
would provide a fund large enough to fully discharge before delinquency the
estimated installment of Real Property Taxes to be paid. When the actual
amount of the applicable tax bill is known, Landlord may, but is not
required to, adjust the amount of such equal monthly advance payment so as
to provide the funds needed to pay the applicable Real Property Taxes before
delinquency. If the amounts paid to Landlord by Tenant under the provisions
of this par11. are insufficient to discharge the obligations of Tenant to pay
such Real Properly Taxes as the same become due, Tenant shall pay to
Landlord, upon Landlord's demand, such additional sums as are necessary to
pay such obligations. All moneys paid to Landlord under this par11. may be
intermingled with other moneys of Landlord and shall not bear interest. In
the event of a breach by Tenant in the performance of the obligations of
Tenant under this Lease, then any balance of funds paid to Landlord under
the provisions of this par11. may, at the option of Landlord, be treated as an
additional Security Deposit under par6.
c. Definition of "Real Property Taxes". As used herein, the term "Real
Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax or other fee, charge, or
excise which may be imposed as a substitute for any of the foregoing (other
than inheritance, personal income or estate taxes) imposed upon the Premises
by any authority having the direct or indirect power to tax, including any
city, county, state or federal government, or any school, agricultural,
sanitary, fire, street, drainage or other improvement district thereof,
levied against any legal or equitable interest of Landlord in the Premises,
Landlord's right to rent or other income therefrom, and/or Landlord's
business of leasing the Premises. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in applicable law taking
effect, during the Term of this Lease, including but not limited to a change
in the ownership of the Premises or in the improvements thereon, the
execution of this Lease, or any modification, amendment or transfer thereof,
and whether or not contemplated by the parties hereto.
12. UTILITIES. Tenant shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Tenant, Tenant shall pay a reasonable proportion, to
be determined by Landlord, of all charges jointly metered with other
premises.
13. REPAIRS AND MAINTENANCE
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a. Tenant's Obligations.
1) General. Tenant shall, at Tenant's sole cost and expense and at all
times, contract for janitorial services and supplies and keep the Premises
and every part thereof in good order, condition and repair, structural and
non-structural (whether or not such portion of the Premises requiring
repairs, or the means of repairing same, are reasonably or readily
accessible to Tenant, and whether or not the need for such repairs occurs as
a result of Tenant's use, any prior use, the elements or the age of such
portion of the Premises), including, without limiting the generality of the
foregoing, all equipment or facilities serving the Premises, such as
plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing system,
including fire alarm and/or smoke detection systems and equipment, fire
hydrants, fixtures, walls (interior and exterior), foundations, ceilings,
roofs, floors, windows, doors, plate glass, skylights, landscaping,
driveways, parking lots, fences, retaining walls, signs, sidewalks and
parkways located in, on, about or adjacent to the Premises. Tenant shall
not cause or permit any Hazardous Material to be spilled or released in, on,
under or about the Premises (including through the plumbing or sanitary
sewer system) and shall promptly, at Tenant's expense, take all
investigatory and/or remedial action reasonably recommended, whether or not
formally ordered or required, for the cleanup of any contamination of, and
for the maintenance, security and/or monitoring of the Premises, the
elements surrounding same, or neighboring properties, that was caused or
materially contributed to by Tenant, or pertaining to or involving any
Hazardous Materials and/or storage tank brought onto the Premises by or for
Tenant or under its control. Tenant, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices.
Tenant's obligations shall include restorations, replacements or renewals
when necessary to keep the Premises and all improvements thereon or a part
thereof in good order, condition and state of repair. If, inclusive of
Tenant's occupancy pursuant to earlier lease agreement(s) and amendments
thereto, Tenant has occupied the Premises for seven (7) years or more,
Landlord may require Tenant to repaint the exterior of the buildings on the
Premises as reasonably required, but not more frequently than once every
seven (7) years.
2) Contracts. Tenant shall, at Tenant's sole cost and expense, procure and
maintain contracts, with copies to Landlord, in customary form and substance
for, and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire
sprinkler and/or standpipe and hose or other automatic fire extinguishing
systems, including fire alarm and/or smoke detection, (iv) landscaping and
irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt
and parking lot maintenance. Tenant shall keep a detailed preventative
maintenance schedule and log showing the frequency of maintenance on all
HVAC, mechanical, electrical and other systems of the Premises and provide
Landlord with a copy of same quarterly.
3) As-ls Condition. The parties affirm that Landlord, its subsidiaries,
officers, shareholders, directors, agents and/or employees have made no
representations to Tenant respecting the condition of the Premises except as
specifically stated herein.
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4) Americans with Disabilities Act. Tenant acknowledges that as of the
Commencement Date, the Premises may not comply with the Americans with
Disabilities Act of 1990 ("ADA"), and that Landlord shall have no obligation
with respect to any such failure of the Premises to so comply. Tenant
shall, at its cost, at any time during the Term as required by any
applicable governmental agency having jurisdiction over the Premises, make
such modifications and alterations to the Premises as may be required in
order to fully comply with the provisions of the ADA, as from time to time
amended, and any and all regulations issued pursuant to or in connection
with the ADA in such a manner as to satisfy the applicable governmental
agency or agencies requiring remediation. Tenant shall at least thirty (30)
days prior to the commencement of any construction in connection with
satisfaction of the ADA, give written notice to Landlord of its intended
commencement of construction together with sufficient details so as to
reasonably disclose to Landlord the nature of the proposed construction,
copies of any notices received by Tenant from applicable governmental
agencies in connection with the ADA and such other documents or information
as Landlord may reasonably request. Tenant shall give the Landlord thirty
(30) days prior written notice as described above in connection with any
such construction. Any and all construction required to so comply with the
ADA shall be completed by Tenant prior to the expiration of the Term.
c. Landlord's Obligations. Landlord shall have no obligation, in any manner
whatsoever, to repair and maintain the Premises, or the equipment therein,
whether structural or non structural, all of which obligations are intended
to be that of the Tenant under par13.a. hereof.
d. Compliance with Governmental Regulations. Tenant shall, at its own cost
and expense, promptly and properly observe and comply with all present and
future orders, regulations, directions, rules, laws, ordinances, and
requirements of all governmental authorities (including but not limited to
state, municipal, county and federal governments and their departments,
bureaus, boards and officials) arising from the use or occupancy of, or
applicable to, the Premises or privileges appurtenant to or in connection
with the enjoyment of the Premises. Tenant shall also comply with all such
rules, laws, ordinances and requirements at the time Tenant makes any
alteration, addition or change to the Premises.
e. Deferred Maintenance and Planned Capital Improvements. Tenant
acknowledges that certain deferred maintenance exists as of the Commencement
Date in connection with the Premises, which deferred maintenance is
described on Exhibit D attached hereto and incorporated herein by this
reference (Items 1 through 7, inclusive) and is collectively referred to as
the "Deferred Maintenance". In addition, certain capital improvements are
required in connection with the Premises, which capital improvements are
described on Exhibit D (Items 8 through 17, inclusive) and are collectively
referred to as the "Capital Improvements". Tenant shall, at Tenant's sole
cost and expense, perform and complete each and every item of Deferred
Maintenance within nine (9) months following the Commencement Date. Tenant
shall, in addition, at Tenant's sole cost and expense, perform and complete
each and every item of the Capital Improvements within eighteen (18) months
following the Commencement Date, which performance and completion shall
include, without limitation, expenditure by Tenant of the minimum amounts of
estimated cost in connection with each of the Capital Improvements as shown
on Exhibit D. Tenant shall provide to Landlord copies of invoices and such
other documents as Landlord may, from time to time, reasonably request in
connection with both the Deferred Maintenance and the Capital Improvements.
In all events, Tenant shall provide to Landlord prior to the expiration of
nine (9) months following the Commencement Date, evidence reasonably
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satisfactory to Landlord that each and every item of the Deferred
Maintenance has been completed. In all events, Tenant will provide to
Landlord, prior to the expiration of eighteen (18) months following the
Commencement Date, evidence reasonably satisfactory to landlord that each
and all of the Capital Improvements have been completed, which evidence
shall include, without limitation, evidence that Tenant has expended the
minimum amount required to be expended by Tenant in connection with the
Capital Improvements. Tenant consents to all Deferred Maintenance and
Capital Improvements and estimated costs listed in Exhibit D. Landlord
agrees that the Deferred Maintenance and Capital Improvements estimated
costs, listed in Exhibit D, will not be included as part of the aggregate
total amount of Fifteen Thousand Dollars ($15,000.00) listed in (14.
e. Miscellaneous.
1) Landlord and Tenant shall each do all acts required to comply with all
applicable laws, ordinances and rules of any public authority relating to
their respective maintenance obligations as set forth herein.
2) Tenant expressly waives the benefits of any statute now or hereafter in
effect which would otherwise afford the Tenant the right to make repairs at
Landlord's expense or to terminate this Lease because of Landlord's failure
to keep the Premises in good order, condition and repair. Specifically,
Tenant waives the provisions of California Civil Code Sections 1941 and 1942
with respect to Landlord's obligations for Tenant tenantability of the
Premises and Tenant's right to make repairs and deduct the expenses of such
repairs from Rent.
3) Tenant shall not place a load upon any floor of the Premises which
exceeds the load per square foot which such floor was designed to carry, as
determined by Landlord or Landlord's structural engineer. The cost of any
such determination made by Landlord's structural engineer shall be paid for
by Tenant upon demand.
4) Except as otherwise expressly provided in this Lease, Landlord shall have
no liability to Tenant nor shall Tenant's obligations under this Lease be
reduced or abated in any manner whatsoever by reason of any inconvenience,
annoyance, interruption or injury to business arising from Landlord making
any repairs or changes which Landlord is required to make or is permitted to
make by this Lease or by any tenant's lease or is required by law to make in
or to any portion of the Premises. Landlord shall nevertheless use
reasonable efforts to minimize any interference with Tenant's business in
the Premises.
5) Tenant shall give Landlord prompt notice of any damage to or defective
condition in any part or appurtenance of the Premises' mechanical,
electrical, plumbing, HVAC or other systems serving, located in or passing
through the Premises. Upon request by Landlord, Tenant shall provide
Landlord with evidence reasonably acceptable to Landlord of service
contracts on such systems.
6) Upon the expiration or early termination of this Lease, Tenant shall
return the Premises to Landlord clean and in the same condition as on the
date Tenant took possession, except for normal wear and tear. Any damage to
the Premises, including any structural damage, resulting from Tenant's use
or from the removal of Tenant's fixtures, furnishings and equipment shall be
repaired by Tenant at Tenant's expense.
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7) Landlord may, at Landlord's option, choose to perform any of the Tenant's
obligations in this par13. ("Tenant's Obligations"). The cost of any such
Tenant's Obligations so performed by Landlord shall be at Tenant's sole cost
and expense. Tenant shall reimburse Landlord for any such costs incurred by
Landlord in the performance of Tenant's Obligations within ten (10) days of
receipt of a billing from Landlord.
14. ALTERATIONS. Tenant shall not make any alterations to the Premises,
including any changes to the existing landscaping, without Landlord's prior
written consent, except for non-structural alterations that do not in the
aggregate exceed Fifteen Thousand Dollars ($15,000.00) in any twelve (12)
month period. As to any alterations made by Tenant, Tenant shall notify
Landlord of the nature of such alterations prior to the commencement of such
alterations. Non-structural alterations include the construction and
removal of interior non-load bearing walls. If Landlord gives its consent
to such alterations or such alterations do not require Landlord's consent
pursuant to the other provisions of this par14, Landlord may post notices in
accordance with the laws of the state in which the Premises are located.
All alterations made by Tenant, whether or not subject to the approval of
Landlord, shall be performed by Tenant and its contractors in a first class
workmanlike manner and permits and inspections shall be obtained from all
required governmental entities. Any alterations made shall remain on and be
surrendered with the Premises upon expiration or termination of this Lease,
except that Landlord may, within thirty (30) days before or thirty (30) days
after expiration of the Term, elect to require Tenant to remove some or all
of the alterations which Tenant may have made to the Premises. If Landlord
so elects, Tenant shall at its own cost restore the Premises to the
condition designated by Landlord in its election, before the last day of the
Term or within thirty (30) days after notice of its election is given,
whichever is later. Should Landlord consent in writing to Tenant's
alteration of the Premises, Tenant shall contract with a contractor approved
by Landlord for the construction of such alterations, shall secure all
appropriate governmental approvals and permits, and shall complete such
alterations with due diligence in compliance with plans and
specifications approved by Landlord. Tenant shall pay all costs for
such construction and shall keep the Premises free and clear of all
mechanics' liens which may result from construction by Tenant.
15. RELEASE AND INDEMNITY. As material consideration to Landlord, Tenant
agrees that Landlord shall not be liable to Tenant for any damage to Tenant
or Tenant's property from any cause, except for damages resulting from
Landlord's gross negligence or willful misconduct, and Tenant waives all
claims against Landlord for damage to persons or property arising for any
reason, except for damage resulting directly from Landlord's breach of its
express obligations under this Lease which Landlord has not cured within a
reasonable time after written notice of such breach from Tenant. Tenant
shall indemnify and hold Landlord harmless from all damages including
attorneys' fees and costs arising out of any damage to any person or
property occurring in, on or about the Premises or Tenant's use of the
Premises or Tenant's breach of any term of this Lease.
16. INSURANCE
a. Payment For Insurance. Regardless of whether the Landlord or Tenant is
the Insuring Party, Tenant shall pay for all insurance for the Premises
required under this par16. ("Insurance Costs") either directly or by
reimbursement to Landlord as set forth in this par16. Premiums for policy
periods commencing prior to or extending beyond the Lease Term shall be
prorated to correspond to the Lease Term. To the extent that Tenant is to
<PAGE>
reimburse Landlord under this par16. for Insurance Costs, payment shall be
made by Tenant to Landlord within ten (10) days following receipt of an
invoice for any amount due.
b. Liability Insurance.
1) Carried by Tenant. Whether or not Tenant is the Insuring Party, Tenant
shall obtain and keep in force during the Term of this Lease a commercial
general liability policy of insurance protecting Tenant and Landlord (as an
additional insured) against claims for bodily injury, personal injury and
property damage based upon, involving or arising out of the ownership, use,
occupancy or maintenance of the Premises and all areas appurtenant thereto.
Such insurance shall be on an occurrence basis providing single limit
coverage in an amount not less than $2,000,000 per occurrence with an
"Additional Insured-Managers or Landlords of Premises" endorsement and
contain an "Amendment of the Pollution Exclusion" for damage caused by heat,
smoke or fumes from a hostile fire. The policy shall not contain any intra-
insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "insured
contract" for the performance of Tenant's indemnity obligations under this
Lease. The limits of said insurance required by this Lease or as carried by
Tenant shall not, however, limit the liability of Tenant nor relieve Tenant
of any obligation hereunder. All insurance to be carried by Tenant shall be
primary to and not contributory with any similar insurance carried by
Landlord, whose insurance shall be considered excess insurance only. All
insurance coverage required pursuant to this par16. which is to name Landlord
as a named insured shall also name Landlord's subsidiaries, directors,
agents, officers and employees as named insureds.
2) Carried by Landlord. In the event Landlord is the Insuring Party,
Landlord shall also maintain liability insurance as described in par16.b.1),
in addition to, and not in lieu of the insurance required to be maintained
by Tenant. In the event Tenant is the Insuring Party, Landlord shall in
addition carry Lessor's Risk Coverage and insure the Premises on Landlord's
umbrella policy. Tenant shall not be named as an additional insured therein
under any insurance obtained by Landlord in accordance with this par16.b.2).
c. Property Insurance - Building, Improvements and Rental Value.
1) Building and Improvements. The Insuring Party shall obtain and keep in
force during the Term of this Lease a policy or policies in the name of
Landlord, with loss payable to Landlord and to the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lender(s)"), insuring loss
or damage to the Premises. The amount of such insurance shall be equal to
the full replacement cost of the Premises, as the same shall exist from time
to time, or the amount required by Lender(s), but in no event more than the
commercially reasonable and available insurable value thereof if, by reason
of the unique nature or age of the improvements involved, such latter amount
is less than full replacement cost. If the coverage is available at a
commercially reasonable cost, such policy or policies shall insure against
all risks of direct physical loss or damage (including Boiler and Machinery
coverage and the perils of flood and earthquake), including coverage for any
additional costs resulting from debris removal and reasonable amounts of
coverage for the enforcement of any ordinance or law regulating the
reconstruction or replacement of any undamaged sections of the Premises
required to be demolished shall also contain an agreed valuation provision
in lieu of any coinsurance clause, waiver of subrogation and inflation guard
protection causing an increase in the annual property insurance coverage
amount by a factor of not less than the adjusted U.S. Department of Labor
<PAGE>
Consumer Price Index for All Urban Consumers for the city nearest to where
the Premises are located. If such insurance coverage has a deductible
clause, then Tenant shall be liable for such deductible amount. Even if
Landlord is the Insuring Party, Tenant's personal property shall be insured
by Tenant under par16.d. rather than by Landlord.
2) Rental Value. The Insuring Party shall, in addition, obtain and keep in
force during the term of this Lease a policy or policies in the name of
Landlord, with loss payable to Landlord and Lender(s), insuring the loss of
the full rental and other charges payable by Tenant to Landlord under this
Lease for one (1) year (including all Real Property Taxes, Insurance Costs
and any scheduled Rent increases). Said insurance shall provide that in the
event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the
completion of repairs or replacement of the Premises, to provide for one
full year's loss of Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurance
clause, and the amount of coverage shall be adjusted annually to reflect the
projected Rent, Real Property Taxes, Insurance Costs and other expenses, if
any, otherwise payable by Tenant, for the next twelve (12) month period.
Tenant shall be liable for any deductible amount in the event of such loss.
3) Adjacent Premises. If the Premises are part of a larger building, or if
the Premises are part of a group of buildings owned by Landlord which are
adjacent to the Premises, the Tenant shall pay for any increase in the
premiums for the property insurance of such building or buildings if said
increase is caused by Tenant's acts, omissions, use or occupancy of the
Premises.
4) Tenant's Improvements. If the Landlord is the Insuring Party, the
Landlord shall not be required to insure Tenant's personal property and
leasehold improvements unless the item in question has become the property of
Landlord under the terms of this Lease. If Tenant is the Insuring Party, the
policy carried by Tenant under this par16.c. shall insure Tenant's personal
property and leasehold improvements.
d. Tenant's Property Insurance. Subject to the requirements of par16.e.,
Tenant at its cost shall either by separate policy, or at Landlord's option,
by endorsement to a policy already carried, maintain insurance coverage on
all of Tenant's personal property and Tenant owned leasehold improvements in,
on or about the Premises similar in coverage to that carried by the Insuring
Party under par16.c. Such insurance shall be full replacement cost coverage
with a deductible of not to exceed $10,000 per occurrence. The proceeds from
any such insurance shall be used by Tenant for the replacement of personal
property or the restoration of Tenant owned leasehold improvements. Tenant
shall be the Insuring Party with respect to the insurance required by this
par16.d. and shall provide Landlord with written evidence that such insurance
is in force.
e. Insurance Policies. If Tenant is the Insuring Party, Insurance required
per this par16. shall be with companies duly licensed to transact business in
the state where the Premises are located, and maintaining during the policy
term a "General Policyholders Rating" of at least A- X, or such other minimal
rating as may be required by Lender(s) as set forth in the most current issue
of "Best's Insurance Guide". Tenant shall not do or permit to be done
anything which shall invalidate the insurance policies referred to in this
par16. If Tenant is the Insuring Party, Tenant shall cause to be delivered to
Landlord certified copies of policies of such insurance or certificates
evidencing the existence and amounts of such insurance with the insureds and
<PAGE>
loss payable clauses as required by this Lease. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior
written notice to Landlord. Tenant shall at least thirty (30) days prior to
the expiration of such policies, furnish Landlord with evidence of renewals
or "insurance binders" evidencing renewal thereof, or Landlord may order such
insurance and charge the cost thereof to Tenant, which amount shall be payable
by Tenant to Landlord upon demand. If the Insuring Party shall fail
to procure and maintain the insurance required to be carried by the Insuring
Party under this par16., the other Party may, but shall not be required to,
procure and maintain the same, but at Tenant's expense.
f. Mutual Waiver. Notwithstanding anything to the contrary contained in this
Lease, to the extent that this release and waiver does not invalidate or
impair their respective insurance policies, the parties hereto release each
other and their respective agents, employees, officers, directors,
shareholders, successors, assignees and subtenants from all liability for
injury to any person or damage to any property that is caused by or results
from a risk which is actually insured against pursuant to the provisions of
this Lease without regard to the negligence or willful misconduct of the
parties so released. Each party shall use its best efforts to cause each
insurance policy it obtains to provide that the insurer thereunder waives all
right of recovery by way of subrogation as required herein in connection with
any injury or damage covered by the policy. If such insurance policy cannot
be obtained with such waiver of subrogation, or if such waiver of subrogation
is only available at additional cost and the party for whose benefit the
waiver is not obtained does not pay such additional costs after reasonable
notice, then the party obtaining such insurance shall promptly notify the
other party of the inability to obtain insurance coverage with the waiver of
subrogation.
17. DAMAGE AND DESTRUCTION
a. Damage - Restoration Required. In the event that the Premises is damaged
by fire or other casualty which is covered under insurance pursuant to the
provisions of par16. above, Landlord shall restore such damage provided that:
(i) the destruction of the Premises does not exceed sixty percent (60%) of
the then replacement value of the Premises; (ii) the insurance proceeds are
available (inclusive of any deductible amounts) to pay one hundred percent
(100%) of the cost of restoration; and (iii) in the reasonable judgment of
Landlord, the restoration can be completed within two hundred and seventy
(270) days after the date of the damage or casualty under the laws and
regulations of the state, federal, county and municipal authorities having
jurisdiction. The deductible amount of any insurance coverage shall be paid
by Tenant except in the case of flood or earthquake and in such case the
deductible amount in excess of $10,000 per occurrence shall be paid by
Landlord. If such conditions apply so as to require Landlord to restore such
damage pursuant to this par17.a., this Lease shall continue in full force and
effect, unless otherwise agreed to in writing by Landlord and Tenant. Tenant
shall be entitled to a proportionate reduction of Rent while such restoration
takes place, such proportionate reduction to be based on the extent to which
the damage and restoration efforts interfere with Tenant's business in the
Premises. Tenant's right to a reduction of Rent hereunder shall be Tenant's
sole and exclusive remedy in connection with any such damage.
b. Damage - Restoration Not Required. In the event that the Premises is
damaged by a fire or other casualty and Landlord is not required to restore
such damage in accordance with the provisions of par17.a. immediately above,
Landlord shall have the option to either (i) repair or restore such damage,
with the Lease continuing in full force and effect, but Rent to be
<PAGE>
proportionately abated as provided in par17.a. above; or (ii) give notice to
Tenant at any time within thirty (30) days after the occurrence of such
damage terminating this Lease as of a date to be specified in such notice
which date shall not be less than thirty (30) nor more than sixty (60) days
after the date on which such notice of termination is given. In the event of
the giving of such notice of termination, this Lease shall expire and all
interest of Tenant in the Premises shall terminate on the date so specified
in such notice and the Rent, reduced by any proportionate reduction in Rent
as provided for in par17.a. above, shall be paid to the date of such
termination. Notwithstanding the foregoing, if Tenant delivers to Landlord
the funds necessary to make up the shortage (or absence) in insurance
proceeds and the restoration can be completed in a two hundred seventy (270)
day period, as reasonably determined by Landlord, and the destruction of the
Premises does not exceed sixty percent (60%) of the then replacement value,
Landlord shall restore the Premises as provided in par17.a. above.
c. End of Term Casualty. Notwithstanding the provisions of par17.a. and
par17.b. above, either Landlord or Tenant may terminate this Lease if the
Premises is damaged by fire or other casualty (and Landlord's reasonably
estimated cost of restoration of the Premises exceeds ten percent (10%) of
the then replacement value of the Premises) and such damage or casualty occurs
during the last twelve (12) months of the Term of this Lease (or the Term of
any renewal option, if applicable) by giving the other notice thereof at any
time within thirty (30) days following the occurrence of such damage or
casualty. Such notice shall specify the date of such termination which date
shall not be less than thirty (30) nor more than sixty (60) days following the
date on which such notice of termination is given. In the event of the giving
of such notice of termination, this Lease shall expire and all interest of
Tenant in the Premises shall terminate on the date so specified in such
notice and the Rent shall be paid to the date of such termination.
d. Termination by Tenant. In the event that the destruction to the Premises
cannot be restored as required herein under applicable laws and regulations
within two hundred seventy (270) days of the damage or casualty,
notwithstanding the availability of insurance proceeds, Tenant shall have the
right to terminate this Lease by giving the Landlord notice thereof within
thirty (30) days of date of the occurrence of such casualty specifying the
date of termination which shall not be less than thirty (30) days nor more
than sixty (60) days following the date on which such notice of termination
is given. In the event of the giving of such notice of termination, this
Lease shall expire and all interest of Tenant in the Premises shall terminate
on the date so specified in such notice and the Rent, reduced by any
proportionate reduction in Rent as provided for in par17.a. above, shall be
paid to the date of such termination.
e. Restoration. Landlord agrees that, in any case in which Landlord is
required to, or otherwise agrees to restore the Premises, that Landlord shall
proceed with due diligence to make all appropriate claims and applications
for the proceeds of insurance and to apply for and obtain all permits
necessary for the restoration of the Premises. Landlord shall use reasonable
efforts to enforce any and all provisions in any mortgage, deed of trust or
other encumbrance on the Premises requiring Landlord and Lender to permit
insurance proceeds to be used for restoration. Landlord shall restore the
Premises to the condition existing prior to the date of the damage if
permitted by applicable law.
18. CONDEMNATION
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a. Definitions. The following definitions shall apply: (1 ) "Condemnation"
means (a) the exercise of any governmental power of eminent domain, whether
by legal proceedings or otherwise by condemnor, or (b) the voluntary sale or
transfer by Landlord to any condemnor either under threat of condemnation or
while legal proceedings for condemnation are proceeding; (2) "Date of Taking"
means the date the condemnor has right to possession of the property being
condemned; (3) "Award" means all compensation, sums or anything of value
awarded, paid or received on a total or partial condemnation; and (4)
"Condemnor" means any public or quasi-public authority, or private
corporation or individual. having power of condemnation.
b. Obligations to be Governed by Lease. If during the Term of the Lease
there is any taking of all or any part of the Premises, the rights and
obligations of the parties shall be determined strictly pursuant to this
Lease.
c. Total or Partial Taking. If the Premises are totally taken by
Condemnation, this Lease shall terminate on the Date of Taking. If any
portion of the Premises is taken by Condemnation, this Lease shall remain in
effect, except that Tenant can elect to terminate this Lease if the remaining
portion of the Premises is rendered unsuitable for Tenant's continued use of
the Premises. If Tenant elects to terminate this Lease, Tenant must exercise
its right to terminate by giving notice to Landlord within thirty (30) days
after the nature and extent of the Condemnation have been finally determined.
If Tenant elects to terminate this Lease, Tenant shall also notify Landlord
of the date of termination, which date shall not be earlier than thirty (30)
days nor later than ninety (90) days after Tenant has notified Landlord of
its election to terminate; except that this Lease shall terminate on the Date
of Taking if the Date of Taking falls on a date before the date of
termination as designated by Tenant. If any portion of the Premises is taken
by Condemnation and this Lease remains in full force and effect, on the Date
of Taking the Base Rent shall be reduced by an amount in the same ratio as
the total number of square feet in the building(s) which are a part of the
Premises taken bears to the total number of square feet in the building(s)
which are a part of the Premises immediately before the Date of Taking. Any
Award for the taking of all or any part of the Premises under the power of
eminent domain or any payment made under threat of the exercise of such power
shall be the property of Landlord, whether such Award shall be made as
compensation for diminution in value of the leasehold or for the taking of
the fee, or as severance damages; provided, however, that Tenant shall be
entitled to any compensation separately awarded to Tenant for Tenant's
relocation expenses and/or loss of Tenant's trade fixtures.
19. ASSIGNMENT OR SUBLEASE
a. Tenant shall not assign or encumber its interest in this Lease or the
Premises or sublease all or any part of the Premises or allow any other
person or entity (except Tenant's authorized representatives, employees,
invitees or guests) to occupy or use all or any part of the Premises without
first obtaining Landlord's consent, which consent shall not be unreasonably
withheld. Any assignment, encumbrance or sublease without Landlord's prior
written consent shall be voidable and at Landlord's election, shall
constitute a default. If Tenant is a partnership, a withdrawal or change,
voluntary, involuntary or by operation of law of any partner, or the
dissolution of the partnership, shall be deemed a voluntary assignment. If
Tenant consists of more than one person, a purported assignment, voluntary or
involuntary or by operation of law from one person to the other shall be
deemed a voluntary assignment. If Tenant is a corporation, any dissolution,
merger, consolidation or other reorganization of Tenant, or sale or other
<PAGE>
transfer of a controlling percentage of the capital stock of Tenant, or the
sale of at least fifty percent (50%) of the value of the assets of Tenant
shall be deemed a voluntary assignment. Rent received by Tenant from its
subtenants in excess of the Rent payable by Tenant to Landlord under this
Lease applicable to the portion of the Premises subleased shall be paid to
Landlord, or any sums to be paid by an assignee to Tenant in consideration of
the assignment of this Lease shall be paid to Landlord. If Tenant requests
Landlord to consent to a proposed assignment or subletting, Tenant shall pay
to Landlord, whether or not consent is ultimately given, an amount equal to
Landlord's reasonable attorneys' fees and costs incurred in connection with
such request. Tenant shall, upon completion of any assignment or subletting
of all or any portion of the Premises, immediately and irrevocably assign to
Landlord as security for Tenant's obligations under the Lease, all Rent from
any such subletting or assignment. Landlord, as assignee and attorney in
fact for Tenant, shall have the right to collect all rent and other revenues
collectable pursuant to any such sublet or assignment and apply such rent and
other revenues towards Tenant's obligations under the Lease.
b. No interest of Tenant in this Lease shall be assignable by involuntary
assignment through operation of law (including without limitation the
transfer of this Lease by testacy or intestacy). Each of the following acts
shall be considered an involuntary assignment: (a) if Tenant is or becomes
bankrupt or insolvent, makes an assignment for the benefit of creditors, or
institutes proceedings under the Bankruptcy Act in which Tenant is the
bankrupt; or if Tenant is a partnership or consists of more than one person
or entity, if any partner of the partnership or other person or entity is or
becomes bankrupt or insolvent, or makes an assignment for the benefit of
creditors; or (b) if a writ of attachment or execution is levied on this
Lease; or (c) if in any proceeding or action to which Tenant is a party, a
receiver is appointed with authority to take possession of the Premises. An
involuntary assignment shall constitute a default by Tenant and Landlord
shall have the right to elect to terminate this Lease, in which case this
Lease shall not be treated as an asset of Tenant.
c. Landlord may at its option, elect to terminate the Lease instead of
approving the requested assignment or sublease. Should Landlord so elect to
terminate this Lease, all of the obligations of the parties thereunder shall
terminate on the later of sixty (60) days following Landlord's notice to
Tenant of its election hereunder, or the effective date of the proposed
assignment or subletting sought by the Tenant, but in no event later than one
hundred twenty (120) days following the date of Landlord's election under
this par19.c. At the time of termination, all obligations of both parties
hereunder shall terminate as to obligations thereafter accruing except as
otherwise expressly provided in this Lease.
20. DEFAULT. The occurrence of any of the following shall constitute a
default by Tenant: (a) a failure of Tenant to pay Rent within ten (10) days
of the date Tenant receives written notice from Landlord that Rent was not
received by the due date; (b) abandonment and vacation of the Premises
(failure to occupy and operate the Premises for twenty (20) consecutive days
shall be deemed an abandonment and vacation); (c) a material breach of any
warranty or representation made by Tenant in par11.2. of that certain Purchase
& Sale Agreement between Tenant, as Seller, and Landlord, as Buyer; or (d)
failure to timely perform any other provision of this Lease within thirty
(30) days of Tenant's receipt of notice from Landlord.
21. LANDLORD'S REMEDIES. Landlord shall have the following remedies if
Tenant is in default (These remedies are not exclusive; they are cumulative
and in addition to any remedies now or later allowed by law):
<PAGE>
a. Landlord may continue this Lease in full force and effect, and this Lease
will continue in effect so long as Landlord does not terminate Tenant's right
to possession, and Landlord shall have the right to collect Rent when due.
During the period Tenant is in default, Landlord can enter the Premises and
relet the Premises, or any part of the Premises, to third parties for
Tenant's account. Tenant shall be liable immediately to Landlord for all
costs Landlord incurs in reletting the Premises, including without
limitation, brokers' commissions, expenses of remodeling the Premises
required by the reletting, and like costs. Reletting can be for a period
shorter or longer than the remaining Term of this Lease. Tenant shall pay to
Landlord the Rent due under this Lease on the dates the Rent is due, less the
Rent Landlord receives from any reletting. No act by Landlord allowed by
this par21.a. shall terminate this Lease unless Landlord notifies Tenant in
writing that Landlord elects to terminate this Lease. After Tenant's default
and for so long as Landlord does not terminate Tenant's right to possession
of the Premises, if Tenant obtains Landlord's consent, Tenant shall have the
right to assign or sublet its interest in this Lease, but Tenant shall not be
released from liability. Landlord's consent to such a proposed assignment or
subletting shall not be unreasonably withheld. If Landlord elects to relet
the Premises as provided in this par21.a., Rent that Landlord receives from
reletting shall be applied to the payment of: first, any indebtedness from
Tenant to Landlord other than Rent due from Tenant; second, all costs,
including for maintenance incurred by Landlord in reletting; and third, Rent
due and unpaid under this Lease. After deducting the payments referred to in
this par21.a., any sum remaining from the Rent Landlord receives from reletting
shall be held by Landlord and applied in payment of future Rent as Rent
becomes due under this Lease. In no event shall Tenant be entitled to any
excess Rent received by Landlord. If, on the date Rent is due under this
Lease, the Rent received from the reletting is less than the Rent due on that
date, Tenant shall pay to Landlord, in addition to the remaining Rent due,
all costs including for maintenance Landlord incurred in reletting that
remain after applying the Rent received from the reletting as provided in
this par21.a.; and
b. Landlord may terminate Tenant's right to possession of the Premises at any
time. No act by Landlord other than giving express written notice thereof to
Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the
Premises, or the appointment of a receiver on Landlord's initiative to
protect Landlord's interest under this Lease shall not constitute a
termination of Tenant's right to possession. Upon termination of Tenant's
right to possession, Landlord has the right to recover from Tenant: (1) the
Worth of the unpaid Rent that had been earned at the time of termination of
Tenant's right to possession; (2) the Worth of the amount by which the unpaid
Rent that would have been earned after the date of termination until the time
of award exceeds the amount of the loss of Rent that Tenant proves could have
been reasonably avoided; (3) the Worth of the amount of the unpaid Rent that
would have been earned after the award throughout the remaining Term of the
Lease to the extent such unpaid Rent exceeds the amount of the loss of Rent
that Tenant proves could have been reasonably avoided; and (4) any other
amount, including but not limited to, expenses incurred to relet the
Premises, court costs, attorneys' fees and collection costs necessary to
compensate Landlord for all detriment caused by Tenant's default. The
"Worth", as used above in (1) and (2) in this par21.b. is to be computed by
allowing interest at the lesser of eighteen percent (18%) per annum or the
maximum legal interest rate permitted by law. The "Worth", as used above in
(3) in this par21.b. is to be computed by discounting the amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of the
award, plus one percent (1%).
<PAGE>
22. ENTRY OF PREMISES. Landlord and/or its authorized representatives shall
have the right to enter the Premises at all reasonable times for any of the
following purposes: (a) to determine whether the Premises are in good
condition and whether Tenant is complying with its obligations under this
Lease; (b) to do any necessary maintenance and to make any restoration to the
Premises that Landlord has the right or obligation to perform; (c) to post
"for sale" signs at any time during the Term, or to post "for rent" or "for
lease" signs during the last ninety (90) days of the Term or during any
period while Tenant is in default; (d) to show the Premises to prospective
brokers, agents, lenders, buyers, tenants or persons interested in leasing or
purchasing the Premises, at any time during the Term; or (e) to repair,
maintain or improve the Premises and to erect scaffolding and protective
barricades around and about the Premises but not so as to prevent entry to
the Premises and to do any other act or thing necessary for the safety or
preservation of the Premises. Landlord shall not be liable in any manner for
any inconvenience, disturbance, loss of business, nuisance or other damage
arising out of Landlord's entry onto the Premises as provided in this par22.
Tenant shall not be entitled to an abatement or reduction of Rent if Landlord
exercises any rights reserved in this par22. Landlord shall conduct its
activities on the Premises as provided herein in a commercially reasonable
manner that will lessen the inconvenience, annoyance or disturbance to
Tenant.
23. SUBORDINATION
a. Automatic Subordination. Without the necessity of any additional document
being executed by Tenant for the purpose of effecting a subordination, and at
the election of Landlord or any Lender(s) against the Premises, this Lease
shall be subject and subordinate at all times to (i) all ground leases or
underlying leases which may now exist or hereafter be executed affecting the
Premises, (ii) the lien of any mortgage or deed of trust which may hereafter
be executed affecting the Premises, and (iii) the lien of any mortgage or
deed of trust which may hereafter be executed in any amount for which the
Premises, ground leases or underlying leases, or Landlord's interest or
estate in any of said items is specified as security. In the event that any
ground lease or underlying 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, Tenant shall, notwithstanding any subordination, attorn to
and become the Tenant of the successor in interest to Landlord. In
connection with any such termination of a ground lease or underlying lease or
any foreclosure or conveyance in lieu of foreclosure made in connection with
any mortgage or deed of trust, then so long as Tenant is not in default
pursuant to this Lease, Tenant shall not be disturbed in its possession of
the Premises or in the enjoyment of its rights pursuant to this Lease during
the Term of this Lease or any extension or renewal thereof.
b. Additional Subordination. From time to time at the request of Landlord,
Tenant covenants and agrees to execute and deliver within ten (10) days
following the date of written request from Landlord, documents evidencing the
priority or subordination of this Lease with respect to any ground lease or
underlying lease or the lien of any mortgage or deed of trust in connection
with the Premises. Any and all such documents shall be in such form as is
reasonably acceptable to Tenant and Landlord as well as the Lender(s) and
other applicable party. Any subordination agreement so requested by Landlord
shall provide for Tenant to attorn to the successor in interest to Landlord
and shall further provide that Tenant shall not be disturbed in its
possession of the Premises or in the enjoyment of its rights pursuant to this
Lease so long as Tenant is not in default with respect to its obligations
<PAGE>
pursuant to the Lease. Any such Subordination, Non-disturbance and
Attornment Agreement shall be recorded in the official records of the office
of the County Recorder in the County in which the Premises is located.
Tenant hereby irrevocably appoints Landlord as attorney-in-fact of Tenant to
execute, deliver and record any such document in the name of and on behalf of
Tenant.
c. Notice from Lender. Tenant shall be entitled to rely upon any notice
given by Lender(s) in connection with the Premises requesting that Tenant
make all future Rent payments to such Lender(s), and Tenant shall not be
liable to Landlord for any payment made to such Lender(s) in accordance with
such notice.
24. ESTOPPEL CERTIFICATE; TENANT FINANCIAL STATEMENTS. Tenant, at any time
and from time to time, upon not less than ten (10) days written notice from
Landlord, will execute, acknowledge and deliver to Landlord and, at
Landlord's request, to any existing or prospective purchaser, ground lessor
or mortgagee of any part of the Premises, a certificate of Tenant stating:
(a) that Tenant has accepted the Premises (or, if Tenant has not done so,
Tenant has not accepted the Premises and specifying the reasons therefor);
(b) the Commencement and Expiration Dates of this Lease; (c) that this Lease
is unmodified and in full force and effect (or, if there have been
modifications, that same is in full force and effect as modified and stating
the modifications); (d) whether or not to the best of Tenant's knowledge
there are then existing any defenses against the enforcement of any of the
obligations of Tenant under this Lease (and, if so, specifying same); (e)
whether or not to the best of Tenant's knowledge there are then existing any
defaults by Landlord in the performance of its obligations under this Lease
(and, if so, specifying same); (f) the dates, if any, to which the Rent and
other charges under this Lease have been paid; (g) whether or not there are
Rent increases during the Lease Term and if so the amount of same; (h)
whether or not the Lease contains any options or rights of first offer or
first refusal; (i) the amount of any Security Deposit or other sums due
Tenant; (j) the current notice address for Tenant; and (k) any other
information that may reasonably be required by any of such persons. It is
intended that any such certificate of Tenant delivered pursuant to this par24.
may be relied upon by Landlord and any existing or prospective purchaser,
ground lessor or mortgagee of the Premises. Tenant agrees, at any time upon
request by Landlord, to deliver to Landlord the current financial statements
of Tenant with an opinion of a certified public accountant, if available,
including a balance sheet and profit and loss statement for the most recent
prior three years all prepared in accordance with generally accepted
accounting principles consistently applied.
25. WAIVER. No delay or omission in the exercise of any right or remedy by
Landlord shall impair such right or remedy or be construed as a waiver. No
act or conduct of Landlord, including without limitation, acceptance of the
keys to the Premises, shall constitute an acceptance of the surrender of the
Premises by Tenant before the expiration of the Term. Only written notice
from Landlord to Tenant shall constitute acceptance of the surrender of the
Premises and accomplish termination of the Lease. Landlord's consent to or
approval of any act by Tenant requiring Landlord's consent or approval shall
not be deemed to waive or render unnecessary Landlord's consent to or
approval of any subsequent act by Tenant. Any waiver by Landlord of any
Default must be in writing and shall not be a waiver of any other Default
concerning the same or any other provision of the Lease.
26. SURRENDER OF PREMISES. Upon expiration of the Term, Tenant shall
surrender to Landlord the Premises and all tenant improvements and
<PAGE>
alterations in the same condition as existed at the Commencement Date, except
for ordinary wear and tear and alterations which Tenant has the right or is
obligated to remove under the provisions of par14. herein. Tenant shall remove
all personal property including, without limitation, all wallpaper, paneling
and other decorative improvements or fixtures and shall perform all
restoration made necessary by the removal of any alterations or Tenant's
personal property before the expiration of the Term, including, for example,
restoring all wall surfaces to their condition as of the Commencement Date.
Landlord can elect to retain or dispose of in any manner Tenant's personal
property not removed from the Premises by Tenant prior to the expiration of
the Term. Tenant waives all claims against Landlord for any damage to Tenant
resulting from Landlord's retention or disposition of Tenant's personal
property. Tenant shall be liable to Landlord for Landlord's cost for
storage, removal and disposal of Tenant's personal property.
27. HOLDOVER. If Tenant with Landlord's consent remains in possession of the
Premises after expiration of the Term or after the date in any notice given
by Landlord to Tenant terminating this Lease, such possession by Tenant shall
be deemed to be a month to month tenancy cancelable by either party on thirty
(30) days written notice given at any time by either party and all provisions
of this Lease, except those pertaining to Term, renewal options and Base
Rent, shall apply and Tenant shall thereafter pay monthly Base Rent in an
amount equal to one hundred fifty percent (150%) of the Base Rent that was in
effect for the last full calendar month immediately preceding expiration of
the Term.
28. NOTICES. All notices, demands, or other communications required or
contemplated under this Lease shall be in writing and shall be deemed to have
been duly given 48 hours from the time of mailing if mailed by registered or
certified mail, return receipt requested, postage prepaid, or 24 hours from
the time of shipping by overnight carrier, or the actual time of delivery if
delivered by personal service to the parties at the addresses specified in
par1. Either Tenant or Landlord may change the address to which notices are to
be given to such party hereunder by giving written notice of such change of
address to the other in accordance with the notice provisions hereof.
29. TENANT IMPROVEMENTS. The Premises shall be delivered to Tenant in its
"as is" condition as of the Commencement Date hereof.
30. OPTION TO RENEW
a. Grant of Option. Tenant shall have the right, at its option, to extend
the Lease for one (1) period of twelve (12) months ("Extended Term")
commencing at the expiration of the Initial Term, provided that at the time
of exercise and at the time of commencement of such Extended Term, Tenant is
not in default under this Lease.
b. Exercise of Option. If Tenant decides to extend the Lease for the
Extended Term, Tenant shall give written notice to Landlord of its election
to extend not less than nine (9) months prior to the expiration of the
Initial Term. Tenant's failure to give timely notice to Landlord of Tenant's
election to extend shall be deemed a waiver of Tenant's right to extend. The
terms and conditions applicable to the Extended Term shall be the same terms
and conditions contained in this Lease except that Tenant shall not be
entitled to any further option to extend. The Base Rent for the Extended
Term shall be as determined in accordance with par30.c.
c. Determination of Base Rent During the Extended Term.
<PAGE>
1) Agreement on Initial Base Rent. Landlord shall not be obligated to
provide Tenant with the proposed fair market rental value until seven (7)
months prior to the expiration of the Initial Term. Landlord and Tenant
shall have thirty (30) days after Landlord provides the proposed fair market
rental value in which to agree on the Base Rent during the Extended Term,
which shall be one hundred percent (100%) of the fair market rental value of
the Premises during said Extended Term. The fair market rental value of the
Premises during said Extended Term shall be based on the uses of the Premises
permitted under this Lease, the quality, size, design and location of the
Premises, and the rental value for lease renewals or extensions of comparable
size, quality and location. If Landlord and Tenant agree on the Initial Base
Rent for the Extended Term during the thirty (30) day period, they shall
immediately execute an amendment to this Lease stating the new Initial Base
Rent.
2) Selection of Appraisers. If Landlord and Tenant are unable to agree on
the Base Rent for the Extended Term within the thirty (30) day period, then
within ten (10) days after the expiration of the thirty (30) day period and
provided that Tenant has timely exercised the subject renewal option in
accordance with par30.b., Landlord and Tenant each at its own cost and by
giving notice to the other party, shall appoint a competent and disinterested
real estate appraiser with at least five (5) years full-time commercial
appraisal experience in the market area to appraise the fair market rental
value of the Premises and set the Base Rent during said Extended Term. If
either Landlord or Tenant does not appoint an appraiser within said ten (10)
days, the single appraiser appointed shall be the sole appraiser and shall
set the Base Rent during said Extended Term. If two (2) appraisers are
appointed by Landlord and Tenant as stated herein, they shall meet promptly
and attempt to set the Base Rent for said Extended Term. If the two (2)
appraisers are unable to agree within thirty (30) days after the second
appraiser has been appointed, they shall attempt to select a third appraiser
meeting the same qualifications within ten (10) days after the last day the
two (2) appraisers are given to set the Base Rent. If they are unable to
agree on the third appraiser, either Landlord or Tenant, by giving ten (10)
days' notice to the other party, can apply to the then President of the Real
Estate Board of Santa Clara County or to the Presiding Judge of the Superior
Court of Santa Clara County, for the selection of a third appraiser who meets
the qualifications stated herein. Landlord and Tenant each shall bear one-
half (1/2) of the cost of appointing the third appraiser and of paying the
third appraiser's fee. The third appraiser, however selected, shall be a
person who has not previously acted in any capacity for either Landlord or
Tenant, or their affiliates.
3) Value Determined by Three (3) Appraisers. Within thirty (30) days
after the selection of the third appraiser, a majority of the appraisers
shall set the Base Rent for the Extended Term. If a majority of the
appraisers are unable to set the Base Rent within the stipulated period of
time, Landlord's appraiser shall arrange for simultaneous exchange of written
appraisals from each of the appraisers and the three (3) appraisals shall be
added together and their total divided by three (3); the resulting quotient
shall be the Base Rent for the Premises during the Extended Term. If,
however, the low appraisal and/or the high appraisal are/is more than fifteen
percent (15%) lower and/or higher than the middle appraisal, such low
appraisal and/or high appraisal shall be disregarded. If only one (1)
appraisal is disregarded, the remaining two (2) appraisals shall be added
together and their total divided by two (2); the resulting quotient shall be
the Base Rent for the Premises during the Extended Term. If both the low
appraisal and the high appraisal are disregarded as stated in this par30.c.3),
the middle appraisal shall be the Base Rent for the Premises during the
<PAGE>
Extended Term.
4) Minimum Initial Base Rent Level. Notwithstanding any other provision
of this Lease, in no event shall the Base Rent for the Extended Term be less
than the Base Rent prevailing immediately prior to the expiration of the
Initial Term.
31.MISCELLANEOUS PROVISIONS.
a. Time of Essence. Time is of the essence of each provision of this Lease.
Successor. This Lease shall be binding on and inure to the benefit of the
parties and their successors, except as provided in par19.
c. Landlord's Consent. Any consent required by Landlord under this Lease
must be granted in writing and may be withheld or conditioned by Landlord in
its sole and absolute discretion unless otherwise provided.
d. Commissions. Each party represents that it has not had dealings with any
real estate broker, finder or other person with respect to this Lease in any
manner, except for the Broker(s) identified in par1., who shall be compensated
by Landlord in accordance with the separate agreement between Landlord and
the Broker(s).
e. Other Charges; Legal Fees. If Landlord becomes a party to any litigation
concerning this Lease or the Premises by reason of any act or omission of
Tenant or Tenant's authorized representatives, Tenant shall be liable to
Landlord for reasonable attorneys' fees and court costs incurred by Landlord
in the litigation. Should the court render a decision which is thereafter
appealed by any party thereto, Tenant shall be liable to Landlord for
reasonable attorneys' fees and court costs incurred by Landlord in connection
with such appeal.
If Tenant becomes a party to any litigation concerning this Lease or the
Premises by reason of any act or omission of Landlord or Landlord's
authorized representatives, Landlord shall be liable to Tenant for reasonable
attorneys' fees and court costs incurred by Tenant in the litigation. Should
the court render a decision which is thereafter appealed by any party
thereto, Landlord shall be liable to Tenant for reasonable attorneys' fees
and court costs incurred by Tenant in connection with such appeal.
f. Landlord's Successors. In the event of a sale or conveyance by Landlord
of the Premises, the same shall operate to release Landlord from any
liability under this Lease, and in such event Landlord's successor in
interest shall be solely responsible for all obligations of Landlord under
this Lease.
g. Interpretation. This Lease shall be construed and interpreted in
accordance with the laws of the state in which the Premises are located.
This Lease constitutes the entire agreement between the parties with respect
to the Premises, except for such guarantees or modifications as may be
executed in writing by the parties from time to time. When required by the
context of this Lease, the singular shall include the plural, and the
masculine shall include the feminine and/or neuter. "Party" shall mean
Landlord or Tenant. If more than one person or entity constitutes Landlord
or Tenant, the obligations imposed upon that party shall be joint and
several. The enforceability, invalidity or illegality of any provision shall
not render the other provisions unenforceable, invalid or illegal.
<PAGE>
h. Auctions. Tenant shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Landlord's prior written consent. Notwithstanding anything
to the contrary in this Lease, Landlord shall not be obligated to exercise
any standard of reasonableness in determining whether to grant such consent.
h. Quiet Possession. Upon payment by Tenant of the Rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Tenant's part to be observed and performed under this Lease,
Tenant shall have quiet possession of the Premises for the entire Term hereof
subject to all of the provisions of this Lease.
i. Conflict. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
j. Offer. Preparation of this Lease by Landlord or Landlord's agent and
submission of same to Tenant shall not be deemed an offer to lease to Tenant.
This Lease is not intended to be binding until executed by all Parties
hereto.
k. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other Rent payable under this Lease. As long as they do not
materially change Tenant's obligations hereunder, Tenant agrees to make
reasonable non-monetary modifications to this Lease as may be reasonably
required by Lender(s) in connection with the obtaining of normal financing or
refinancing of the property of which the Premises are a part.
l. Construction. The Landlord and Tenant acknowledge that each has had its
counsel review this Lease, and hereby agree that the normal rule of
construction to the effect that any ambiguities are to be resolved against
the drafting party shall not be employed in the interpretation of this Lease
or in any amendments or exhibits hereto.
n. Captions. Article, section and paragraph captions are not a part hereof.
o. Exhibits. For reference purposes the Exhibits are listed below:
Exhibit A: The Premises
Exhibit B: Intentionally Deleted
Exhibit C: Rules and Regulations
Exhibit D: Description of Deferred Maintenance and Capital Improvements
LANDLORD:
TENANT:
LIMAR REALTY CORP. #36, a California corporation
MEDIA ARTS GROUP, INC., a Delaware corporation
<PAGE>
By:
By:
Name:Theodore H. Kruttschnitt
Name:
Title:President
Title:
EXHIBIT C
521 CHARCOT AVENUE, SAN JOSE, CALIFORNIA
Rules & Regulations
This Exhibit C is attached to and made a part of that certain Lease dated May
22, 1997 by and between Limar Realty Corp. #36 as Landlord and Media Arts
Group, Inc., as Tenant.
For the purpose of these Rules & Regulations the word Premises shall refer to
the Premises Tenant is leasing and the Property containing the Premises as
described in par2. of the Lease.
1. No sign, placard, picture, advertisement, name or notice (collectively,
"Signs") shall be installed or displayed on any part of the Premises without
the prior written consent of Landlord, except that Tenant may post Signs
inside the Building which are not visible from the exterior of the Building.
Landlord shall have the right to remove, at Tenant's expense and without
notice, any sign installed or displayed in violation of this rule. All
approved signs or lettering on doors and walls shall be printed, painted,
affixed or inscribed at the expense of Tenant.
2. Neither Tenant nor any employee or invitee of Tenant, shall make any
structural roof or terrace penetrations.
3. Tenant shall not cause any unnecessary labor by carelessness or
indifference to the good order and cleanliness of the Premises. Landlord
shall not in any way be responsible to any Tenant for any loss of property on
the Premises, or for any damage to any Tenant's property.
4. Landlord will furnish Tenant, free of charge, with six (6) keys to the
Premises. Tenant, upon the termination of its tenancy, shall deliver to
Landlord the keys of all locks for doors on the Premises, and in the event of
loss of any keys furnished by Landlord, shall pay Landlord therefor.
5. If Tenant requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with, Landlord's reasonable
instructions in their installation.
6. Tenant shall not place a load upon any floor of the Premises which exceeds
the load per square foot which such floor was designed to carry and which is
allowed by law. Landlord shall have the reasonable right to prescribe the
weight, size and position of all equipment, materials, furniture or other
property brought into the Premises. Heavy objects shall, if considered
necessary by Landlord, stand on such platforms as determined by Landlord to
<PAGE>
be necessary to properly distribute the weight. Business machines and
mechanical equipment belonging to Tenant, which cause noise or vibration that
may be transmitted to the structure of the Premises to such a degree as to be
objectionable to Landlord, shall be placed and maintained by Tenant, at
Tenant's expense, on vibration eliminators or other devices sufficient to
eliminate noise or vibrations. Landlord will not be responsible for loss of,
or damage to, any such equipment or other property from any cause, and all
damage done to the Premises by maintaining or moving such equipment or other
property shall be repaired at the expense of Tenant.
7. Except as expressly permitted in writing by Landlord, Tenant shall not use
or keep in the Premises any kerosene, gasoline or inflammable or combustible
fluid or material other than those limited quantities necessary for the
operation of Tenant's business. Tenant shall not use or permit to be used in
the Premises any foul or noxious gas or substance, or permit or allow the
Premises to be occupied or used in a manner offensive or objectionable to
Landlord by reason of noise, odors or vibrations not bring or keep or permit
to be brought or kept in the Premises any animal life form, other than human,
except seeing eye dogs when in the company of their masters.
8. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall
not be used for any purpose other than that for which they were constructed
and no foreign substance of any kind whatsoever shall be thrown therein. The
expense of any breakage, stoppage or damage resulting for the violation of
this rule shall be borne by the Tenant who, or whose employees or invitees,
shall have caused it.
9. Tenant shall not sell, or permit the retail sale of newspapers, magazines,
periodicals, theater tickets or any other goods or merchandise to the general
public in or on the Premises except for Tenant's semi-annual "damaged goods"
sale. Tenant shall not use the Premises for any business or activity other
than that specifically provided for in Tenants Lease. Notwithstanding the
above, Tenant shall have the right to install vending machines for use by
Tenant, its employees and invitees.
10. Tenant shall not interfere with radio or television broadcasting or
reception from or in neighboring areas.
11. Landlord reserves the right to exclude or expel from the Premises any
person who, in Landlord's reasonable judgment, is in violation of any of the
Rules and Regulations of the Premises or in violation of the CC&R's.
12. The Premises shall not be used for the storage of merchandise held for
sale to the general public, or for lodging nor shall the Premises by used for
any improper, immoral or objectionable purpose. No cooking shall be done or
permitted on the Premises, except that use by Tenant in its kitchen, if any,
located in the Premises and Underwriters Laboratory's approved equipment for
brewing coffee, tea, hot chocolate and similar beverages and microwaving food
shall be permitted, provided that such kitchen, equipment and use is in
accordance with all applicable federal, state, county and city laws, codes,
ordinances, rules and regulations.
<PAGE>
EXHIBIT C
CHARCOT AVENUE, SAN JOSE, CALIFORNIA
Rules & Regulations
(continued)
13. Without the written consent of Landlord, Tenant shall not use the name of
the Premises in connection with or in promoting or advertising the
business of Tenant except as Tenant's address.
14. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by any governmental agency.
15. Tenant assumes any and all responsibility for protecting its Premises
from theft, robbery and pilferage, which includes locking doors and securing
other means of entry to the Premises closed.
16. The requirements of Tenant will be attended to only upon appropriate
application to the office of Landlord by an authorized individual. Employees
of Landlord shall not perform any work or do anything outside of their
regular duties unless under special instructions from Landlord.
17. Tenant shall not store or abandon vehicles in the Premises parking
areas nor park any vehicles in the Premises parking areas other than
automobiles, motorcycles, motor driven or non-motor driven bicycles, four-
wheeled trucks, or other equipment used in the operation of Tenant's
business.
18. Landlord reserves the right to make such other reasonable Rules and
Regulations as, in its judgment, may from time to time be appropriate for
safety and security, for care and cleanliness of the Premises and for the
preservation of good order therein. Tenant agrees to abide for all such
Rules and Regulations hereinabove stated and any additional Rules and
Regulations which are adopted.
19. Tenant shall be responsible for the observance of all of the foregoing
Rules and Regulations by Tenant's employees, agents, clients, customers,
invitees and guests.
<PAGE> 1
MEDIA ARTS GROUP, INC.
EXHIBIT 11.01
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (1)
<TABLE>
<CAPTION>
Three months Six months
Ended September 30 Ended September 30
____________________ ___________________
1997 1996 1997 1996
________ ________ ________ ________
<S> <C> <C> <C> <C>
Net income (loss) $ 2,873 $(12,112) $ 4,204 $(13,467)
======== ======== ======== ========
Weighted average common shares
outstanding 11,031 9,867 11,031 9,867
Common shares issuable on
exercise of options and
warrants (2) 267 - 265 -
-------- -------- -------- --------
Weighted average common and
common equivalent shares
outstanding 11,298 9,867 11,296 9,867
======== ======== ======== ========
Net income (loss) per common
share $ 0.25 $ (1.23) $ 0.37 $ (1.36)
======== ======== ======== ========
</TABLE>
(1) This Exhibit should be read with Note 2 of Notes to Unaudited
Condensed Consolidated Financial Statements.
(2) The computation of common and common stock equivalents utilizes
the treasury stock method.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,180
<SECURITIES> 0
<RECEIVABLES> 8,258
<ALLOWANCES> 2,799
<INVENTORY> 6,040
<CURRENT-ASSETS> 23,033
<PP&E> 6,712
<DEPRECIATION> 2,829
<TOTAL-ASSETS> 27,176
<CURRENT-LIABILITIES> 12,898
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 10,040
<TOTAL-LIABILITY-AND-EQUITY> 27,176
<SALES> 30,413
<TOTAL-REVENUES> 30,413
<CGS> 9,892
<TOTAL-COSTS> 13,680
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 1,163
<INCOME-PRETAX> 6,659
<INCOME-TAX> 2,455
<INCOME-CONTINUING> 4,204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,204
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
